THORChain is an independent blockchain built using the Cosmos SDK and will be used as a cross-chain decentralized exchange (DEX). But what is THORChain and how does it work? If you do not know that, this article will help you to learn about it. THORChain is a decentralized liquidity protocol that allows users to exchange assets without permission. It enables the exchange of native layer-1 assets like BTC by acting as a vault manager. To secure its network, THORChain uses Tendermint and Cosmos-SDK.
What is THORDChain?
THORChain is a multi-currency protocol with a cross-chain architecture that allows users to exchange tokens from different networks (including Bitcoin and Ethereum) with other tokens that do not belong to the same network.
Cryptocurrency traders and investors rely on decentralized exchanges to exchange their cryptocurrencies, such as between Bitcoin and Ethereum, which are not possible with native networks. THORChain solves this problem by creating an interoperable environment that allows users to exchange different cryptocurrencies directly without leaving the protocol and without intermediaries.
The Thorchain protocol also supports the decentralized exchange (DEX) of the same name. Like Uniswap or SushiSwap, Thorchain DEX allows anyone to trade or lend their crypto assets by providing liquidity to asset pools, and receive a return (or "yield") for those assets in exchange.
THORChain is a Tendermint-based chain and therefore uses Tendermint BFT (Byzantine Fault Tolerance) as its consensus mechanism. It also employs Proof of Stake (PoS) to resist Sybil. As part of the PoS element, the validator system can stake RUNE tokens to run network nodes and validate transactions. THORChain allows token holders to delegate these validators, which checks the validators and allows the delegators to receive a portion of each block reward.
What is Thorchain (RUNE) used for?
RUNE serves the economic functions within the THORChain system by providing incentives and deterrents to network participants. RUNE is used to:
Validators: They must stake RUNE to be part of the validator set, which has a lock-in period to prevent risk-free attacks
Gas Fees: All network transaction fees (gas or "gas" used to change the protocol ledger) are paid in RUNE. The network may need to charge fees for executing transactions, transactions, and cross-chain transactions.
- Liquidity: Stake RUNE in a Continuous Liquidity Pool (CLP) to earn liquidity fees
- Rewards: Block rewards for validator nodes are paid in RUNE
How does THORChain work?
To enable cross-chain exchange of non-native tokens, THORChain employs a protocol called continuous lending pools used by Bancor DEX. All supported non-network native cryptocurrencies are deposited into the liquidity pool along with the native token RUNE.
When a user initiates a transaction, that is, an exchange between two non-native assets, the system automatically converts one token to RUNE and then RUNE to another token. Essentially, instant-executed double swaps are what enables non-custodial swaps on the THORChain protocol.
There are 100 to 300 validators, and nodes need to bind at least 1 million RUNE to get validators. Nodes are hosted on an additional layer with extra security to facilitate control over the network.
So I hope now you will understand what is THORChain and how does it work. The team at Thorchain believes that its cross-chain swap protocol is just the beginning. They want to build a protocol for all DeFi, offering lending and even synthetic services across various blockchains.
