THORChain was conceptualized in 2018 by a team participating in a Binance Dexathon (decentralized exchange coding competition). THORChain facilitates cross-chain liquidity and reduce the need for centralized exchanges and third parties within the DeFi space. It enables cross-chain swaps and yield generation on crypto-assets like Bitcoin and Ethereum.
THORChain is a layer-1 network based on the Cosmos SDK and Tendermint. THORChain works as a cross-chain permissionless Decentralized Exchange (DEX). It also uses Threshold Signature Schemes (TSS) to secure its leaderless asset vault. Tendermint and TSS provide a layered Byzantine Fault Tolerance (BFT) consensus mechanism, and a two-thirds majority consensus is required for funds to enter and exit the primary TSS vault.
There are four key types of users in the THORChain ecosystem:
Swappers who use liquidity pools to swap assets.
Liquidity providers who add liquidity to pools and earn rewards.
Node operators who provide bonds and are paid to secure the system.
Traders who monitor and rebalance pools with the intention of making profits.
Unlike other cross-chain protocols, THORChain doesn’t wrap assets before swapping. Instead, it uses native assets on THORChain to perform autonomous, transparent asset swaps.
Asset swaps are enabled by liquidity pools. These pools are made up of assets contributed by Liquidity Providers and are secured by a network of node operators. Liquidity providers deposit their assets in THORChain’s liquidity pools to earn yield, made of swap fees and system rewards. Anyone can add liquidity to an existing pool, making THORChain permissionless. In addition, THORChain is non-custodial because only the original depositor can withdraw the assets that they have deposited in the pool. Liquidity providers can also propose new asset pools, provided these assets are tokens of a supported chain in the ecosystem.
Node operators, called THORNodes, are independent and communicate with each other to form a cross-chain swapping network. In exchange for securing the network, they will receive rewards in the form of fees for every swap made. Before becoming a node operator, a user has to provide a bond of RUNE. These bonds are held as collateral to ensure that node operators behave in the best interest of THORChain. The total bonded needs to be twice as big as the RUNE pooled.
During an asset swap, swappers will send their assets to THORChain and receive another asset. For instance, when swapping BTC to ETH, swappers will send their BTC to THORChain. When BTC enters the network, there will be a BTC to RUNE swap and then a RUNE to ETH swap. ETH will then be sent to the swapper from a THORChain vault. This process allows THORChain to perform native swaps without wrapping assets.
Market prices on THORChain are regulated by arbitrage traders, which in turn defines the value of asset swaps. These traders look for assets that are mispriced between markets to make profits from the price differences. This mechanism allows THORChain market prices to be regulated naturally, without the need for oracles.
With this liquidity pool model, THORChain is able to determine how much any asset is worth in any other asset simply by using pool balances. In effect, THORChain acts as a vault manager that monitors deposits and withdrawals while using pool ratios to price assets. This helps create decentralized liquidity, removing centralized intermediaries.
