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If you had 1 $BTC and wanted to trade it for $ETH, how would you go about doing it?
Most people would use a centralized exchange like Binance or Coinbase to make this swap.
That’s just… Embarrassing. 🤮
It’s been 15 years since Bitcoin’s inception and we still don’t have a standard alternative of swapping between tokens that live on different blockchains, fully onchain.
The standard is still using centralized entities which not only require KYC – that generally takes hours or even days to complete – but that also makes you give up custody of your assets, something that goes against the promise of blockchain.
Not to mention the billions of dollars that the exchanges (FTX, Mt.Gox, Poloniex etc…) have lost on behalf of their customers over the years.
Here at Milk Road, we’re all about bringing more people onchain, so today we’ll talk about perhaps one of the most important protocols in crypto: ThorChain.
ThorChain is a protocol that allows anyone in the world to swap between tokens that live on different blockchains, in a fully decentralized and permissionless way.
With ThorChain, if you had 1 $BTC and wanted to trade it for $ETH, you’d just need:
- A Bitcoin wallet where you hold your $BTC
- An Ethereum wallet
- The ability to sign a couple of transactions
That’s all you need to make swaps across multiple blockchains, in a fully onchain manner, without using a CEX or even a multi-chain bridge like Wormhole or Ronin, which were hacked for billions in the past.
ThorChain makes these swaps in a safer and decentralized way, ensuring you don’t lose your funds on the way.
At a point in November, over $200 million in $BTC was traded (24h) via ThorChain, which became the 3rd largest decentralized exchange by volume, just behind Uniswap and PancakeSwap.
Principled Bitcoiners should be familiar with @THORChain It is the *only market* to trade #Bitcoin at scale without an intermediary... which is the entire point of Bitcoin. >$200m of native non-wrapped BTC was traded here in the past 24 hrs, permissionlessly. If you'd like… twitter.com/i/web/status/1…
— Erik Voorhees (@ErikVoorhees)3:49 PM • Nov 12, 2023
When that happened, ThorChain settled around 2% of the total Spot Bitcoin volume that day. That’s no small feat.
It shows that ThorChain has found a good PMF (product market fit) and it has the potential to compete against other DEXs and disrupt many centralized exchanges.
In addition, ThorChain has also implemented a strong business model along with a strong economic structure for its $RUNE token.
So, in today’s report, I want to unpack the ins and outs of ThorChain to:
- Learn how they’ve built a great product that has found product market fit
- Asses whether or not $RUNE is a token you should invest in
Let’s get into it friends…
An Introduction to ThorChain
At its core, ThorChain is an exchange, similar to Coinbase or Uniswap, as it facilitates the exchange of one token for another (X for Y).
However, it sets itself apart in two crucial ways.
Firstly, unlike Coinbase but like Uniswap, ThorChain operates on a decentralized and trustless framework.
Secondly, unlike Uniswap but like Coinbase, it enables cross-chain swaps.
This innovation allows for direct swapping between different blockchain assets, such as Bitcoin and Ethereum, without needing an intermediary.
Why is this important?
Because right now, swapping tokens isn't easy or always safe.
- You might use bridges, but they can be risky – like when the Wormhole exploit happened.
- You could use a centralized exchange, but that's a hassle because you have to KYC, move your funds there, swap them, and then move them back onchain. They can also go bust like FTX. 🤷
ThorChain addresses these challenges by enabling direct, onchain token swaps.
Many people confuse ThorChain with a bridge. This isn’t a bridge. It’s an exchange.
In this coming section, you will get a better understanding of how ThorChain actually works.
ThorChain Mechanics
ThorChain can handle swaps between a variety of chains including Bitcoin, Ethereum, Binance Smart Chain, Avalanche, Dogecoin and more…
For each supported blockchain, ThorChain has special vaults. Think of these as big, secure wallets that hold different assets. These vaults are crucial for managing the swaps.
Here’s how a swap occurs. Let’s imagine you want to trade 1 Bitcoin for 17 Ethereum.
- Connect your Bitcoin wallet to ThorChain.
- Connect your Ethereum wallet as well.
- Tell ThorChain you want to swap 1 Bitcoin for 17 Ethereum.
- Network validators, who are stakers of ThorChain's native token, RUNE, confirm your swap.
- They take your Bitcoin and first swap it for RUNE.
- Then, they swap that RUNE for Ethereum and send the ETH to your Ethereum wallet.
TL;DR: Your 1 Bitcoin is converted into 10,000 RUNE (fictional number), then 10,000 RUNE is swapped for 17 Ethereum.
To pull this off, ThorChain is built on its own blockchain, which is part of the Cosmos network.
This setup is key to how ThorChain operates, for 3 reasons.
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