Messari: A Detailed Explanation of THORChain's Product Architecture, Development Status, and Roadmap

Original Author: Sami Kassab, Messari

Original Title: 《THORChain: Approaching Valhalla》

Compiled by: Biscuit, Chain Catcher

Summary

• THORChain's TVL has reached a historic high (ATH) of $1 billion, with nearly $500 million in liquidity pools.
• Total trading volume reached $2 billion in March, with expectations for a new record in April due to the popularity of LUNA and UST.
• In less than three weeks after integrating Terra, $90 million has accumulated in the liquidity pools of UST and LUNA, with average APYs since launch of 44% and 18%, respectively.
• Since the beginning of this year, mainstream assets on the network have averaged double-digit APYs: BTC 18%, BNB 40%, ETH 20%, and BUSD 20%.
• Migrating 3% of UST from Anchor and 5% of BTC from Ethereum to THORChain would increase the deterministic price of RUNE by nearly 500% compared to current levels.
• Last month, Synths were activated on the network, now accounting for 24% of total capacity.
  In the past two years, there has been a surge of new Layer1 protocols, indicating that we are in a multichain world. As these Layer1s grow into isolated ecosystems, cross-chain liquidity becomes increasingly important. Ryan Watkins has been promoting THORChain as a decentralized cross-chain liquidity protocol that serves as an alternative to exchanges and custodians, achieved through cross-chain liquidity pools composed of THORChain's native asset RUNE and other blockchain's native assets in a 1:1 ratio.
  Currently, seven mainstream blockchains are connected to THORChain, with over 25 assets on the network. Using THORChain, users can exchange native Bitcoin, Ethereum, BNB, and more in a truly decentralized manner.
  Chaosnet's Chaotic Period
  July 2021 was a tough month for THORChain. In a span of two weeks, the network suffered two consecutive attacks on its ETH router, resulting in the theft of approximately $16 million in funds. Fortunately, all users affected by the hacks were compensated from the protocol's treasury. Given the complexity of cross-chain swaps, these hacking incidents were not surprising. Compared to DEXs with only a few thousand lines of code, THORChain has over 200,000 lines of code. In fact, one of the hackers left a message in the tx data field that included "This is just a lesson to reduce future damage" and "Don't rush to control the code of a nine-figure fortune."
  After such an embarrassing failure, the team halted all development collaborations to focus on resolving the issues at hand. Countless security-focused changes and initiatives were made to the protocol, network, and programs. Additionally, many third-party audits were commissioned, a bug bounty program was launched with Immunefi, and an independent security team named THORSec was established with Nine Realms. Overall, these changes will make the protocol more resilient and robust.
  Three Pillars
  The three pillars of cryptocurrency are decentralized exchanges, store of value, and stablecoins. THORChain allows users to swap assets without a centralized exchange and without KYC. This enables anyone in the crypto ecosystem, regardless of their location, to trade Bitcoin and use it as a store of value. Furthermore, THORChain enables Bitcoin holders to bridge to another chain without relying on centralized third parties and without converting assets, fulfilling the first two parts of the three pillars.
  On March 25, Terra introduced UST and LUNA to THORChain. LUNA is the second-ranked Layer1 ecosystem by total value locked (TVL), with an on-chain value of approximately $26 billion. Terra's native decentralized stablecoin UST has a market cap of over $16 billion. In less than three weeks, Terra has become the fourth largest chain on THORChain, with liquidity exceeding $90 million.
  UST addresses the main issues with stablecoins: most stablecoins are centralized, untrustworthy, and can be frozen, and are currently under strict scrutiny from regulators, while allowing permissionless trading of fully decentralized stablecoins on THORChain.
  Network Status
  Recently, the THORChain network surpassed the $1 billion TVL milestone, composed of assets in its liquidity pools and RUNE providing security for the network. Previously, the protocol had set a cap on its liquidity pools to protect the network and users during the early development phase. When Terra was integrated into THORChain, this threshold was removed, allowing liquidity to grow unrestricted. Looking ahead, the only hard limit on liquidity pool depth will be to protect the total supply of RUNE tokens released, and due to the network's incentive pendulum, it is unlikely to restrict growth.
  
  THORChain restarted the network after being attacked, restoring trading functionality, and liquidity soared to new heights, exceeding $500 million in March. With the growth of liquidity, trading volume reached over $2 billion. The increase in liquidity on the network reduced slippage, which directly lowered swap fees, attracting more trading volume. The increase in trading volume led to higher yields, thereby attracting more liquidity into the pools.
  This created a virtuous cycle where deeper liquidity leads to more trading volume, resulting in higher APYs, which incentivizes more liquidity to enter the network and directly boosts the price of RUNE. This is why THORChain is referred to as a liquidity black hole.
  
  Historically, the assets with the highest trading volume are BUSD, followed by BTC, BNB, and ETH. In just 11 days in March, there was nearly $1 billion in trading volume, with expectations for April's trading volume to reach ATH. This is partly attributed to the trading volume of LUNA and UST, with UST being the second highest asset by trading volume this month, while BUSD's trading volume is historically the highest, likely because Terra is the only fast and low gas chain supported by THORChain. With the addition of UST, BUSD may soon be surpassed.
  
  The six assets with the deepest liquidity pools on THORChain are BTC, ETH, BUSD, LUNA, UST, and BNB. Given that BTC and ETH are the most liquid assets in all of cryptocurrency, it is not surprising that they dominate the asset depth on THORChain.
  
  The mainstream assets listed above have averaged double-digit APYs since the beginning of the year: BTC 18%, BNB 40%, ETH 20%, BUSD 20%, LUNA 18%, UST 44%. APY includes fees generated from trading and block rewards. As the scale of synthetic assets on THORChain expands, APY will increase as holders do not have to pay transaction fees to liquidity providers.
  
  Nodes
  THORChain's network has been criticized for a lack of decentralization due to a limited number of nodes. This situation has changed in the past six months. Over 60 nodes have gone live, reaching the previously planned cap of 100 active nodes. In early April, the team voted to increase this active node cap to 120. Nodes will gradually be added to the active network until the cap is reached.
  
  The recent increase in the number of nodes is primarily due to the project team's decision to allow seed round investors to use their locked RUNE to run nodes. Approximately 5.2% (26 million) of the RUNE supply was allocated to several large seed round investors and has been locked until the mainnet delivery date. The new protocol will allow investors to view tokens from the treasury and bind them to THORChain nodes to enhance network security. The protocol terms require these RUNE to be bound to nodes for 12 months or until the mainnet launches.
  
  Currently, there are 162 nodes on THORChain, with 102 active. Running a node requires operating a THORNode for the network itself and running a full node for each blockchain supported by the network (Bitcoin, Ethereum, etc.). Therefore, running a full node has high hardware requirements, leading most nodes to use cloud service providers. Since most nodes rely on the same cloud service provider, the team is developing plans to prevent a single cloud provider from shutting down the network, and the community is also considering utilizing the Akash network as an alternative to centralized cloud providers in the future.
  Deterministic Price
  THORChain has a unique security model where node operators must bind twice the value of non-RUNE assets in the liquidity pool. Additionally, each liquidity pool is 50% RUNE. This means that for every $1 of non-RUNE value added to the network, $3 of RUNE is locked. Essentially, the market cap of RUNE is at least three times the non-RUNE assets locked in THORChain's liquidity pools, allowing for the calculation of a benchmark RUNE price. This baseline RUNE price is referred to as the deterministic value. Since the trading price of RUNE is typically above the deterministic value, the speculative coefficient can be determined. Over the past six months, the coefficient has ranged from 3x to 10x, averaging 6x.
  
  The ATH of RUNE price reached in November 2021 gradually declined, eventually bottoming out in March 2022. As the price of RUNE began to rise, the deterministic price also started to increase, indicating that improvements in the network's fundamentals supported the price increase. Interestingly, the speculative coefficient was at a historical low when the deterministic price was at ATH.
  Since the deterministic value of RUNE is directly related to the TVL of THORChain's liquidity pools, the baseline RUNE price can be modeled based on future predictions of TVL growth. With this in mind, THORChain currently only receives inflows from two major markets: the Terra ecosystem and Bitcoin.
  Anchor is a decentralized money market based on Terra, known for providing a fixed yield of 20% on UST stablecoin investments. Arca's research analyst Bodhi Pinkner stated that THORChain could be a beneficiary of Anchor's shift to dynamic yields. Recently, Anchor passed a vote to transition from fixed yields to semi-dynamic yields to make the protocol more sustainable. Therefore, as Anchor's yields begin to decline below 20%, investors may seek higher yields elsewhere. THORChain's offering of 44% APY on UST investments may attract some users into its liquidity pools.
  Historically, Bitcoin has not had native DeFi projects. Centralized services like BlockFi and Celsius provide Bitcoin yields through lending but require sending Bitcoin to third-party custodial wallets, which conflicts with the decentralized spirit of cryptocurrency. As a result, synthetic Bitcoin products like renBTC and wBTC were created to allow Bitcoin to connect to Ethereum and join its DeFi ecosystem. Although there are currently $13.3 billion in synthetic Bitcoin assets on Ethereum, connecting Bitcoin to Ethereum for yield purposes remains primarily centralized and requires many complex steps. THORChain offers a decentralized alternative with yields several orders of magnitude higher than existing solutions.
  
  Based on the aforementioned situations with Terra and Bitcoin, a portion of these assets held by individuals and institutions may shift to THORChain as it proves its reliability. Due to the deterministic pricing mechanism, the minimum price of RUNE can be predicted based on potential future TVL growth. Assuming that 3% of UST from Anchor and 5% of Bitcoin from Ethereum are transferred to THORChain, it would result in a minimum benchmark price of RUNE at $12.44, equivalent to 484% of the current deterministic price.
  
  Synths
  In March 2022, THORChain's synthetic assets (Synths) went live on Chaosnet, fully collateralized by liquidity pools. The launch of Synths enables instant settlement of assets, with users facing no risk of permanent loss or liquidation, and costs only a fraction of the L1 asset swap costs. Traders and arbitrageurs can use Synths to bypass L1 gas costs. The main difference between Synths and Synthetix on Ethereum or Mirror on Terra lies in capital efficiency. On Synthetix, synthetic assets require a 400% collateralization ratio, while Mirror requires at least a 150% collateralization ratio. Since THORChain Synths are backed by underlying assets in liquidity pools, the collateralization ratio will always be 100%.
  
  Since their launch, Synths have rapidly gained significant attention. As the usage cap for Synths increased from 5% to 15%, they now account for 24% of all network capacity. The maximum cap for Synths is expected to gradually increase until it reaches 33% of pool depth (16.6% of non-RUNE asset depth).
  As THORChain is built on top of the Cosmos SDK, once IBC is integrated into the network, Synths will be able to interact with over 250 applications in the Cosmos ecosystem. In addition to THORSynths, the team plans to launch a new set of cross-chain DeFi features, including lending, savings accounts, stablecoins, and a THORChain address naming system.
• Lending: Users will be able to borrow dollars from blue-chip LP positions at 0% interest, without liquidation, with collateralization ratios as low as 100%.
• THORSavings: Interest-bearing accounts with single asset exposure. Users will be able to simply lock value directly from their wallets and earn yields in THOR.USD or blue-chip assets.
• THOR.USD: An algorithmic stablecoin pegged to the dollar, with a minting and burning model similar to that of UST/LUNA.
  The use of Synths, lending, and THORSavings will all increase the depth of THORChain's liquidity pools, creating a liquidity black hole. This will directly impact the price of RUNE by increasing the deterministic price.
  Path to Mainnet
  The transition of THORChain from Chaosnet to mainnet is referred to as the planning phase. To complete the transition, the core project team will hand over full control of the protocol, GitHub, social media, and treasury to the community. Before the mainnet launch, the core team's goal is to have at least 100 nodes on the network, deploy at least 5 major projects, launch THORFi, and provide sufficient community support for wallets, exchanges, dashboards, and bots.
  As the first two goals have already been met, the team plans to launch the mainnet sometime in the second half of 2022. Meanwhile, the THORChain community is working to integrate assets from Cosmos (ATOM), Avalanche (AVAX), Haven (XHV), Decred (DCR), Dash (DASH), and Monero (XMR), all of which are on THORChain's roadmap for 2022.
  Final Thoughts
  Although THORChain has faced some challenges in its development, the project team and community continue to build and move towards Asgard. Over the past six months, THORChain has significantly improved its security measures, integrated Terra and Dogecoin into the network, activated Synths, doubled the number of nodes, and more than doubled its TVL.
  Looking ahead, THORChain focuses on integrating more chains, particularly privacy coins, launching THORNames, integrating with IBC and DEX aggregators, and ultimately launching THORFi. THORFi is the final component needed for THORChain to become a full-fledged DeFi financial hub.