THORChain emerged as a solution providing native crosschain swaps, providing a powerful alternative offering something the CEXs never could; decentralized and permissionless swaps. Even today, bridging and interoperability solutions often involve the wrapping of assets. If there are any protocols besides majors like BTC, ETH, SOL, etc. which have ‘stood the test of time’, THORChain firmly fits the bill. Founded in 2018, the protocol’s path has not been easy. From multiple exploits to other issues and everything in between, RUNE is as battle-tested as any project.
Now, THORChain encompasses a bustling ecosystem of exchange frontends, wallets, infrastructure resources, and more, all working to bring the benefits of crosschain native swaps to more users. THORChain’s offerings have even expanded far beyond simply swapping, getting into the decentralized lending space via its THORFI lending arm, which has seen quite a lot of use for its 0% interest BTC loans…
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Background on THORChain
THORChain aims to replace CEXs, by allowing users to swap between native L1 assets. For example, you could swap native $BTC on the Bitcoin network, for native $AVAX, on the Avalanche Network, all without a CEX. Currently, 10 native assets are supported: $BTC, $ETH, $DOGE, $BNB, $ATOM, $LTC, $BCH, and most recently, $AVAX, as well as stablecoins in USDC and USDT.
THORChain is an autonomous and decentralized cross-chain network that aims to decentralize the liquidity of crypto assets via a network of public THORNodes and ecosystem products. The protocol takes its inspiration from Tendermint and the Cosmos-SDK and introduces Threshold Signature Schemes (TSS) to determine how to move assets in response to user-submitted transactions.
THORChain watches for incoming user deposits to its vaults and executes business logic based on the transaction request, such as adding or removing liquidity or swapping assets. The ethos behind the protocol architecture is to achieve and sustain high levels of decentralization while capturing enough liquidity to provide cross-chain services to its users.
THORChain’s native $RUNE token is used for governance, as well as to secure the network. $RUNE uses a unique tokenomics design, where the token is used to pair with native L1 assets, like $BTC or $ETH. This liquidity pairing design is implemented to allow the protocol to scale while making liquidity pools reliable. $RUNE operates on a 3-1 ratio, meaning RUNE in the protocol should be 3x the value of the combined native L1 assets in the pool. This provides an inherent value-accrual system to the token, as $RUNE will grow in value as long as the TVL of the protocol grows.
THORChain has faced many challenges in its development but has grown to become a large protocol. With skepticism of CEXs growing as a narrative, THORChain’s use case has become even more apparent. The team continues to expand to new blockchains and add new features, including their Savers vaults, which aim to make it easy for people to deposit native L1 assets single-sided, meaning they don’t have to worry about pairing the asset with $RUNE. This feature could be seen as a way to take market share from CEXs and bring this liquidity on-chain into the THORChain ecosystem. An additional governance proposal being discussed is THORFi, a lending and borrowing system for the native L1 assets on THORChain.
THORFi Lending
With ThorFi, Thorchain realizes its vision to enable 3 important financial primitives: swapping, saving, and lending. Users will be able to lend one asset on one chain and borrow another asset on a different chain. Lending allows users to deposit native collateral, and then create a debt position at a collateralization ratio CR (collateralization ratio).
All loans have 0% interest.
No liquidations.
Loans have no expiration and can be repaid in any asset.
A minimum loan period can apply – not currently set
Risk is managed with limits on collateral for each pool, slip-based fees when opening and closing loans, dynamic CR, and a circuit breaker on the $RUNE supply.
This benefits the protocol by increasing:
capital efficiency of the pools – which increases the system’s income and real yield.
trading volume and fees.
the total amount of $RUNE that is bonded, allowing Thorchain to scale.
The debt is always denominated in USD (aka $TOR) regardless of what L1 asset the user receives.
It is worth noting that $TOR is a non-transferable unit of account with a market cap of $0. It is designed to match the value of $1 within Thorchain. All collateral, debit, and repayments are converted to and accounted for in $TOR (more information in the Derived Assets section).
How THORFi Lending Works
Even though the product is presented as a lending product, it functions like an option. For instance, if you give 1 $ETH to the protocol and borrow against it at 50% LTV, then you are able to borrow cash and are given the opportunity to buy 1 $ETH for that amount of cash. To conceptualize this idea, the borrower is not really borrowing, since their position cannot be liquidated and they never have an obligation to pay off the loan. Because of that, the user has no debt, and calling it a borrower can be a misnomer.
Instead, the user is buying a perpetual call option, and since these are deep-in-the-money, re-strikable options, this makes it resemble an actual loan. The borrower does not have an obligation, but rather an opportunity, whereas ThorFi does have an obligation as the counterparty to the option owner.
When making analogies to traditional lending models in DeFi, like Aave or Compound, we can see that the roles are inverted. In standard DeFi lending protocols, the collateral is locked in a smart contract and can be accessed by either the borrower or a liquidator.
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