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While the broader market has been engrossed in a widespread sell-off, a few protocols have been reaping the rewards of their relentless innovation. Among these, Thorchain, a cross-chain decentralized exchange (DEX), has been making notable strides.
THORChain (RUNE) operates as a decentralized liquidity network that aims to make improvements on the XYK liquidity pool formula implemented by protocols such as Uniswap or Bancor. THORChain is its own independent blockchain network that allows for cross-chain swaps between any assets without the need to wrap or “peg” tokens. Theoretically, this means you can use THORChain to directly swap Bitcoin (BTC) for Ethereum (ETH) without using a centralized exchange, such as Binance.
The project itself was initially founded in 2018 to improve the “flawed” CEX model of transferring cryptoassets between chains. So, THORChain's initial motivations were to create a network that could bridge external chains and facilitate cross-chain transactions as a form of a DEX itself. The project’s founders themselves are more difficult to pinpoint as most have chosen to remain anonymous. The community behind the project generally fuels much of the development, with those who have been working on THORChain for greater than 18 months being considered contributors.
THORChain’s primary use case is to operate as a cross-chain decentralized exchange. The network aims to improve upon the interoperability of the emerging multi-chain space without compromising decentralization or security. To develop a functioning cross-chain DEX, THORChain leverages an automated market maker (AMM) model that uses its native token RUNE as the base swap pair for liquidity pools. For this reason, RUNE serves as an underlying intermediary that powers the entire protocol.
In a way, THORChain serves as a unique cross-chain bridge that facilitates any-to-any token swaps concurrently through the development of something called Continuous Liquidity Pools (CLPs). This is what allows THORChain to successfully enable cross-chain functionalities with the qualities of a DEX to facilitate non-custodial token swaps across networks. This is all made possible through the use of RUNE.
The RUNE token has two key utilities:
- Liquidity pool token
- Collateral for bonds
RUNE acts as the base pair for THORChain liquidity pools, allowing users to swap between different asset pools using RUNE as a back-end intermediary. Additionally, RUNE acts as a security token by serving as collateral for bonds. The bonded RUNE is kept within a vault and is required to be staked by nodes on the network. If a node is acting maliciously, THORChain can then slash the bond and penalize the node.
A Resilient Rally for RUNE
Thorchain's native token, RUNE, experienced an approximate 30% upsurge in the past week. This can be primarily attributed to the introduction of the "Streaming Swap" concept on August 1. Prior to this innovative move, the daily trading volume lingered around $11-16M in July. However, post the Streaming Swap introduction, volumes skyrocketed to an impressive $55-95M by mid-August.
The essence of the Streaming Swap is its ability to dissect substantial cross-chain trades into more manageable fragments, executed over a 24-hour timeframe. This strategy mirrors the Time-Weighted Average Price (TWAP) trade, aiming to mitigate any significant market impact.
Time-weighted average prices (TWAPs) are a type of on-chain price oracle that is used to calculate the average price of an asset over a period of time. TWAPs are more resistant to manipulation than spot prices, which are calculated as the ratio between the assets' reserves.
Uniswap V2 introduced TWAPs, and Uniswap V3 improved on the mechanism by calculating the geometric mean of relative prices for both assets in an arbitrary pool. This approach lowers price slippage by making sure that most of the liquidity is provided at a small range around the effective, real price.
However, concentrated liquidity also makes it easier for manipulation attacks. In these attacks, the attacker swaps a large amount of one asset in the pool to create an inflated oracle update. The attack's success depends on the achieved deviation between the wider-market spot price and the manipulated spot price, and how many blocks the price manipulation is held for.
From the security perspective, the TWAP approach is based on the assumption that arbitrageurs will front-run de-manipulating transactions and keep the attack very expensive and not profitable for the attacker.
Among the advantages of TWAPs are simplicity of calculations, inexpensive executions, and certainly better protection against price manipulation than the spot price. However, there are some tradeoffs that put the user experience or even funds at risk.
- Data feed accuracy and freshness: Using the price average over many blocks increases the costs of manipulation, while a shorter TWAP value follows closely the spot price. This is fine at the time of low fluctuations, but it becomes problematic in the high volatile time because the TWAP does not respond to the real condition of the market. So in case of rapid price shifts, the TWAP will deliver “outdated”, stale prices derived from past quotations. This may be the case during rug-pulls, rapid market collapses, and growths or exploits. Sadly, inverse proportionality between data accuracy and security is inevitable in this case.
- Scalability of security: This inverse proportionality leads to the impossibility to optimize both data accuracy and security at the same time, making it hard to scale the security in the long term. So, the only, but capital-inefficient way for scaling this solution is to increase the liquidity on the tracked market, making it more expensive to manipulate, because the attack will require more assets to occur. It is especially important to have some liquidity across the entire range in the case of Uniswap V3 which implements concentrated liquidity - it significantly increases the cost of potential attack. However, there is no certainty that the liquidity will not change over time.
- Market coverage: TWAPs have another limitation - they can only represent the price action from a single trading environment, such as AMM DEX. It means that the delivered price data don’t reflect the global markets. Furthermore, a sufficient level of security is dependent on a sufficient level of liquidity, which can shift over time.
- Concentrated liquidity: Concentrated liquidity even significantly lowers the cost of manipulation, compared to the full-range method.
- TWAT: Based on x*y=k equation, if somebody wants to move the price, the price impact increases. When the liquidity is concentrated between some limited price range, attackers can push out an asset’s price out of that narrow range, up to max tick limit (practically to infinity). In addition, due to the lower slippage, attackers have much less risk of being arbitrage (as seen in the case of one of the Rari exploits).
Overall, TWAPs are a more secure way to calculate the price of an asset than spot prices. However, they are not without their limitations. It is important to be aware of these limitations and to take steps to mitigate them when using TWAPs.
The Future for Streaming Swaps
Beyond its obvious benefits, the Streaming Swap tackles a long-standing trader inconvenience. Instead of compelling traders to manually parse extensive trades into smaller swaps—each requiring its own on-chain transaction and invariably inflating gas fees—Thorchain has seamlessly automated the process. The outcome? All fragments are consolidated into one inbound and one outbound transaction.
Thorchain's claim to fame is its unique position as the sole cross-chain DEX that facilitates the exchange of native tokens spanning various chains. In this context, its rivalry isn't with fellow DEXes but predominantly with centralized exchanges (CEXes). The Streaming Swap feature has further fortified Thorchain's stance, allowing it to vie with CEXes in handling more sizable trades.
While the recent surge has arguably pushed RUNE into an overbought zone, the potential for DEX growth remains vast, particularly as they continually refine their features, gradually mirroring those flaunted by CEXes.