How will THORChain replace CeFi?

2022.12.26

How will THORChain replace CeFi?

The mechanism behind THORChain's security model.

2022.12.26 - 09:32:38

THORChain

Navigating Web3 tides with focused insights

The mechanism behind THORChain's security model.

Written by: Revelo Intel

Compiled by: TechFlow

In this episode, host Dan Smith joins Sam, Matt, and Westie from Blockworks Research along with THORChain core developer Chad Barraford to discuss how THORChain could replace CeFi, the mechanisms behind THORChain's security model, and more.

Below are notes taken from the podcast.

THORChain, a Cross-Chain DEX

Chad does not view THORChain as a cross-chain bridge, because it involves exchanging one asset for another rather than simply transferring value between chains.
THORChain is more like a decentralized alternative to centralized exchanges.
THORChain is working on building new protocols capable of competing with centralized exchanges by offering faster, cheaper, and more transparent services.
THORChain targets a broader global audience, unlike most centralized exchanges that focus on specific countries.

The Unique Economics and Security Design of $RUNE

THORChain has a token called $RUNE, which provides economic security for non-native assets on the network.
In the event that all assets on the network are stolen, $RUNE would go to zero, but attackers would have spent more money acquiring those stolen assets—otherwise they can only burn $RUNE and receive a small amount of other tokens.
Economic security is important for "creating economic disincentives for attackers targeting the network" and "preventing attacks on the network and theft of valuable assets."
THORChain’s unique asset design ensures attackers lose more value than they gain during an attack.
The network undergoes a process called "Churn" every few days, where it removes inactive, inefficient, or outdated nodes.
Currently, there are approximately 86–88 nodes in the network.
Gaining control over two-thirds of these nodes is extremely expensive and difficult, as a node must have a larger bond size than all other nodes in the network.
Integrating with IBC (Inter-Blockchain Communication protocol) carries both risks and benefits.
The goal is to support various chains including Bitcoin and Ethereum, aiming to be stronger and more flexible than IBC.

Connecting New Chains to THORChain

The process of adding a new blockchain such as Solana to the network includes creating chain clients, testing, integrating into the Exchange.js library, and marketing the addition to the community.
Technical requirements for adding new blockchains include the ability to generate private keys and the cost of running a node on the network.
The community plays a role in deciding whether to add new blockchains.
Binance Chain and Ethereum L2s are potential candidates for future integration.

Liquidity Incentives

The value of $RUNE can impact system security.
If the value of $RUNE increases, it creates greater demand for $RUNE, leading to increased security and TVL.
The system has a natural incentive mechanism that dynamically shifts rewards toward nodes and away from liquidity pools based on market conditions, encouraging node operation and maintaining a 1/3 to 2/3 balance between them.

THORChain Savers Vaults and Synthetic Assets

Significant progress was made early in THORChain’s development, such as using a Flip-based feedback mechanism to collect fees, but it faced challenges attracting liquidity.
The solution was to offer single-sided yield, allowing users to earn Bitcoin without exposure to other assets.
Yields come from the pool itself, generated through swaps, trades, and block rewards.
Synthetic assets, backed and redeemable by underlying assets, facilitate trading between synthetic assets and Layer 1 assets.
The goal is to increase the number of synthetic assets on the network to boost user yields and build alternatives to centralized services.

Impermanent Loss Protection and LP Risk Profile

There is a possibility of removing the Initial Liquidity Protection (ILP) feature.
ILP was implemented to incentivize liquidity providers and reduce loss risk for dual-sided liquidity providers.
The network has now introduced Saver Vaults as an alternative option for risk-averse users to earn yield without being exposed to ILP, thereby altering the traditional dual-sided LP risk profile.
Synth Caps also serve as a method to limit excessive liquidity in certain pools.
The aim is to balance the needs of liquidity providers and users while maintaining network stability.

Managing Risk via Synthetic Asset Utilization Caps

Higher utilization of synthetic assets results in higher leverage within liquidity pools.
It is not recommended to enable Protocol-Owned Liquidity (POL) for pools with less than 50% utilization, as this may create greater buy and sell pressure on $RUNE, potentially driving down its value.
At 50% utilization, buy and sell pressures cancel each other out; however, at higher utilization levels, buy pressure exceeds sell pressure.
POL allows synthetic asset utilization to scale up as high as possible toward a hard cap while protecting LP value.
If the value of synthetic assets fluctuates significantly, LP values will also change, but POL intervenes to support LPs and prevent temporary losses.
The ultimate backstop for synthetic asset and LP value is the reserve fund, currently representing around 40% of RUNE’s circulating supply.

THORChain Lending

Focused on innovative and experimental lending designs structurally different from other options in the DeFi space.
It enables asset-agnostic and chain-agnostic services, including the ability to support first-layer Bitcoin loans.
The design supports zero-interest, no-liquidation, and no-maturity loans, making it a public goods network rather than a profit-driven private entity.
The design allows people to take out loans using their cryptocurrency without worrying about financial stress or interest rate fluctuations.
It is also revolutionary in ensuring borrowers can always reclaim their collateral.

THORChain as Backend Infrastructure

Products built on THORChain are user-friendly.
User interfaces will be built atop THORChain, similar to the XDeFi wallet.
THORChain itself won’t need to build user interfaces in the future.
The vision is for THORChain to fade into the background as part of crypto infrastructure, becoming invisible to end users.
Trust Wallet recently integrated with THORChain.