Thorchain is a decentralized liquidity protocol that enables the exchange of assets across various blockchains in a non-custodial manner. The protocol is built using the Tendermint consensus engine, Cosmos-SDK state machine, and GG20 Threshold Signature Scheme (TSS). It operates as a Layer 1 cross-chain decentralized exchange (DEX) and is secured by its native token, RUNE.
The key components of Thorchain include the Tendermint consensus engine, Cosmos-SDK, GG20 Threshold Signature Scheme (TSS), Asgard Vaults, and the THOR.RUNE token. The Tendermint consensus engine allows Thorchain to achieve Byzantine fault tolerance (BFT) and maintain network security. The Cosmos SDK enables Thorchain to scale efficiently and interoperate with other blockchains, enhancing the overall user experience. The GG20 TSS allows Thorchain to secure funds in on-chain vaults without the need for multi-signature wallets. Asgard Vaults are on-chain vaults that store and manage assets within Thorchain, controlled by validator nodes. The THOR.RUNE token is used for securing the network and participating in the liquidity pools.
Liquidity Pools and Swaps
Thorchain operates a series of liquidity pools that users can deposit their assets into. These liquidity pools facilitate swaps between various native crypto assets, such as Bitcoin, Ethereum, Binance Chain, Avalanche, Cosmos Hub, Dogecoin, Litecoin, and Bitcoin Cash, as well as the various tokens that are native to those chains. Users can provide liquidity to these pools and earn yield from trading fees, incentives, and block rewards. Liquidity providers can deposit assets symmetrically or asymmetrically, with each method having its unique advantages and drawbacks.
Impermanent Loss Protection
Impermanent Loss Protection (ILP) was available for liquidity providers in the past. However, with the introduction of Savers Vaults, ILP for new Dual LP deposits was removed at block 9450000. Deposits made before this block will continue to receive ILP indefinitely.
Integration with THORSwap Protocol
THORSwap is built on Thorchain’s cross-chain liquidity protocol, which enables the platform to offer native asset swaps and seamless integration with multiple blockchains. By leveraging Thorchain’s innovative technology, THORSwap eliminates the need for users to rely on centralized exchanges for transferring crypto assets.
THORSwap Use Cases
THORSwap’s primary use case is to enable users to perform permissionless cross-chain swaps. This functionality simplifies the process of trading and exchanging assets across different blockchains, providing users with a more convenient and efficient experience. Some of the platform’s notable use cases include trading, liquidity provision, and cross-chain asset management.
User Interface and Wallet Support
THORSwap’s user-friendly interface simplifies the process of conducting cross-chain swaps for both experienced and novice users. The platform supports six wallet types for seamless integration with different blockchain networks, including MetaMask, Trust Wallet, Ledger, Trezor, WalletConnect, and Keystore.
Regulatory and Tax Considerations
When adding liquidity asymmetrically, it can be considered either a taxable event on half of the user’s position or a non-taxable event, as users do not swap assets before adding them to the pool. However, it becomes a taxable event when withdrawing the deposit. The tax implications depend on the legislation in a user’s country and the position taken by the taxpayer.
RUNE is the native token of Thorchain. It serves as a base pair for users to swap RUNE for any other supported asset. It has a supply of 500 million and four main use cases: settlement, security, governance, and incentives. RUNE is used as the settlement asset for all liquidity pools, facilitating swaps between two pools. A 1:1 ratio of RUNE:ASSET is required for each pool. For example, a pool with $100,000 in BTC will need to hold $100,000 worth of RUNE. To ensure security, node operators have to bond twice as many RUNE as the amount they added to a pool. The RUNE bonds are held as collateral to ensure that the node operators behave in the best interest of the network. RUNE token holders can choose which asset or chain they want to give priority to. They do so by voting with their liquidity. For instance, a pool that has the most RUNE committed will enjoy higher priority. Block rewards and swap fees are paid to liquidity providers and node operators in RUNE on a set emission schedule. RUNE can also be used to pay for gas fees.