Decentralized exchanges have been gaining popularity, with billions of dollars in trading volume. UniSwap alone sees over $1 billion in daily trading volume regularly. Although protocols like UniSwap, SushiSwap, and Curve are fantastic, they do not facilitate swaps across multiple Blockchains when it comes to trading assets inside the Ethereum ecosystem. To address this issue, one typical solution is to represent external assets on Ethereum as wrapped or synthetic tokens. Outside of Ethereum, the most popular asset on other Blockchains is, of course, Bitcoin. Bitcoin may be represented in a variety of ways on Ethereum, allowing it to be exchanged on decentralized exchanges. Wrapped Bitcoin, renBTC, and sBTC are just a few examples. Even though the majority of these methods are effective, they generally include significant sacrifices in terms of asset custody or security. What if there was a mechanism to exchange native assets instead such as trading Bitcoin on the Bitcoin Blockchain and Ether on the Ethereum Blockchain?

This is when Thorchain enters the picture. Thorchain is a decentralized liquidity protocol that enables native asset trading across Blockchains like Bitcoin, Ethereum, and Binance Smart Chain. Thorchain employs a liquidity pool concept similar to UniSwap or Bancor when it comes to managing liquidity. Liquidity providers lock two assets in a liquidity pool under this scenario. This offers liquidity for traders who wish to exchange between these two assets and pay a small fee to the liquidity providers. Thorchain is frequently described as a UniSwap cross-chain. This is typically a decent simplification for understanding the overall concept of Thorchain.

Thorchain began as a small project in 2018 during the Binance hackathon. After the hackathon, the Thorchain team continued their research, but later that year, they chose to put some of their efforts on hold as they waited for a few missing pieces of technology needed to build a fully functional cross-chain decentralized exchange. Tendermint and Cosmos SDK, as well as a working implementation of the TSS Threshold Signature Scheme, were among them. Because of the product's potential, the team decided to fund a small seed round and work on a proof of concept for Instaswap, a decentralized exchange built on top of the Thorchain protocol, which was later showcased at the Cosmos hackathon in Berlin.

The first go-to-market product, BEPSswap, was introduced in July 2019. BEPSwap's main purpose was to facilitate BEP2 asset exchanges, and it was only available on the Binance chain. In July 2019, the team chose to acquire more funding through the Binance DEX Initial DEX Offering. The IDO generated $1.5 million, which was enough to fund the project's further development. The team kept working on the protocol, and in April 2021, the Multi Chain Chaos Network, or MCCN, was released as a limited maintenance release. Even to this day, the Thorchain team has chosen to maintain a high level of anonymity.

A network of nodes created using Tendermint and Cosmos SDK is at the core of the Thorchain protocol. Using this method, Thorchain was able to develop a new Blockchain with its own consensus and network layer without having to recreate everything from start. Thorchain makes use of the Tendermint BFT model, which allows the network to establish agreement even if up to a third of the nodes fail. The consensus process is essential since Thorchain nodes must collaborate in order to record transactions from other Blockchains, for example.

Let's look at an example to understand how it works in practice. Assume a user wishes to transfer Bitcoin from the Bitcoin network to the Ethereum network. The user sends a standard Bitcoin transaction to the Thorchain network's Bitcoin vault, which is a Bitcoin address managed by the network. Thorchain nodes keep an eye on vault addresses to ensure that fresh transactions are acknowledged. Each THORNode, or Thorchain node, is made up of a few essential components to do this. The service that runs the Thorchain Blockchain, as well as a full node for each of the linked Blockchains and the Bifrost, are the most crucial. The Bifrost protocol serves as a link between the Thorchain network and other networks like Bitcoin and Ethereum. One of its key roles is to keep an eye on the vault addresses for inbound transactions that will eventually be turned into Thorchain witness transactions. The witness transactions are originally marked as pending, which is one of the Thorchain state machine's states. The transaction is transferred to the completed state once the majority of nodes agree on the state of the inbound transaction. The user's Bitcoin deposit is recorded on the Thorchain Blockchain at this moment. It's time to complete the trade by returning Ether to the user. The Thorchain protocol initiates a swap when a new inbound transaction is completed. The trade is recorded on the Thorchain Blockchain, and the Bifrost protocol is employed once more, this time to start an ETH withdrawal from the Ether outbound vault. This outbound transaction is converted from Thorchain's internal representation to a legitimate destination chain transaction using the appropriate chain client, in this instance the Ethereum client, then broadcast to the appropriate network. The switch is complete at this point, and the user now has Ether in their Ethereum wallet. Although this appears to be an easy task, it takes a lot of detail to work.

The network must be able to manage vault addresses on each of the connected Blockchains in order to sign transactions. Of course, holding private keys on each of the nodes would be a massive security issue, which is why Thorchain employs the Threshold Signature Scheme, or TSS, as previously discussed. TSS is a cryptographic mechanism for generating and signing distributed keys. You may think of it as a more advanced form of Multisig. Both have the same purpose in mind; to allow several parties to get together and sign a transaction only when a certain threshold is met. The key difference is that Multisig is generally done on the Blockchain's application layer. As an example, TSS support is always possible regardless of the Blockchain because it depends on basic cryptographic principles. This provides for a more cost-effective and secure transaction signing procedure. TSS offers a lot of advantages, but it hasn't been through as much testing as other common cryptographic elements like ECDSA or certain hash functions.

The operation of vaults is another interesting aspect of Thorchain architecture. Inbound and outbound vaults are the two types of vaults. The majority of the funds in the system are stored in inbound vaults. They are slower, but more secure because they require a transaction to be signed by two-thirds of all TSS signers, which may take up to 20 seconds. Because this would be too restrictive for the whole system, Thorchain established the smaller, less secure outbound vaults that each of the THORNodes manages. These vaults are faster because they only require one signature from each of the nodes that they run on. The system also tops up these vaults on a regular basis as the funds are needed for outbound transactions.

The RUNE token is the final key component in the Throchain architecture. RUNE is the engine that drives the Thorchain ecosystem and provides the economic incentives needed to keep the network safe. A native token and RUNE make up all liquidity pools in their system. To exchange Bitcoin for Ether, for example, the transaction must pass through the BTC-RUNE and Ether-RUNE pools. Each asset must be associated with RUNE. This generally results in fewer pools than a system like UniSwap, which can generate a pool out of any two assets. Aside from that, Thorchain nodes must fulfill the staking requirements by bonding a specific amount of RUNE. This bond is then used to underwrite the assets in the pools, securing the system. If a node tries to steal funds from the protocol, their bond is reduced by 1.5 times the value of the assets stolen, and the pools are restored. Furthermore, if the node does not provide dependable service, they risk having their bond cut.

The Thorchain protocol also encourages node operators to bond the maximum amount of RUNE at all times. This is accomplished using a process known as the Incentive Pendulum. The incentive Pendulum is to keep their system in the best possible shape. When 67 percent of RUNE in the system is bonded and 33 percent is sucked into pools, this is the state. In the ideal condition, the nodes would bond $2 million worth of RUNE for every $1 million worth of assets in their pools. RUNE is also used to pay network transaction fees, subsidized gas for sending outbound transactions to multiple networks, and to participate in Thorchain governance, where users may suggest which chains and assets the network should include next.

The Thorchain team is concentrating on building their Thorchain ecosystem while ensuring the system performs as intended with the introduction of the long-awaited Multi Chain Chaos Network. When it comes to communicating with the Thorchain protocol, users have many options. They can utilize one of the decentralized exchanges, such as ThorSwap or Asgardex, or one of the Thorchain-integrated wallets, such as ShapeShift. In the future, we should see additional applications and wallets integrate with Thorchain. On top of that, it appears that new chains and assets will be added to the network, as well as additional Thorchain nodes entering the network and, ideally, increased trading volume and TVL in the liquidity pools. The extra protective measures will eventually be withdrawn, and the chaosnet will take over as the mainnet. Thorchain appears to be an intriguing protocol and a missing component in the define ecosystem, allowing users to exchange local assets without the use of centralized exchanges.