In this section of the THORChain Coin Guide, let's investigate what Decentralized Finance on THORChain is and how it's platform works.
WHAT IS DEFI ON THORCHAIN?
THORChain is a Decentralized Exchange. It operates with the same basic elements as all other DEX's with the exception that THORChain is pushing the boundries of existing DeFi operations. How? By providing investment vehicles which allow liquidity transfers and pooling to occur cross-chain in native tokens.
- HOW DO SWAPS WORK ON THORCHAIN?
A modified version of Bancor's continuous lending pools is utilized by THORChain to conduct swaps. In this type of a transaction, assets are deposited into liquidity pools all shared with THORChain's native token, RUNE. In each and every trade occurring on THORChain, all other assets are swapped against the RUNE token.
Let's assume a user wants to trade coin X into coin Y. The THORChain protocol breaks the transaction into two separate transactions: 1.) Swap Coin X for RUNE tokens; and, 2.) then swap RUNE tokens for Coin Y. By using this mechanism to conduct swaps the ability is present for THORChain to perform cross-chain swaps.
When THORChain launched, the blockchains supported by it's protocol were Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Binance Smart Chain. The number of supported blockchains by THORChain is expected to rapidly grow.
- HOW DO LIQUIDITY POOLS WORK ON THORCHAIN?
The Automated Market Maker (AMM) model is utilized on THORChain to provide asset prices. The prices so generated are reflective of external exchanges. Traders continuously intervene on the occurrence of a price discrepancy through arbitrage to cause a convergence in pricing, thereby restoring the price to it's proper level.
Users providing liquidity in the THORChain system supply RUNE plus one other coin/token asset to a pool. For this provision, the liquidity provider receives a reward in the form of RUNE tokens plus a portion of the fees collected from those traders utilizing the said liquidity pool.
What’s more, validating nodes are incentivized to post double the monetary value of the assets held in vaults. Here’s why:
Fees from trades swing between liquidity providers and nodes. If nodes are “under bonded” a higher percentage of fees goes to nodes, encouraging more bonding. The opposite occurs if over-bonding occurs. When 67% of all RUNE in the protocol is bonded and 33% of it is staked, Thorchain is in its “optimal state.”
In theory, this over-collateralized system of bonding means corrupt nodes have more to lose than gain when acting dishonestly.
Beyond security, the DEX’s incentives are structured to create ample liquidity, as fees, non-custodial yield, and DeFi’s natural openness ensure trades on Thorchain typically have low slippage, meaning the difference between a quoted price and the actual trade price used is minimized.
[Smith, W. "What is Thorchain? The DeFi Bridge for Bitcoin, Ethereum and More". (Accessed July 19, 2021).
HOW DOES ONE USE DEFI ON THORCHAIN?
To use THORChain for DeFi (or any other purpose), you can follow these steps:
- You must have a wallet that is compatible with THORChain. Trustwallet is an available option. But for convenience and safety reasons, it is highly recommended to use Thorswap's native wallet, Keystore. (See step 2 to gain access to Thorswap).
- An interface such as Thorswap must be accessed.
- Click 'Launch App' in the upper right corner of your screen and connect your wallet.
- Either connect your existing wallet to Thorswap (upper right corner of screen) (or to download Keystore go here and follow the directions to download).
- You may conduct any desired DeFi transactions (swaps, withdrawing assets, depositing liquidity, withdrawing liquidity, etc.) using THORChain's Chaosnet.
A few items about Chaosnet merit mention:
- Chaosnet is in Beta and the site itself warns users: "Take your own Risk. Always back up your wallet and do not play with large funds. Bookmark app.thorswap.finance to be safe". [Thorswap. Chaosnet. (Accessed July 19, 2021)
- By design, Chaosnet has a limit on the swaps/liquidity that can be transferred cumulatively at any time as a protective measure while in Beta. If the FUNDS CAP OVER LIMIT exceeds 100% you will be unable to trade on Chaosnet. You will have to wait until this number falls below 100% to trade. The FUNDS CAP OVER LIMIT may be found near the top of the Chaosnet site page.
- The THORChain team is presently working to remove the aforementioned protective measures which will, in effect, transform Chaosnet into the THORChain Mainnet.
THORChain is a unique, innovative, and huge step forward in the development of an interoperable DeFi system. The availability of cross-chain swaps and liquidity pooling using native tokens provides great benefits both to system users and the DeFi investment vehicles as a whole. THORChain has definitely paved the road for future DeFi growth and development.