INTRODUCTION
Hello guys, this is Le Dex and here you can find stuff about decentralized finance. I'm writing a series about strategies and where I choose to put my money on DeFi. Today I'm gonna present you a full review of THORChain and especially THORSwap the main DEX of this chain.
You can check my previous episodes here:
NATIVE ASSETS
First of all, we gonna need to understand what is the meaning of native assets. I will give examples in order to understand that with a better way. If you have your funds into $ETH blockchain (ERC20) and you want to buy $BTC with these funds then you need to trade your $ETH for $WBTC. $WTBC (Wrapped Bitcoin) is an asset pegged to the value of $BTC inside ERC20 network. Users get the opportunity to swap assets of the native blockchain (Ethereum) with the "value" of the wrapped or synthetic asset. BUT, $WBTC IS NOT BTC. It represents its value but it is not $BTC. You cannot send your $WTBC to a Bitcoin Address in your wallet. To do that you need the native $BTC and here is how you did that before THORChain:
I used to send my $ETH to a CEX (Centralized Exchange) like Binance / Kraken / Kucoin / Crypto.com , trade them for $USDT and finally buy $BTC. Then I could send my native $BTC to my Bitcoin wallet address.
Although there is no problem with this example, I do not want get mess with CEX and especially with withdraws. I do not want for a CEX to know how much crypto I own and I don't like that sometimes they stopped my withdraw to send a new selfie or a new photo of my ID.
THORSWAP is the answer to this. (use my official link if you don't want to get scummed with another similar domain of Thorswap)
Thorswap is Multichain DEX (Decentralized Exchange) which means that users can accomplish transactions between many chains. So if you need to trade your native $ETH for your native $BTC Thorswap is a solution.
BENEFITS
- There is no third party taking part to this transaction. Really guys, this is MVP! You don't have to transfer you funds to a CEX (which are banks with crypto).
- Swap with a native asset of another chain. No need to buy more $WBTC, $WETH or similar wrapped/synthetic assets. Now there is a way to make a direct swap through chains!
- "Not your keys not your coins" they say. EU is trying to implement some regulations about CEX and control every transaction. You won't be able to send crypto to a non-custodial wallet that the owner hasn't proved his ownership with documents. So, how will Metamask ask for your documents? This cannot happen and this situation is a mess, so, Thorswap makes the first step to come up against it and gives us a solution.
- You can take profits from your native assets($BTC) without a third party involving. For example, you can swap your native $BTC for $UST in the Terra ecosystem and lend them into Anchor protocol with 2 moves!
SUPPORTED CHAINS
Currently there are 7 blockchain supported by Thorswap but the DEV team is focused on adding more and more. Recently they added TERRA network
- THOR
- TERRA
- BTC
- ETH
- BNB (be careful here this is not the ETH EVM, Binance smart chain or Bep20, but is the original Binance chain Bep2)
- LTC
- BCH
SUPPORTED WALLETS
If you dive inside Thorswap and try to connect your wallet you will see a huge list for the supported wallets. My proposal is the xDEFI WALLET which is a multichain wallet and can support all the networks we talked about above. You do not need to "Create a new wallet" as you can import your Metamask phrase into XDEFI and have fun!
You can download your xDefi extension from their official site: https://www.xdefi.io/ and import your old wallet or create a new one. After that, you can connect your wallet with Thorswap and here is how appears:
HOW IT WORKS
The model that Thorswap team uses is almost the same with other DEXes like Uniswap , Sushiswap etc:
1)There are Liquidity Providers who deposit their native assets into Liquidity Pools and in return they earn yield from the trading fees.
2)There are Traders who desire to exchange one asset for another (ex. native $BTC for native $ETH)
3)There are THORChain Nodes and this is the difference between Thorswap and other DEXes. They are users who run nodes calling THORnodes which compromise a Node for each blockchain supported. For instance, a node operator will be running a THORChain node, a Bitcoin node, an Ethereum node etc.
To understand this a better way, think of the Liquidity Pools like they are simply wallets controlled in a decentralized way by Node Operators, instead of a centralized server like in CEX. So, the (1)Liquidity Providers deposit their native assets in their native LPs (if you deposit $BTC the address of the LP will be $BTC address). When a trader wants to swap $ETH for $BTC this is what happens:
- Firstly, the validating nodes (node operators) will detect and agree that $ETH has been received into the $ETH LP(Liquidity pool) as they are running Ethereum nodes too.
- In the background the transaction is handled by pricing ETH to RUNE and then RUNE to BTC.
- Then the 2/3 of the node validators sign an export transaction from the $BTC LP to the trader's wallet with the value of the $ETH he used in the swap.
- So the value of the ETH address transferred to the value of BTC address in the trader's wallet and that is why you connect a wallet into different blockchains at the same time (xDEFI wallet).
But the question is here why someone has to trust those validators and what prevents them from a rug pull? The answer to this question is the native coin of THORChain $RUNE and we will explore it below.
$RUNE, THE NATIVE ASSET
$RUNE is the native coin of THORChain network. THORChain is based on COSMOS SDK. There is a total supply of 500.000.000 $RUNE and there is a circulation supply of 330.000.000 $RUNE. In the weekly chart we can see a strong support at 3.5$ which is a very good entry point but will it go there? So my personal plan is to DCA in when it falls cuz I count $RUNE as a medium risk asset and I want set up a good position with enough space in my portfolio (10-15%).
How it helps THORChain:
- When you want to validate a THORnode you must deposit a certain amount of $RUNE, as bond for the privilege. Then you will be able to sign transactions which is something that prevents from rug pulls. Actually it is a security mechanism called Proof-of-bond which helps penalize validators for misbehavior.***
- LPs must pair every deposit with $RUNE. If you want to deposit $100k BTC in the LP you have to deposit $100k RUNE too. If you deposit only BTC, half of your BTC will be sold for $RUNE under the hood.
- $RUNE is the asset in which fees are charged to traders and paid to validators and Liquidity Providers.
- It is used for THORChain governance(1 $RUNE = 1 vote)
***for those who dive deeper only: [ THORnodes are responsible for posting a bond with the a certain amount of $RUNE. This amount depends on the value of all native assets in the liquidity pools and it is x2 that value. For example, if the liquidity pools have $50m of combined BTC, ETH, LUNA, UST the validators are incentivized to collectively post at least $100m of RUNE in their bond in order to be able to run nodes [there is also a x1 value that is deposited by Liquidity providers. When you deposit $50m of assets you will have to deposit $50m of RUNE too for the liquidity. So, the protocol owns x3 the value of $50m means $150m]. If the value is less, system becomes "underbonded" and the trading fees are going only to THORnodes in order to catch the bond. If the opposites happens, the THORChain system becomes "overbonded" and the trading fees are going only to Liquidity Providers. This automatic system is called "Incentive Pendulum" and it is unique aspect of THORChain. ]
LIQUIDITY POOLS AND IMPERMANENT LOSS
There is 1 liquidity pool for each asset that THORSwap supports. For example:
- 25 assets supported by THORSwap = 25 liquidity pools with $RUNE pair ONLY.
- 25 assets supported by Uniswap = 150 potential liquidity pools with every pair you can think between the 25 supported assets.
This happens to build strong and deep pools. The result is less slippage for the traders which means better rates at trading and more trading = more fees = more liquidity providers.
You can find the variety of LPs in the following link in the "Pool section": THORSwap Liquidity pools
There are even more pools if you scroll down...
Just because there is only one asset in the display doesn't mean you deposit only this asset. Remember that every asset is paired with $RUNE and if you deposit only 1 asset the system will automatically sell the half of your asset's deposit for $RUNE in order to provide liquidity. What I don't like about liquidity pools is the impermanent loss which is something I try to avoid most of the times. Till now, I was trying to avoid with finding pairs with correlation in the price to be safe.(if you don't know what impermanent loss is you can check out this video: What is impermanent loss from Finematics a YouTube channel you have to subscribe for sure!)
BUT, THORSwap has a UNIQUE solution for this too:
They build a mechanism which is called Impermanent Loss Protection and ensures that a liquidity provider either will make a profit, or will leave with even. This mechanism provides you with 1% of your impermanent loss each day. So if you lock your liquidity for 100 days your impermanent loss will be covered partially 1% for each day to 100%. This mechanism tracks the Liquidity Provider's deposit value and when the users goes to withdraw, their loss against the original deposit value is calculated and refunded to the user with $RUNE from the reserve.
In the following link you can check out more information about this mechanism and how it works from GitLab:
https://gitlab.com/thorchain/thornode/-/issues/794
To deposit your liquidity you have to go to the "Deposit" section of the dashboard:
There are 2 ways you can deposit you liquidity. The first one is called symmetrical and you deposit 50% of the asset you want to deposit and 50% $RUNE. The second ways asymmetrical and you deposit 100% of your asset you want to deposit or you deposit 100% of $RUNE in the liquidity pool. The system will automatically sell half of your assets to make them 50%-50%. You can choose the way of the deposit from the three tab section: BTC / BTC + RUNE / RUNE.
CONCLUSION
In conclusion, we finally found a nice way to farm with our native $BTC and get high APY in a decentralized way . I was never comfortable with $WBTC and other wrapped tokens and I think other people will agree with me too. Also, I live in EU and I'm totally insecure about the regulation that these people are going to pass through and the consequences to my way of using crypto. The developers of THORChain are doing great work and in less than a year they have added so many blockchains. The future looks brilliant cuz they gonna add even more chains soon. THORSwap will be the next top platform for buying/selling crypto above from all centralized exchanges because DeFi is the future!
I will soon make a new thread about which strategies I'm going to follow in THORChain exactly. The reason I make that article is for us to learn about how it works and why THORSwap is such an innovation for the Decentralized Finance.
However, this is not a financial advice and you must always do your own research before you invest in DeFi space.
I will be happy to answer any of your questions down below to the comments or send me a personal message through twitter. If you like my stuff and you find it useful you can direct donate me:
Addresses
- BTC : 1Gzsdiw4PBbD4zLAvVRcNR6ECbbSd69y6C
- ETH : 0x3689115C7f622c31Fa400978AeC1072831B29872
- ADA : addr1q95hvjls2rdvxlz94q25q45tu6083pmc5g65upglfqqljeaeuket7v2vcgqw3a0wxljtvs88mzj8jndqa4mmr6wm2uyqqnc7ja
- HARMONY : one1x6y3zhrlvgkrr7jqp9u2asg89qcm9xrj2c24aq
- LUNA : terra1xwq59th62jeuwr6d8nesyz4v6ak9lr7jlp8ypf
- SOLANA : 5emxBQPgyqB8JQkwPQiRKWXKp3u1A4LeAyryaPpiaLzY
