THORChain RUNE Lighting Bolt Logo

THORChain Investors Guide


Introduction

THORChain is without exaggeration the project that has excited me most ever since the first learning of bitcoin.

Erik Voorhees

Do you wish you could go back in time and buy (more) bitcoin several years ago? If only you knew then, what you know now. What if I told you there’s a way? Well, kind of a way. You can’t go back in time, but you can apply your knowledge of the past to the present. There are reasons why bitcoin was so successful and why bitcoin continues to be the leading cryptocurrency. By applying those reasons to today’s cryptocurrencies, you can narrow in on the ones with the most upside potential. 

THORChain’s RUNE token has >100x potential but without the lottery ticket odds. There are risks and they will be discussed, however, by the end of the report you’ll see how plausible that upside potential is and how well protected the downside is. THORChain is a type of asymmetric investment that only comes around once a decade.

To appreciate THORChain, let's go over what makes Bitcoin special and how THORChain compares.  We'll start with the first sentence from the Bitcoin whitepaper.

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

Satoshi Nakamoto

A purely peer-to-pool version of an exchange would allow online swaps to be done directly from one party to a market maker without going through a financial institution.


I’ve developed a new open-source peer-to-peer e-cash system called Bitcoin. It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust.

Satoshi Nakamoto

A new open-source peer-to-pool exchange system called THORChain has been developed. It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust.


The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.

Satoshi Nakamoto

The root problem with a centralized exchange (CEX) is all the trust that’s required to make it work. The CEX must be trusted not to steal from customers, but the history of CEXs is full of breaches of that trust. CEXs must be trusted to buy crypto and hold it in customer accounts, but they have opaque reserve reporting which increases the likelihood of fractional reserve banking. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.


Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.

Bitcoin.org

THORChain uses peer-to-pool technology to operate with no central authority or banks; managing liquidity pools and the approval of swaps is carried out collectively by the network. THORChain is open-source; its design is public, nobody owns or controls THORChain and everyone can take part. Through many of its unique properties, THORChain allows exciting uses that could not be covered by any previous exchange.


THORChain is not the next Bitcoin. THORChain complements Bitcoin and was modeled after Bitcoin. THORChain is the only decentralized exchange (DEX) that can swap bitcoin for thousands of other cryptocurrencies without a central authority or bank involved.

Bitcoin is revolutionary because you can send without third party. THORChain is revolutionary because you can swap without third party.

THORChain is being integrated into all the major crypto wallets. Wallet users will be able to swap inside their wallet and maintain custody of their crypto. They’ll have no idea they’re using THORChain since it works in the background - the best technology is that which you don’t know you’re using. Combined with first mover advantage, THORChain is poised to become core infrastructure for decentralized finance (DeFi) and cement it’s token RUNE as one of the sector’s top cryptocurrencies.


Note the difference between trading and swapping. Trading is when you buy and sell using fiat money. For example, if you sell stock ABC for some amount of dollars, then use those dollars to buy stock XYZ, you’re trading. If you could exchange stock ABC directly for stock XYZ without going into and out of dollars, then you would be swapping the two stocks. DEXs don’t use fiat money, therefore all cryptocurrencies are swapped for one another. Throughout this report and online, you’ll see the term swapping used instead of trading when referring to transactions on a DEX.


Biggest Problem in Crypto

Albert Einstein grinning

We cannot solve our problems with the same thinking we used when we created them

Albert Einstein

If you want to make a lot of money, invest in the solution to a large problem. Bitcoin solved the problems with conventional money and in turn has been the most successful investment of our lifetimes.

One of the biggest problems in crypto right now is the ability to swap bitcoin for other cryptocurrencies.

Ever since the invention of the second cryptocurrency, Litecoin, the only way to swap Bitcoin for Litecoin or any other crypto was through a centralized exchange (CEX). An exchange that has all your personal information, and more importantly, has custody and control over the crypto in your account. Remember, the point of crypto is cutting out third parties to protect your personal information and maintain custody of your assets. Therefore, using a CEX is actually the antithesis of crypto.

But if you wanted to trade your bitcoin for any other crypto, you had no choice. You had to use a CEX despite the obvious contradiction.

Unfortunately, this led to all the major disasters you’ve heard about in the sector.

  • In 2014, Mt. Gox was the largest exchange in the world handling about 70% of all bitcoin trading. The exchange was hacked and 650,000 bitcoin were stolen, about 5% of the total bitcoin supply!
  • QuadrigaCX became Canada’s largest crypto exchange by 2018 with 350,000 clients. After the mysterious death of the CEO, $190 million in crypto went missing, and the company declared bankruptcy. Investigators later concluded QuadrigaCX was a basic Ponzi scheme and likely never invested any client funds.
  • Celsius was the largest crypto lender with 1.7 million users. They filed for bankruptcy in June 2022 following the collapse of LUNA and the market. Users are owed $4.7 billion and are unlikely to recover much of it. It’s still unclear whether Celsius failed because of poor lending practices combined with the market crash and bank run, or if it was a fraud from the beginning.
  • Sam Bankman-Fried (SBF) was all the talk because of the collapse of FTX. Over 1 million Americans and 5 million others worldwide lost about $8 billion.

There are many other frauds and hacks that have occurred on various exchanges throughout the years. Of the 10 largest hacks of all time, six have occurred on CEXs. Hopefully this drives home the point that CEXs are one of the largest problems in the industry, if not the biggest problem of all. When you use a CEX to custody your assets, you never truly know if they’re holding your crypto or not.

I definitely personally hope centralized exchanges burn in hell as much as possible.

Vitalik Buterin, Ethereum Co-Founder

The obvious solution to a centralized exchange is a decentralized exchange (DEX). An exchange where you can trade with no central authority, or third party involved, and maintain custody of your crypto.

There are some DEXs like Uniswap, PancakeSwap, and Trader Joe. However, they can only trade tokens created on their respective layer 1 blockchains. For example, Uniswap is an Ethereum DEX that can only trade Ethereum based tokens (ERC20). PancakeSwap is a Binance smart chain DEX that can only trade Binance smart chain based tokens (BEP20). Trader Joe is an Avalanche DEX that can only trade Avalanche based tokens (ARC20). Follow the drift? Each layer 1 DEX can only trade their respective protocol’s tokens.

None of these DEXs can swap different layer 1 tokens between each other, most notably bitcoin with ethereum.

Vitalik Buterin tweet saying its embarrassing we don't have a true decentralized exchange to swap bitcoin and ethereum​​​​​​People have been working on this problem for over a decade. One of the early solutions was Atomic Swaps, but they never caught on. Atomic swaps require two people to find each other at the exact same time, with the exact same crypto to swap, for the exact same amount & price. It’s like a dating app that requires two people to swipe right at the exact same time for there to be a match. It technically works but can’t scale.

Another solution that’s been developed is using a smart contract called a bridge and wrapping tokens. A wrapped token is just an I.O.U.

That’s as good as money sir. Those are I.O.U’s.

Lloyd Christmas, Dumb and Dumber

Think of a bridge like a goldsmith vault, and the receipt you get for storing gold there is a wrapped token. You could then trade the receipt/wrapped token for the same value as the gold backing it, because buyers of the receipt/wrapped token trust they can give it to the vault/bridge and get actual gold back. But you know all too well the problems throughout history with paper gold.

WBTC is bitcoin wrapped in an ethereum contract. WBTC is paper bitcoin, an I.O.U. for bitcoin. 1 BTC goes into the contract, 1 WBTC token comes out as the receipt. WBTC can then be used on Uniswap and any other ethereum based application.

On December 1st, 2023 there were 160,293 bitcoin held inside WBTC. On September 1st, 2022, there were 247,660 bitcoin. A lot has been withdrawn since the collapse of FTX and the market’s concerns about third party custody.

The market was so worried about counterparty risk, you can see them panic selling their WBTC in November 2022, driving the price below par with bitcoin. Overall, it was only 1-2% below par, so not the end of the world, but still noticeable.

Wrapped bitcoin (WBTC) price chart from CoinGecko showing FTX collapse

However, the collapse in the price of wrapped bitcoin on the Solana network must have felt like the end of the world for some people.

Sam Bankman-Fried’s FTX had their version of wrapped bitcoin on the Solana network, called SOBTC. The collapse of FTX led to redemptions of SOBTC being stopped. That means people can’t exchange their SOBTC tokens for the bitcoin backing them. There’s supposed to be 16,150 bitcoin in SOBTC, worth about $452 million. All people can do is wait and see what happens with FTX or sell the SOBTC tokens on the secondary market. Rather than risk getting nothing for them, some people have been selling them for 3 cents on the dollar!

Sollet wrapped bitcoin (SOBTC) price chart from CoinGecko showing FTX collapse


Counterparty risk isn’t the only concern with bridges and wrapping tokens. You also have smart contract risk. What if the code to the bridge gets hacked?

The WBTC smart contract is controlled by BitGo. Let’s assume they’re trustworthy and we don’t have to worry about them not delivering bitcoin when WBTC is redeemed. There’s still the risk that someone hacks the WBTC smart contract and steals the bitcoin. Since the bitcoin is being held inside an ethereum contract, it no longer has the protection of the Bitcoin protocol itself. This means a token held inside a bridge is only as safe as the bridge itself.

This makes bridges targets for hackers and has resulted in the top two hacks of all time, totaling $1.2 billion.

  • The largest hack of all time happened in March 2022 on Axie Infinity’s Ronin network. 173,600 Ethereum and 25.5 million USDC, worth $614 million, were stolen.
  • The second largest hack happened in August 2021 on the Poly Network. A dozen different cryptocurrencies were stolen, worth $611 million. In a strange twist of events, the hacker returned the stolen crypto saying he did it for fun. More likely, he realized he would have a hard time selling them.

Bridges also increase the incentives for a 51% attack on a protocol. Vitalik Buterin goes into further detail on this reddit post if you want to learn more. The main takeaway is:

The fundamental security limits of bridges are actually a key reason… I am pessimistic about cross-chain applications… it's always safer to hold Ethereum-native assets on Ethereum or Solana-native assets on Solana than it is to hold Ethereum-native assets on Solana or Solana-native assets on Ethereum.

Vitalik Buterin, Ethereum Co-Founder

Bridges aren’t an effective solution to cross chain swaps, and if anything, are creating new problems.

Almost every single negative thing you’ve heard about crypto – frauds, thefts, hacks - has occurred on bridges and CEXs. It’s a billion dollar problem, and the solution to such a problem stands to be worth billions.

It just so happens there is a solution.

THORChain.


THORChain Fixes This

I don't think this is an exaggeration to say that when I discovered THORChain and learned about it, it was the most exciting feeling I had gotten since learning about bitcoin back in 2011

Erik Voorhees

Erik Voorhees is one of the first bitcoin billionaires and is one of the first people to speak publicly about crypto over a decade ago. Early on he saw the need for a cryptocurrency exchange and started ShapeShift in 1. However, as he mentions in the clip above, ShapeShift was still a CEX.

When Erik Voorhees & ShapeShift learned of THORChain, they recognized it for what it was - the solution to one of the biggest problems in crypto.

When THORChain’s Multi-Chain Chaosnet went live in April 2021, ShapeShift was one of the first websites to have it integrated into their backend. This turned ShapeShift from a CEX into a DEX overnight. After a decade of searching, Erik finally found what he was looking for.

THORChain is Better Than CEX

All the theft and fraud with centralized exchanges could have been avoided if people didn’t leave their crypto on the exchange. Those who bought their crypto, then transferred it to a hot or cold storage wallet, were safe from the frauds and thefts of the past.

The problem is people want to be able to trade their crypto, so they leave it on the exchange. It’s a hassle to constantly transfer your crypto from a CEX to your wallet, back and forth, back and forth. Plus, every time you do that you introduce the potential for user error and risk sending your crypto to the wrong address only to lose it for good.

Many crypto users are aware of the risks with CEXs and use them as little as possible. They maintain custody of their crypto in hot or cold storage and use DEXs to swap. However, to swap between different blockchains they have to use bridges and wrapped tokens, which introduces a whole new set of risks. It’s no different than having custody of a piece of paper that’s a receipt for gold. It’s just not the same thing.

What’s needed is the ability to swap layer 1 tokens, without bridges, and maintain custody. The solution has to be able to swap crypto, with no wrapped tokens, within your wallet.

THORChain is that solution.

THORChain is true DeFi. It’s the only DEX that can swap bitcoin without wrapping it and from within a user’s wallet.


Based on the Nakamoto coefficient measure of decentralization, THORChain is consistently ranked near the top of the list as one of the most decentralized crypto currencies in the sector. Just like Bitcoin, THORChain has no CEO, board of directors, or head office.

Decentralization is the value proposition in crypto, not blockchain. Decentralization is what makes a crypto secure from theft and attacks, whether from insiders or outsiders. The more decentralized a crypto is, the more difficult it is for any one person or entity to defraud or attack the protocol. CEXs and bridges are highly centralized which makes them more susceptible to fraud and hacks.

THORChain is economically secure. Nodes that secure THORChain have to post a bond that’s always larger than the amount they could possibly steal or lose to hackers. Should a theft or hack occur, the nodes could lose some or all their bond, which incentivizes them to secure the network. Whereas CEX management teams and programmers have no money at risk if their exchange or bridge is hacked. CEXs and bridges are economically insecure.

THORChain is open source. Anyone can review the code and propose changes. Anyone can build on top of THORChain. Anyone at any time can audit the holdings and transactions on the protocol. Whereas CEXs are closed source, no one can review their inner workings, and they can’t be audited at will, if at all.

Being a pragmatically run exchange, versus run by humans, means no fractional reserve banking can take place. Every penny of crypto has to be accounted for otherwise THORChain will stall until it's rectified. With CEXs, fraud can last a long time and continue to metastasize until it blows up in everyone’s face.

Every human being on the planet can use THORChain. All that’s required is a smartphone and a crypto wallet. There’s no KYC, no account to open, no one to ask permission to use THORChain. This means the 1.7 billion unbanked people in the world, and 4.3 billion underbanked people in the world, can access THORChain. Whereas CEXs require KYC and having a bank account, automatically excluding the unbanked and underbanked. CEXs can arbitrarily deny you the ability to open an account, or worse, freeze your account after you’ve put crypto into it. That’s not possible with THORChain since it’s permissionless and you always maintain custody of your crypto.

THORChain is the only DEX that can swap bitcoin and tether, the largest trading pair on CEXs. The largest crypto exchange in the world, Binance, can trade bitcoin with several hundred different tokens. THORChain on the other hand, with its DEX aggregation feature, enables bitcoin to be swapped with several thousand different crypto currencies.


THORChain is more than just a DEX for swapping layer 1 tokens. The DEX forms the base for much larger potential.

THORChain has synthetics which can be used by high frequency traders. Swapping layer 1 tokens means you’re subject to their respective block times on each chain, which can be cumbersome for 

active traders. Synths are basically a layer 2 on THORChain and settle within seconds, mimicking the experience of trading on a CEX.

THORChain has a savers feature where people can earn yield on their bitcoin and other crypto. THORChain is the first and only DeFi protocol that can offer native bitcoin yield. The yield comes from the swapping fees on the network, not from lending it out. 

THORChain developers are currently working on a lending feature. If enabled, users would be able to deposit their bitcoin and other tokens and borrow against them. This would be another first in crypto, the ability to borrow against layer 1 bitcoin in DeFi.

Also proposed are order books (to place limit orders) and perpetual futures.

If all these features come to fruition, it would make THORChain more than just a DEX. It would make it the first and only commercial bank for bitcoin. But not just any commercial bank, a primary dealer too. 

Primary dealers in the U.S. are market makers in treasuries and are the only banks permitted to trade directly with the Fed. When you include their commercial banking business, it makes them the largest and most powerful banks in the world. Topping the list are J.P. Morgan, Wells Fargo, and Goldman Sachs.

If Bitcoin is the central bank of crypto, and THORChain is the only market maker for bitcoin in DeFi, THORChain is poised to become the largest primary dealer and commercial bank of DeFi. If Bitcoin makes the Fed obsolete, THORChain will make J.P. Morgan, Wells Fargo, and Goldman Sachs obsolete.

How do you like them apples!?

Now that you know how unique and special THORChain is, let’s get to the fun part. How much money could you make?


Upside Potential

… DeFi is going to continue to move towards greater adoption and will eventually reign supreme.

Patrick Hillman, Binance Chief Strategy Officer

Decentralization is the future. DEXs are the infrastructure of the future. THORChain is the only DEX that can swap bitcoin therefore it’ll be part of that future. To get an idea what that future will look like, let’s look at the past.

In the 1800’s, America was still being settled. By 1860 the U.S. was the 9th largest economy in the world. Despite the civil war from 1861-1865, the US entered the Gilded Age and by 1890 was the world’s largest economy. This rapid economic growth was made possible by the direct investment into infrastructure, most notably the railroads.

Railroad mileage in the United States tripled between 1865 and 1881. Transported freight increased by 643%. Steel production increased by 7,986% within 16 years. U.S. steel production surpassed the combined totals of Britain, Germany, and France!

Those who made this possible, such as J.P. Morgan, Andrew Carnegie, and Cornelius Vanderbilt, became the wealthiest people in the world. Their families are still living off those fortunes 140 years later. The list isn’t complete without mentioning John D. Rockefeller, considered the richest person in modern history.

Standard Oil Company was established in 1863. 16 years later, Rockefeller controlled 90% of the United States refining capacity. Rockefeller made his fortune by consolidating and vertically integrating America’s oil refineries, transportation, and distribution. He had a monopoly on the entire oil industry’s infrastructure.

The above is meant to illustrate the importance of infrastructure to a developing economy and the fortunes that can be made by those who provide it.

Crypto is a new frontier being settled. And like any physical territory, the crypto economy can’t reach its true potential without infrastructure. THORChain is poised to become a core piece of crypto infrastructure that enables DeFi to reign supreme.

Just as railroads made it easy to transport people and goods across vast distances, connecting markets like never before, THORChain makes it easy to transport tokens and value across blockchains, connecting those networks like never before. THORChain’s protocol is a crypto railroad, and RUNE is the token making up the rails.

THORChain Will Dwarf CEXs

 

In 5-10 years DEXs will be bigger than CEXs.

CZ, Binance Founder & CEO, circa 2022

Binance is the largest crypto exchange in the world. How can THORChain become bigger than Binance?

A decentralized network can grow much bigger than a centralized network because there are no barriers to entry. Anyone around the world, from individuals to corporations, from the first world to third world, can contribute as they please to a decentralized network. For example, consider Uber and Airbnb.

Uber is the largest taxi company in the world but doesn’t own any taxis. Uber’s inventory of taxis is decentralized which made it possible to grow much quicker and larger than any centralized taxi company. Airbnb is the largest hotel company in the world but doesn’t own any hotel rooms. Their inventory of hotel rooms is decentralized, again, making it possible to grow much quicker and larger than any centralized hotel chain could manage.

THORChain’s inventory is decentralized, which means it can grow much quicker and larger than its centralized counterparts, such as Binance.

Uber and Airbnb still have some centralized aspects though. You have to create an account with them just like you have to create an account with Binance. This is a barrier to entry and limits their growth.

Whereas there’s no account to open with THORChain. All you need is a smart phone. THORChain can be integrated into the back end of any wallet, website, or app. Users of these front ends have no idea they’re using THORChain, it’s just happening in the background. Front ends install THORChain for two reasons. It’s a feature all their users want, and they get a way to monetize their audience.

Crypto wallets, websites, and apps follow the Silicon Valley business model of getting lots of users then finding a way to monetize them later. Crypto wallets have been around for several years without any means to generate revenue. Until now. By integrating THORChain, a front end can customize their own commissions on each swap and start a revenue stream. Just like Trust Wallet has done.

In the video above, CZ mentions Trust Wallet, Binance’s official crypto wallet and their way of betting on DeFi. Trust Wallet is one of the most popular wallets in crypto with over 60 million users. For years it had no income. That changed in December 2022.

CZ from Binance retweeting Trust Wallet tweet announcing THORChain integration

By integrating with THORChain, Trust Wallet now has a way to start making some money.

Trust Wallet is only one example though. There are already multiple wallets that have THORChain integrated into their back ends and even more working on it. As each new integration goes through, the more pressure it puts on others to follow suit because who wants to use a wallet that can’t swap bitcoin? Within weeks of Trust Wallet’s announcement, two more wallets jumped on the bandwagon after being pressured by their users.

Exodus crypto wallet tweet saying they don't want to be left behind and will integrate THORChain

Ledger crypto wallet tweet saying they are integrating THORChain

All right, enough hype! You want to see some numbers. I know, I know.

It’s important to go through the above so you can appreciate the size of the problem and the size of the solution, to grasp the size of the upside. Because the numbers get mind boggling big and you wouldn’t believe me if I just threw them out there. They would sound too fantastic, and you’d dismiss them as unlikely. The above was necessary, not just to consider the genuine potential of THORChain, but to demonstrate the probability of it succeeding.

Huge upside potential is worthless if it has a low chance of happening. That’s why you don’t bother with lottery tickets, they’re a waste of time, let alone money. The probability of winning is just too low. The probability of an investment being successful is much more important than its upside potential.

When you find an opportunity that has a decent chance of success combined with high upside potential - an asymmetric bet - then that is worth your time and money.

THORChain is an asymmetric bet worth paying attention to. It’s not a worthless idea in a whitepaper. It exists. It’s truly unique. It’s being used. It’s being adopted. The only question that remains is how big will it get?

RUNE Could Be the #3 Crypto

Bitcoin has been the #1 crypto by market cap since it was invented. Ethereum has been #2 for several years now. But what about the #3 spot? The position has seen its fair share of different crypto rotate in and out.

During the bull market in 2021, Binance (BNB) catapulted to #3 by market cap. When Coinbase (COIN) went public in 2021, its market cap relative to the crypto sector put it at #5.

As of December 1st, 2023, BNB is #4 and COIN is #6. Despite the strength in bitcoin, we're still in a bear market. Trading activity on the exchanges is down, taking valuations down with it.  Many still have cash on the sidelines indicated by USDT being the #3 crypto by market cap.

If DEXs become bigger than CEXs, then it’s plausible RUNE could be the #3 crypto by market cap one day.

Right now, RUNE hangs out in the upper range of the top 100 crypto by market cap, making it a solid mid cap in the world of cryptocurrencies. However, THORChain is still tiny relative to its peers as you can see in the following charts.

30 day average spot volume comparing centralized and decentralized exchanges

 

The volume traded on Binance dwarfs all other exchanges. If we remove Binance from the chart, we can see the others more clearly.

30 day average spot volume comparing centralized and decentralized exchanges excluding Binance

 

Notice the volume on THORChain is a rounding error on both charts. It barely registers. Also, notice the navy-colored bars on the charts above. They’re all the DEXs in the top 100 crypto. If we compare just the DEXs with each other, THORChain still looks like small. And remember, these other DEXs can’t handle bitcoin.

Crypto decentralized exchange comparison of fully diluted market cap, total value locked (TVL), and 30 day average spot volume

 

For every $1/day of trading volume on THORChain there’s $8/day volume on Uniswap.

For every $1/day of trading volume on THORChain there’s $10/day volume on Coinbase.

For every $1/day of trading volume on THORChain there’s $60/day volume on Binance. 

Said differently, there’s over eight times more volume on Uniswap, over ten times more volume on Coinbase, and over sixty times more volume on Binance!

THORChain is tiny and has a lot of room to grow.

Let’s explore how big it could get.

Valuation Analysis

The following are some ways to value THORChain’s RUNE token relative to Binance’s BNB token and Coinbase’s COIN shares.

On December 1st, 2023, RUNE was $6.46/token. With 337.87 million RUNE outstanding that works out to a market cap of $2.18 billion.

The COIN IPO closed with a $63.31 billion market cap. If THORChain were to have a $63.31 billion market cap, RUNE would be $187.38/token.

During the COIN IPO, the market cap of BNB was $85.06 billion. If THORChain were to have a $85.06 billion market cap, RUNE would be $251.75/token.

The COIN market cap on December 1st, 2023 was $32.00 billion. If THORChain were to have a $32.00 billion market cap, RUNE would be $94.71/token.

The BNB market cap on December 1st, 2023 was $34.68 billion. If THORChain were to have a $34.68 billion market cap, RUNE would be $102.64/token.

As of December 1st, 2023, Coinbase claims to have 120 million verified users, and Binance boasts having 140 million registered users. Based on all the front ends that have integrated THORChain, it has about 70 million potential users. COIN is trading for $292/user and BNB is trading for $247/user, and if RUNE had a similar valuation, it would trade between $51.17/token to $60.49/token.

A more direct approach to valuing RUNE is based on how much crypto is held as inventory on the exchange. The way THORChain is designed, RUNE will always have a minimum market cap of around 3x the value of the crypto in inventory. RUNE can’t trade below this value, it’s the floor price. Think of this like the NAV or book value. However, RUNE can and does trade above this value, which is the premium the market prices in for future growth. The community refers to this as the speculative premium or speculative multiplier. It’s like a P/NAV or P/Book multiple. The RUNE token can trade at whatever premium the market sees fit to price in the future growth of THORChain. This premium has been over 20x and during the bear market settled around 3x.

The next section “HOW THORCHAIN WORKS” will go into further detail how RUNE derives a minimum value. For now, just accept this rule of thumb:

RUNE market cap is always at least 3x the total value of crypto in inventory.

Therefore, to estimate the potential value of RUNE we need to estimate the potential value of crypto that could be held in inventory.

To keep things simple, let’s ignore Ethereum, stable coins, and all other cryptocurrencies and just consider how much bitcoin could end up on THORChain.

A good indicator of how much bitcoin could find its way to THORChain is WBTC. People put bitcoin into WBTC so they can use it in DeFi on Ethereum. They want to earn yield on their bitcoin and swap it on DEXs. THORChain offers yield on bitcoin and the ability to swap on a DEX, but without wrapping and is decentralized. Therefore, it’s reasonable to expect a similar amount of bitcoin, if not more, could end up on THORChain.

On September 1st, 2022 there were 247,660 bitcoin wrapped in WBTC. On December 1st, 2023 there were 160,293 bitcoin held in WBTC. The large decline is the result of FTX collapsing. The market got spooked about counterparty risk, and since WBTC is a centralized wrapped token, they didn’t want to take any chances and started withdrawing.

If 160,293 bitcoin ends up in THORChain’s inventory, and the bitcoin price is $40,000, that would be $6.41 billion worth of bitcoin in inventory. Times by three and RUNE would have a market cap of $19.24 billion, which works out to $56.93/token. If we give it a 3x speculative premium, that would be $170.79/token.

If 247,660 bitcoin ends up in THORChain’s inventory, and the bitcoin price is $40,000, that would be $9.91 billion worth of bitcoin in inventory. Times by three and RUNE would have a market cap of $29.72 billion, which works out to $87.96/token. If we give it a 3x speculative premium, that would be $263.88/token.

THORChain enables people to earn yield on their crypto therefore another way to estimate the amount of bitcoin that could end up in inventory is by looking at the companies offering yield on crypto. Celsius, BlockFi, Voyager, and several more offer people yield on their crypto by lending it out. The demand for these companies is a good indicator for the demand to earn yield on bitcoin.

In April 2022, Celsius was promoting they had over 150,000 bitcoin deposited on their platform. Add in the other companies and we easily get over 250,000 bitcoin pretty quickly, similar to the amounts held in WBTC.

All the above is just considering bitcoin. Add in Ethereum, stable coins, and all the other crypto and we get a RUNE token price in the $100’s quite easily.

Also remember, Celsius, BlockFi, and Voyager all collapsed in the summer of 2022 and filed for bankruptcy. In the fall we had the collapse of FTX and the exodus from WBTC. All of this highlights the risks and problems with centralized companies, reinforcing the need for a decentralized alternative like THORChain, increasing the probability of attracting the same amount of bitcoin if not more.

To appreciate the valuations above you need a deeper understanding of how THORChain works and how the RUNE token derives its value.

RUNE is one of the only cryptocurrencies in the world that has an objective value.

Yes, a crypto that is backed by something!


How THORChain Works

The way exchanges, brokerage firms, and market makers work in traditional finance (TradFi) is a bit different than crypto.

In TradFi you have exchanges like the NYSE and NASDAQ that list various stocks. You have brokerage firms like Robinhood that act as interfaces to the exchanges and enable people to trade stocks. And you have market makers like Citadel that provide the exchanges with liquidity, an inventory of stocks to buy and sell. Sometimes the brokerage firm and market maker are the same company, like Interactive Brokers.

In crypto, exchanges such as Binance and Coinbase are also brokerage firms. Binance decides what crypto it wants to list on their exchange and they’re also the interface you use to trade on their exchange. Then there are unique market makers like GSR and Cumberland that provide liquidity. These traditional companies operating in crypto are referred to as CeFi (centralized finance).

DeFi is structured a bit differently than CeFi. A DEX like THORChain is the exchange and market maker in one. The various front ends (wallets, websites, apps) that run THORChain in the background can be viewed as brokerage firms.

These front ends are available to everyone on the globe, you just download their software. Which means anyone in the world can access THORChain. Unlike TradFi brokerage firms, where you have to fill out a bunch of paperwork to apply for an account.

Like any exchange, THORChain decides what tokens it wants to list. It has the top cryptocurrencies by market cap available to swap with more being worked on, such as Monero. With THORChain’s DEX aggregation feature, it’s possible to swap bitcoin with several thousand different cryptocurrencies. Binance only supports several hundred.

Where it gets a bit tricky is understanding how market making and swapping works on THORChain. THORChain is an automatic market maker and its inventory of crypto to swap is held in liquidity pools. Understanding how this works is key to appreciating the upside potential in the RUNE price.

Liquidity Pools

Liquidity pools are always two different assets and they’re always balanced 50/50 by dollar value. For example, every liquidity pool on THORChain is paired with RUNE. The bitcoin pool has equal dollar amounts of BTC and RUNE in it. The ethereum pool has equal dollar amounts of ETH and RUNE in it. And so on. Since the dollar amounts of the two assets are always equal in a liquidity pool, at any given time there’s 50% of various crypto and 50% RUNE in total on THORChain.

When someone contributes inventory to a liquidity pool, they become a liquidity provider (LP), and they essentially buy units of that pool. If you deposit $1,000 of BTC into THORChain’s bitcoin pool, you’ll end up with LP units that are backed with $500 worth of BTC and $500 worth of RUNE. You can also deposit a mixture of BTC and RUNE into the pool. Say you deposit $800 of BTC and $200 of RUNE into the pool, you still end up with LP units that are backed with $500 worth of BTC and $500 worth of RUNE. No matter what ratio you deposit in the pool, your LP units will always be backed 50/50 BTC/RUNE.

THORChain’s liquidity pools are what give RUNE an objective value. Since every pool is paired with RUNE, and as long as there’s crypto in the pools, RUNE has an objective minimum value. The RUNE market cap can’t trade below the total value of all the other crypto in the pools.

Swapping

Remember, the difference between trading and swapping. Trading is when you buy and sell using fiat money. For example, if you sell stock ABC for some amount of dollars, then use those dollars to buy stock XYZ, you’re trading. If you could exchange stock ABC directly for stock XYZ without going into and out of dollars, then you would be swapping the two stocks. DEXs don’t use fiat money, therefore all cryptocurrencies are swapped for one another.

How does swapping in liquidity pools work?

Assume the bitcoin pool size is $2,000, with $1,000 of BTC and $1,000 of RUNE in it. If someone has $100 of BTC and they want to buy RUNE, their $100 of BTC is deposited into the pool and the pool sends $100 of RUNE to the buyer. The amount of BTC in the pool goes up to $1,100 and the amount of RUNE in the pool goes down to $900, but the total dollar value of the pool remains the same at $2,000. $100 in value goes in, $100 in value comes out. But the pool is not balanced 50/50 anymore. This is where arbitrageurs come in. Arb bots would sell $100 of RUNE to buy $100 of BTC and balance the pool back to $1,000 BTC and $1,000 RUNE.

What if someone has $100 of ETH and wants to buy BTC with it?

$100 of ETH is deposited into the ETH pool and $100 worth of RUNE is withdrawn from the pool. The $100 of RUNE is deposited into the bitcoin pool, and then $100 of BTC is withdrawn from the pool and delivered to the buyer. Arb bots would take the other side and sell BTC to buy ETH, which balances the pools back to 50/50. In this scenario, the buyer has no idea RUNE is moving from one pool to another. All the buyer sees is the BTC leaving their wallet and the ETH showing up. The RUNE movements happen behind the scenes and the buyer doesn’t have to know anything about RUNE or THORChain to execute the swap.

To keep the math simple in the examples above, I’m ignoring the price movements in the pools and the fees charged on each swap.

The fees generated on all the swaps are how the LP’s make money. These liquidity fees, or yield, are what encourage people to offer their crypto as inventory in the pools. By contributing crypto into the pools and becoming an LP you earn your pro rata share of all the fees going into that pool. 

When someone buys/sells crypto on THORChain they drive the price up/down on the pool. The price is determined by a formula that considers the size of the swap relative to the size of the pool. Therefore, the larger the swap, the more you will move the price of the crypto you’re trying to buy/sell.

These price movements are unique to THORChain and result in crypto trading at different prices than other exchanges. This is what arbitrageurs take advantage of. They make a profit by closing the price gap which in turn rebalances the pools. 

This preprogrammed pricing formula, along with arbitrageurs and continuous liquidity pools, is what makes THORChain an automatic market maker.

Walmart - Exchange & Market Maker

If this is the first time you’ve read about liquidity pools, I’m sure it sounds confusing. Let’s try and relate it to something more tangible using Walmart as an example.

Walmart, like an exchange, decides what products to list and gives people the ability to buy them. Walmart, like a market maker, has an inventory of products and will sell them to people or buy them back when returned.

Imagine every product in Walmart as a liquidity pool. A toothpaste pool, a socks pool, a toaster pool, etc., and they’re all paired 50/50 with USD. For example, if Walmart has 50 toasters selling for $20 each that would be $1,000 worth of toasters in the pool. If the pool is balanced with USD, then there’s $1,000 of USD in it. So, the size of the toaster pool is $2,000 and it’s balanced 50/50 by dollar value.

When you go to Walmart to buy a toaster, you put $20 USD into the toaster pool and take out a toaster. The number of toasters in the pool goes down by 1 and the amount of USD in the pool goes up by $20. We then have 49 toasters in the pool worth $980 and the USD in the pool is $1020, but the total dollar value of the pool is still $2,000. To rebalance the toaster pool at 50/50, Walmart will remove $20 USD from the pool and buy a new toaster from the manufacturer. Then the pool is back to 50 toasters worth $1,000 and $1,000 worth of USD, rebalancing the pool back to 50/50.

Now go the other way around.

You have a toaster, and you want to return it for your money back. You put your toaster into Walmart’s toaster pool and get $20 USD out of it. The number of toasters in the pool goes up to 51 and is worth $1020, the amount of USD in the pool goes down to $980, but the total dollar value of the pool is still $2,000. Only the ratio has changed. This time, Walmart removes the toaster from the pool and sends it back to the manufacturer for a refund. There are now 50 toasters, the $20 USD comes back into the pool, and it’s rebalanced back to 50/50 by dollar value.

In reality, Walmart doesn’t keep $1 of USD for every $1 of products they have in inventory, it’s more like 1 cent of USD for every $1 of inventory. And Walmart makes a profit differently than THORChain. But the overall operations of the two are similar. If USD goes into Walmart, a product comes out. If a product goes into Walmart, USD comes out. And Walmart constantly rebalances its inventory.

Decentralized Liquidity

A big difference between Walmart and THORChain is who owns the inventory. Walmart owns all the products on its shelves. Whereas THORChain doesn’t own any crypto in its pools.

The crypto in the pools comes from people all over the world. An LP could be a housewife in Nigeria or a hedge fund in New York. Anyone can become an LP and provide their crypto as inventory on THORChain. Just like anyone can offer their vehicle as inventory on Uber or their house as inventory on Airbnb.

The platforms with decentralized inventories become the biggest in their sectors.

Facebook is the world’s largest media company, but it doesn’t create any of its content. YouTube is the largest video platform in the world, but it doesn’t create any videos. Alibaba is the largest retailer in the world, but it doesn’t carry an inventory.

Despite their success, Uber, Airbnb, Facebook, YouTube, and Alibaba are still centralized entities. Their management still prevents some people from using their platforms. Whereas THORChain is decentralized, open, and permissionless. THORChain can’t prevent anyone from providing inventory in the pools therefore it has no limit to how big its inventory can grow.

Actually, there is a limit of sorts. It’s a pre-programmed formula that caps how much crypto can be put in the pools based on the security available to protect the pools. Other than this programmed cap, there’s no individual that can stop you from adding crypto into the pools.

The limit on the size of the liquidity pools, called the hard cap, is based on how much RUNE is bonded with the nodes in the network. To be economically secure, the node bonds have to be worth more than the crypto in the liquidity pools. Since it takes ⅔ of the nodes to access the crypto in the pools, the hard cap is set at the amount bonded by the lowest ⅔ of nodes. As the dollar value of that bonded amount goes up so will the hard cap, making more room in the pools.

Decentralized Security

We have these liquidity pools with millions (eventually billions) of dollars of crypto in them, but how are they secured? What controls and protects all that crypto in the pools?

This is where node operators come into play. It’s the nodes on THORChain that safeguard the network and hold the private keys to all the crypto in the pools.

To swap native layer 1 tokens without wrapping them, all the crypto in the pools must be held on their native blockchains. Therefore, all the BTC in the bitcoin pool is held in a regular bitcoin address. All the ETH in the ethereum pool is held in a regular ethereum address. And so on. The key to each address is split up amongst the nodes, no single node ever has access to an entire key.

The keys are distributed amongst the nodes through a technology called Threshold Signature Scheme (TSS). TSS is like a multi-party computation (MPC) wallet where one key is broken up into shards rather than a multi-sig wallet that uses many different keys. Through TSS, each node only has a portion of the private key to any address.

The keys to each crypto address are broken up into as many pieces as there are nodes. If there are 85 nodes on THORChain, then each key is broken up into 85 pieces and each node is given a piece.

Through TSS, we only need 2/3 of the pieces put back together to create the whole key. So, if we have 85 nodes on the network, we only need 57 of them to put their pieces together to re-create the key and access the crypto in that address.

A node gets its piece of the keys when it churns into the network. Every few days there’s a churn. This is when some nodes are removed, new nodes are added, the pools get moved to a new address, new keys are created, and pieces distributed.

Nodes that want to leave, have been banned by other nodes, have been in the network the longest, have the most infractions, or aren’t running the latest version of the protocol are at the top of the list for being churned out of the network. A node that is churned out can always get back in at the next churn. The only qualifying factor for being churned in is the size of the bond posted by the node. Nodes with the largest bond are at the front of the line to get in.

The churning process is designed to keep the network healthy and ensure good acting nodes stay in the network and bad acting nodes get kicked off. And since anyone can run a node, the nodes are decentralized, which makes the security decentralized.


The bonds posted by the nodes are what secures the network.

Only RUNE can be used for the bond to become a node and the amount bonded is always larger than the value of the crypto in the pools. The bond is held in escrow and is the financial incentive for nodes to act responsibly. If a node underperforms and impedes the network, they’ll get slashed. Like getting speeding or parking tickets. Nodes must operate judiciously otherwise they’ll lose money.

What if all the nodes got together to steal the crypto in the pools? In theory they could. But if they did, the market would see THORChain has failed and everyone would sell RUNE, driving the price to zero. Therefore, the RUNE posted as a bond by the nodes would also go to zero. Since that bond is larger than the value of the crypto in the pools, the nodes would lose more money than they stole.

This is what makes THORChain economically secure. Those that are entrusted with protecting the crypto in the pools have the most to lose should something bad happen to that crypto. Imagine if Sam Bankman-Fried had to post a $20 billion bond to have $10 billion in customer deposits? He would think twice before stealing anything.

Tokens that are wrapped or bridged aren’t economically secure either. The people in control of the wrapped tokens have no money to lose if they get hacked, just their reputation. THORChain’s economic security ensures the people who are trusted to protect the network always have more to lose than what can be stolen or lost. This incentivizes the node operators to do everything in their power to defend the network.


THORChain is designed to have the value of bonded RUNE be the same as the value of crypto in the pools. The target is to have $1 bonded in the network for every $1 in the pools.

Amount of RUNE in the network when it is balanced

Every line above is the same, just written differently each time to help you visualize things.

The numbers above are always in flux so the ratio of crypto to RUNE is also in flux. The numbers above represent the network when it’s in balance. When this balance is struck, the fees generated on the platform are split evenly between the liquidity pools and node operators.

The fee split between the pools and nodes is managed by the incentive pendulum.

If nodes keep joining the network and increasing the amount bonded, it becomes inefficient to have all that capital tied up in bonds. Having all that extra money in the node bonds does not increase the security of the network. The network is already economically secure if nodes risk losing $2 to protect $1 of crypto. The network isn’t any more secure if nodes risk losing $10 to protect $1 of crypto.

Amount of RUNE in the network when it is inefficient

When the total value of the bonds gets bigger than the total value of the liquidity pools, the incentive pendulum kicks in, and the fee split gets skewed towards the liquidity pools. The reduction in yield to the nodes is meant to discourage them from adding to the bond, perhaps even withdraw, and the increase in yield to the liquidity pools is meant to encourage money moving there.

If LP’s keep joining the network and increasing the value of the liquidity pools relative to the bonds, the incentive pendulum kicks in, and the fee split gets skewed towards the node operators. The reduction in yield to the liquidity pools is meant to discourage LP’s from adding to the pools, perhaps even withdraw, and the increase in yield to the nodes is meant to encourage more money coming into the bonds to secure the network.

If the network has more value in the liquidity pools relative to the bonds, it becomes insecure. When this happens, it makes economic sense for the nodes to collude and steal the crypto from the pools.

Amount of RUNE in the network when it is insecure

In the example above, node operators would only have to spend $2 to steal $5 of crypto. 

To prevent this from happening there’s a hard cap on how big the liquidity pools can get. The cap is equal to the total bond of the bottom 2/3 of nodes. The network automatically prevents anyone from adding to the pools to avoid going over this limit.

If the pools reach the hard cap, the incentive pendulum will stop sending fees to the pools and all the fees will go towards the node operators, encouraging more money to be bonded in the network and encouraging LP’s to withdraw from the pools.

Rune Deterministic Price

As long as there’s bitcoin, ethereum, stable coins, etc. in the liquidity pools, RUNE will have a value. When the network is in balance, the value of RUNE is 3x the value of the crypto in the pools.

Amount of RUNE in the network when it is balanced

This means the market cap of RUNE cannot go below 3x the value of the crypto in the pools putting a floor in the RUNE price. The community refers to this floor price as the deterministic price. No other cryptocurrency derives value like this.

THORChain’s liquidity pools are a cross section of all the top cryptocurrencies, representing about 95% of the market cap of the whole sector. Therefore, THORChain’s liquidity pools represent the whole crypto market. Since RUNE is the other half in all these pools, the value of RUNE is directly proportional to the value of the whole crypto market. This makes RUNE akin to an ETF on the whole crypto market!

Assume the amount of crypto in the pools remains constant. If the crypto market goes up in value, RUNE’s deterministic price will go up. If the crypto market goes down in value, RUNE’s deterministic price will go down.

Now assume the value of the crypto market remains constant. As new crypto is added to the pools, RUNE’s deterministic price will go up. If crypto is withdrawn from the pools, RUNE’s deterministic price will go down.

RUNE’s deterministic price is like the book value or net asset value of a stock. All stocks trade at some P/B or P/NAV which represents the premium the market is pricing in for future growth. The valuation multiple used with RUNE is called the speculative premium. The speculative premium is the RUNE price you see quoted online divided by the deterministic price. Since the deterministic price is the absolute floor price for RUNE, it’s impossible for the speculative premium to go below 1. The closer the speculative premium is to 1, the better the entry price you’re getting.

In summary, there are three variables that influence the RUNE price:

  • How much crypto is in the liquidity pools
  • The total value of the crypto market
  • The speculative premium

It’s fair to assume all three variables would go up during a bull market, and during a bear market all three variables would go down. You can see this happening in the chart below.

THORChain RUNE Price Deterministic Price Speculative Premium

 

RUNE’s price chart looks pretty ugly. Pun intended! The chart appears to have bottomed out. It’s interesting to note the deterministic price has been more stable than the actual RUNE price. Every peak and valley in the chart can be explained with a news/market event, however, the persistent decline in the RUNE price is mostly from the persistent decline in the speculative premium.

The speculative premium is how the market prices in the future expected size of THORChain. It represents how big the market believes THORChain will get.

As of December 1st, 2023 the RUNE price is $6.46, the deterministic price is $1.74, and therefore the speculative premium is 3.7x.

The market is pricing in THORChain to grow 3.7x from its current size.

The current size is $184.5 million of crypto in the pools. So, the market is pricing in a total of $682.7 million crypto ending up in the liquidity pools. I’m expecting billions to end up in the liquidity pools, therefore I believe the market is mispricing RUNE.

How will billions of dollars’ worth of crypto find its way into THORChain?

There’s a theory called the Liquidity Black Hole that explains it.

Liquidity Black Hole

Every participant that interacts with THORChain has a financial incentive to do so.

The permissionless open-source nature of THORChain makes it possible for any wallet, website, or app to integrate it in their backend. It doesn’t cost them anything to do it, just their developers’ time to add the code. These front ends want to incorporate THORChain because they can customize their own fees on each swap and monetize their audience.

When a wallet integrates THORChain, it introduces new users and new volume to the liquidity pools. The wallet collects their fees on the swaps and gains new users because they’re offering a new feature that users want and other wallets don’t have. Competing wallets see this and want in on the action too, otherwise they’ll be left behind. They integrate THORChain and the cycle continues.

THORChain liquidity black hole for wallets, interfaces, and front ends

It will get to a point where not having THORChain integrated will hurt a wallet because they’ll lose users to their competition. Therefore, this virtuous cycle will continue until every crypto wallet in the world integrates THORChain. Several already have, most notably Trust Wallet. Ledger is working on it along with many others.

Other wallets will piggyback on Trust Wallet and Ledger’s due diligence.  If THORChain passes their internal tests, then it must be good enough for the average wallet to integrate.

This is how THORChain becomes core infrastructure in crypto. Like infrastructure in the physical world, THORChain is buried and out of sight. Just as you take running water for granted, people will start taking for granted the ability to swap bitcoin within their wallets. They will come to expect it just like expecting a glass of water at a restaurant.

Wallets integrating THORChain, and increasing swap volume, creates two more virtuous cycles.

The first cycle starts with an increase in swap fees, that increases the yield to the liquidity pools. People see the yield going up on the pools and they add more crypto to the pools. As the pools get bigger, the cost to swap in them goes down. The cheaper it is to swap, the more volume it will attract from traders. The swap volume goes up and the cycle continues.

THORChain liquidity black hole for the liquidity pools

This cycle will continue until the liquidity pools reach a steady yield dictated by the market.

The second virtuous cycle also starts with an increase in swap fees. These increase the yield to node operators. The increase in yield encourages new nodes to join which increases the RUNE bonded in the network. The increased bond size means network security goes up enabling the liquidity pools to get bigger. As the pools get bigger, the cost to swap in them goes down. The cheaper it is to swap, the more volume it will attract from traders. The swap volume goes up and the cycle continues.

THORChain liquidity black hole for the node operators and bonded RUNE

This cycle will continue until the yield on the nodes reaches a steady state dictated by the market.

When we add all three virtuous cycles together, we get the Liquidity Black Hole.

THORChain Liquidity Black Hole

Each cycle amplifies the other, like a black hole getting stronger as it gets bigger.

There’s nothing to stop the Liquidity Black Hole since THORChain is decentralized and permissionless. Crypto from all over the world will be sucked into the liquidity pools and they’ll keep growing until they reach a natural saturation point.

Additional Features

This whole chapter only reviewed the basic function of THORChain, the automated market maker. THORChain has other features, and several more are being developed.


A drawback of swapping layer 1 to layer 1 tokens is the gas fees you must pay on each blockchain. For the average user they’re palatable. However, they can add up for active traders and become prohibitive to a particular trading strategy. Especially for arb bots. THORChain has made swapping extremely cheap through synthetics (synths).

Synths are kind of like a layer 2 on THORChain. Users can deposit a layer 1 token into a liquidity pool, and instead of receiving LP units, they can receive a synthetic representation of that token that’s always pegged 1:1 by price. I know, this is like a wrapped token... Synths can only be swapped on THORChain and only subject to THORChain’s gas fees and block times. This means active traders and arb bots can swap much cheaper and quicker than regular layer 1 tokens. When synths were activated, the swap volume on the liquidity pools went up by an order of magnitude and increased the yield going to the pools.


Synths also make it possible for single sided savers.

Savers is a way for users to earn yield on their crypto without going directly into a liquidity pool. When someone becomes an LP in the bitcoin pool, they have price exposure to two tokens, BTC & RUNE. But not everyone wants that. With single sided savers, a user can deposit bitcoin, maintain 100% price exposure to bitcoin, and receive yield in bitcoin. The swap fees on the liquidity pools are split between LP’s and single sided savers. The LP’s keep a larger portion of the fees for enabling this service.

There’s billions of dollars of demand for people to earn yield on their crypto demonstrated by the early success of BlockFi, Celsius, and Voyager. Unfortunately, they all blew up last year, highlighting the problems with centralization. THORChain’s single sided savers is the decentralized solution.


The failed entities above also lent billions of dollars to their clients using crypto as collateral. A lot of people want to borrow against their bitcoin instead of selling it. Instead of selling bitcoin, paying capital gains taxes, and having no more upside exposure to the price, people would rather keep their bitcoin for continued price exposure, delay paying taxes, and borrow against it to free up some capital. To meet this demand, THORChain developers created a lending feature.

The lending design has gone through several changes over the last couple of years. In its current form, users deposit their collateral to THORChain and can borrow against it at some programmatic collateralization ratio. The loans have no interest, no liquidation levels, and no maturity date. They’re a game changer in the world of crypto.

How’s that possible? It’s because THORChain does not directly hold on to the collateral, it uses the collateral to its own advantage.

Consider a typical loan in TradFi. A bank will lend you money against collateral. If the value of your collateral drops toward the loan value, the bank will sell it to make themselves whole before the collateral drops below the loan value. Basically, a margin call. Now imagine instead, the bank taking your collateral, selling it, and using the proceeds to do share buybacks on its stock? The bank would get an immediate benefit from their share price going up. However, when you repay your loan to get your collateral back, the bank would have to issue new shares, sell them, and use the proceeds to buy your collateral back. This would hurt the bank’s share price.

This is how lending works on THORChain.

When a loan is opened, THORChain will sell the collateral to buy RUNE, then burn those RUNE tokens. This is deflationary on the RUNE supply and creates upward pressure on the RUNE price. The more loans taken out on THORChain, the more it will drive up the RUNE price.

The user’s collateral is effectively held in equity of RUNE.

When a user wants their collateral back, they have to pay back their loan.

When the loan is closed, THORChain mints new RUNE tokens to buy the collateral and deliver it back to the user. This is inflationary on the RUNE supply and will have downward pressure on the RUNE price.

The net effect on the RUNE supply, whether inflationary or deflationary, depends on the price movements of both RUNE and the collateral from the opening of the loan to the closing of it.

If the RUNE:COLLATERAL price ratio goes up from the loan origination to the loan closure, the net effect on the RUNE supply will be deflationary. If the RUNE:COLLATERAL price ratio goes down from the loan origination to the loan closure, the net effect on the RUNE supply will be inflationary. 

Therefore, the main risk with the lending feature is the price ratio of RUNE:COLLATERAL. If it goes against us, and THORChain experiences a bank run of sorts where everyone is redeeming their loans at once to get their collateral back, it could cause a death spiral on the RUNE price.

This might be giving you flashbacks of the Terra LUNA/UST collapse. The design of THORChain’s mint/burn mechanism is completely different than LUNA/UST. For example, there’s a cap on the RUNE token supply at 500 million (there’s 327 million RUNE outstanding right now). Should the cap ever get hit, the protocol will pause the ability to access collateral until the RUNE supply goes back down.

If you have reservations about a mint/burn mechanism being introduced to THORChain, know this. It’s impossible for the mechanism to cause the RUNE price to collapse straight out of the gate. The loans have to be opened first before they can be closed. Opening the loans is what causes the run up in RUNE price from which it could fall. The fall in RUNE price would then be proportional to the initial rise in price.

In reality, the best-case scenario for THORChain is the borrowers never pay back their loan. Paying off the loan means RUNE has to be minted which inflates the supply. THORChain doesn’t want that to happen, therefore it doesn’t want the loan to be paid back. This is how, and why, THORChain can offer no interest, no liquidation, no maturity date on the loans. Having interest, liquidation levels, and a maturity date would only encourage users to pay back their loan.

This lending design is revolutionary even by DeFi standards.

Lending alone could drive a lot of users to THORChain and drive up the RUNE price. But that’s not all.


One of the advantages CEXs still have over DEXs is the ability to place limit orders. Right now, all the swaps on THORChain are market orders. Having the ability to enter limit orders would open the door to more users and volume. Therefore, developers are working on order books so that users can place limit orders.


Streaming swaps are also being discussed. These could make swapping on THORChain extremely cheap, compared to any CEX or DEX. Since swap fees are based on the size of the swap, smaller swaps have less fees. What if you broke your swap into hundreds or even thousands of tiny swaps that execute every few seconds? No human is going to do this, but it can be done by a program quite easily. Lowering the cost to swap, especially if it’s cheaper than CEXs, will drive more volume to THORChain.

When I reference trading volume on CEXs like Binance I’m just talking about their spot volume. It doesn’t include derivatives/futures trading. Futures trading in crypto, and all markets for that matter, dwarf spot trading. If THORChain had futures trading it could easily double or triple its total swap volume. Developers have been tinkering with how to introduce a perpetual futures contract on THORChain. They’re not sure if it’s technically possible yet but it’s something they have cooking in the oven.


Now that you understand how THORChain works, how the RUNE token derives value, the implications of the Liquidity Black Hole, and all the features being developed, go back and review the valuation analysis. 

The numbers should hit home better now. And perhaps you can envision those valuations as just the beginning.


For a more thorough understanding of how THORChain works please review the developer documents on this link:

https://docs.thorchain.org/


Risks

This is crypto. You could lose all the money you invest in RUNE.

What’s the probability of RUNE going to zero? It’s a thumb suck to try and guess something like that, but I believe there’s a single digit percent chance.

If THORChain does fail for some reason in the future, I believe it will happen after a run up in the RUNE price, giving you time to recover your initial investment.

You can’t avoid risk when investing, especially if you want to significantly increase your net worth. What you can do is mitigate the risk through position sizing.

With investments like RUNE, you don’t put all your money into it. You only invest 5-10% of your portfolio. That way if the worst-case scenario happens, and your investment in RUNE goes to zero, it only affects 5-10% of your portfolio. The other 90-95% of your portfolio will be fine and you should be able to recover from it.

Whereas if RUNE truly does take off and go up 100x, the 5-10% you invested will 5x-10x your portfolio.

This is how speculating works. You look for asymmetric bets and risk a little to make a lot. 

The following is a list of risks in no particular order and how THORChain mitigates each risk.

Hackers

Every cryptocurrency is susceptible to being hacked. Especially as they go up in value and the prize for a would-be thief gets bigger. However, if a hack occurs it doesn’t necessarily mark the end of said crypto. It depends on the circumstances and severity of the hack.

For example, Bitcoin was hacked in its early days.

On August 15, 2010, someone in the Bitcoin community noticed 184.5 billion bitcoin were created and split evenly between two different addresses. The solution was simple but would come at a slight cost. In order to update the code to prevent it from happening again, and to erase all those extra bitcoin, a soft fork was required. Bitcoin was effectively restarted from a point in time just slightly before the hack took place. This means some transactions that occurred between the time stamp on the fork and the hack would be erased/reverted to an earlier state. A small price to pay at the time, but nonetheless, a price to pay.

Another notable hack was The DAO on the Ethereum network.

The DAO made headlines in the spring of 2016 raising 11.5 million ETH (worth $150 million) from over 11 thousand people. It was one of the earliest and biggest projects built on Ethereum at the time. As quickly as they raised the money, about one third of it was stolen. 3.6 million ETH were transferred to an account subject to the 28-day holding period under the terms of The DAO Ethereum smart contract.

The hacker didn’t have direct access to the ETH yet, and this gave the community time to discuss how to respond. The debate was intense. In the end, a hard fork of Ethereum went through so the funds in The DAO could move to a recovery address where they could be exchanged back to ETH by their original owners. The hard fork meant a new Ethereum chain was created and that is the one you know and think of today. The original Ethereum chain, where the hack occurred, still exists as Ethereum Classic. Despite its sordid history, Ethereum Classic has consistently ranked in the top 25 cryptocurrencies by market cap.

THORChain Hacks

THORChain has been hacked a few times. But unlike the hacks on Bitcoin, The DAO, and others, these hacks were expected.

Expected?!

Yes. Well sort of.

Imagine you have $1 billion, and you want a vault to store it in. Before you put your billion dollars in the vault you want to be confident the vault is secure. The people who built and installed the vault can give you all the assurances in the world that it’s safe and secure, but you want a way to double check. Rather than risk $1 billion in the vault right away, you put $10 million in it. You tell the world, especially thieves, that if they can steal the $10 million, they can have it. If the money is stolen, it’s a small price to pay to figure out how they did it, so you can fix it. Rather than hire a consultant for $10 million to audit the vault, you get the actual people who would try to steal from you auditing the vault. And if they can’t break into the vault, you keep your $10 million.

THORChain developers implemented a similar strategy with launching the protocol. To appreciate how, it helps to go through the history of THORChain leading up to the hacks.

In September 2020, Single Chain Chaosnet (SCCN), colloquially called Chaosnet, was launched. This alpha version of THORChain was only able to trade Binance Chain (BEP2) tokens and was meant to test the technical, economic, and security design of the protocol. To encourage participation in Chaosnet, the project treasury promised to replace any assets that were hacked, stolen, and/or lost. Leading up to the launch there were numerous disclosures to outline the risks of Chaosnet. Such as this from Aug 21, 2020:

Chaosnet is a decentralized network, you are interacting with a network which is not within the control of the THORChain team. Chaosnet is an experiment in liquidity and security, it’s high risk and not for use by new users. Chaosnet has real assets at risk which act as an incentive to encourage attacks on the network by profit seeking actors. All assets staked, bonded or being swapped are at risk of permanent loss. By participating in Chaosnet you understand that you’re taking full responsibility for any potential loss of assets; neither node operators nor THORChain team will be held accountable. Chaosnet is designed to expose the network to scrutiny & attack in order to prove the security & economic incentives are correct; and to demonstrate the network is resilient, performant and overall fit-for-purpose.

The rationale for Chaosnet is based on game theory & behavioral economics (i.e.) without genuine incentives for all agents it’s not possible to test the hypothesis or design assumptions underpinning the network. Chaosnet is a vital step before THORChain’s Mainnet. Persistent security bounty means real assets incentivize agents to attack the network for a potential reward.

Assets bonded & staked on the network therefore could be drained, stolen, or irrevocably lost through malicious actors, disruptive node behavior or technical malfunction. Chaosnet is a decentralized, permissionless network based on game theory and using complex & immature technology. There are likely many attack vectors which have not been identified during audits and testing.

THORChain Chaosnet Risk Summary

SCCN operated until April 2021 attracting ~$200M in total value locked. Many bugs were worked out and updates made over those months but there were no hacks or major issues. Therefore, THORChain was deemed ready for its next phase of testing, the beta version called Multi Chain Chaosnet (MCCN).

MCCN is where actual layer 1 bitcoin, ethereum, and other assets would be pooled and swapped on their native blockchains. No longer just the wrapped BEP2 tokens on SCCN. SCCN continued to operate in parallel to MCCN.

The exact same risk factors to SCCN applied to MCCN.

The assets being deposited into MCCN were purposely gated by a ‘liquidity cap.’ This cap started out small and was gradually lifted as confidence grew and proved the economic & security model and demonstrated the resilience & performance of the network.

Here’s a timeline of events on MCCN.

  • April 13, 2021 MCCN launched with 500k RUNE liquidity cap.
  • April 26, 2021 Liquidity cap raised to 750k RUNE.
  • May 5, 2021 Liquidity cap raised to 1.5M RUNE.
  • May 19, 2021 Liquidity cap raised to 2.25M RUNE.
  • May 25, 2021 Liquidity cap raised to 3.0M RUNE.
  • June 8, 2021 Liquidity cap raised to 4.5M RUNE.
  • June 24, 2021 Liquidity cap raised to 5.5M RUNE.
  • June 28, 2021 Liquidity cap raised to 7.0M RUNE. Black hat hacker stole ~$140k. Network was halted for 6 hours to fix and update the protocol.
  • July 2, 2021 Liquidity cap raised to 10.0M RUNE.
  • July 9, 2021 White hat hacker discovered a bug in the Ethereum router affecting ERC777 tokens. Network was halted for 5 days to fix and update the protocol.
  • July 14, 2021 Network resumed trading.
  • July 15, 2021 Black hat hacker sole ~$8M of ETH via the Ethereum router. Network was halted for 6 days to fix and update protocol.
  • July 21, 2021 Network resumed trading.
  • July 22, 2021 Grey hat hacker stole ~$8M worth of ERC20 tokens via the Ethereum router. Network was halted indefinitely to regroup and re-evaluate.

All the vulnerabilities were on the Ethereum router. Bitcoin and all other chains operated without incident and still do to this day. Chaosnet served its purpose by identifying the security issues and where the code and design needed to be improved.

Remember, the timeline above occurred during the peak of the bull market in 2021. The developers could have opened THORChain up wide and allowed hundreds of millions to flow in, but they didn’t. Despite the steadily increasing liquidity cap, it was kept small enough for the treasury to cover any losses. Also, when hacks like this have happened to other protocols in the past, many of their developers would tuck their tail between their legs and walk away. THORChain developers did the opposite. They doubled down on their efforts and brought in more people to help. 

Over the next couple months, all users were made whole from the treasury, as was promised.

Here are the four problems that led to the exploits and how they were fixed.


Problem 1: The Ethereum Code was Unaudited

THORChain code was audited as part of SCCN, but the updated MCCN code was not. An audit was scheduled with Trail of Bits, but unfortunately had not begun at the time of the first attack. Both Trail of Bits and Halborn Security performed two simultaneous audits while the network was halted.


Problem 2: There was no Official Bounty Program

As part of SCCN a bounty program had been released, but it was not refreshed as part of MCCN. This was overlooked. Thus, there were no publicly clear incentives and campaigns for white hat hackers to be onboarded and find vulnerabilities. To rectify this, a $1 million bounty program was established with Immunify, the leading bug bounty platform for crypto projects.


Problem 3: There was no Ongoing “Red Team”

All exchanges have active security teams, whether it’s a stock or crypto exchange. THORChain needed a 24/7 continuously running red team to review the code line-by-line on each new update, as well as actively monitor the network. A red team called THORSec was created to fill this role. The team is composed of world-class white hat hackers - security experts who have uncovered major exploits of other networks in the past. THORSec is funded by the treasury, but distinct from core developers and external auditors. The responsibilities of THORSec include:

  • Review and approval of pull requests to THORChain’s open-source codebase.
  • Provide 24/7 monitoring of the protocol.
  • Respond to issues, events, and incidents.
  • Create run books and procedures for network updates, chain additions, and hard forks.
  • Monitoring for connected chain vulnerabilities, upgrades, and hard forks that could impact THORChain.

Problem 4: THORChain had no Active Security Monitoring

THORChain’s autonomous nature made it vulnerable. THORChain happily executed the attack transactions and there was nothing anyone could do about it, except for all the nodes shutting down their machines. Six different solutions were implemented and are discussed below.

Automatic Solvency Checker

This is the ability for each node to scan wallet balances and report negative discrepancies between the on-chain balance and what THORChain thinks it has.

  • A reactive mode where nodes continuously check the balance of on-chain wallets and THORChain vaults when assets are deposited.
  • A proactive mode where nodes continuously check the balance of on-chain wallets and THORChain vaults when assets are withdrawn.

Granular Network Pause Controls

Previously, the only ability to pause the network was to ‘halt trading’ which stopped trading and adding liquidity. It did not stop refunds or withdrawals, which allowed attackers to siphon funds even when trading was halted. A new set of network pause controls was established.

PauseTrading - The entire network will be paused for trading and adding liquidity. This can also be set for a specific blockchain.

PauseChain - The network will pause trading as well as refunds and withdrawals.

PauseTHORChain - This effectively freezes the entire network allowing the network to trap attacks, but still produces blocks. The only action allowed will be mimir to react to the changing situation.

Node Timeouts

When the attacks happened, the node and community were very quick to observe, but there was no mimir setting to react, or the mimir was hesitant to execute the halt. A new feature (PauseChainGlobal) now grants each node a unilateral ability to pause the network, once per churn cycle, and only for 1 hour. Each node that calls it will increase the pause for a further 1 hour. Each node can also call to resume, in which case 1 hour is deducted. This is a rudimentary and leaderless way to converge to a pause period that allows the network to respond to a global threat but does not give any node the ability to pause the network and keep it paused for malicious reasons.

Outbound Throttling

This feature throttles the outbound queue so that large transactions of assets in the network are delayed. If an attack is discovered, then any node can call to pause and trap the outbound assets. This feature does negatively impact the user experience of large transactions, but for most users it won’t be an issue. As the network is hardened the throttle can be opened by mimir.

The maximum delay is 60 minutes. Breaking up the transaction won’t change how it is scheduled, since the aggregate value of all outbounds is counted. A smaller transaction that happens to get scheduled at the same time as a large spike in activity will also get delayed alongside everyone else.

Node Broadcast Bot

Nodes can now broadcast a signed message directly from their machines. This feature allows node operators to stay anonymous but still broadcast help or emergency messages to the rest of the community at any time.

Live Monitoring Bot

A bot scans the network for any abnormal activity and immediately broadcasts the issue. This is just an ability for the network to monitor unusual spikes in activity and investigate closer.

The intent of these changes is to make any hacker view an attack on THORChain as not worth it, and instead, see that it’s more profitable to file for a bounty and get paid honestly.

If the Outbound Throttling and Node Timeouts had been in place during the hacks then the hacker would have been delayed a full 60 minutes, and nodes could have paused and saved the funds. Even if the attacker had broken the transactions into much smaller ones, the maximum they could have gained in the first few minutes would have been in the vicinity of $100k-$200k. This amount is less than the bounty they could have gained, so they may have considered reporting the bug instead of going through with the hack.


THORChain was halted for 2 months while developers implemented the changes above, finished the third-party audits of the code, and the treasury paid users back for the $16M stolen in the hacks.

From mid-September to the end of October 2021, THORChain was slowly brought back online. Full operations of MCCN resumed in November 2021.

To further strengthen the security of THORChain, Stagenet was developed in December 2021. Stagenet is a clone of THORChain that acts as a live testing ground, with real world assets, to test updates before implementing them on THORChain. Whereas before, updates would go on THORChain without any way to test them other than in theory.

From January 2022 to June 2022, THORChain functioned without any major incidents. Bugs were found and fixed. New features were tested and rolled out. The collapse of LUNA and UST in May 2022 affected THORChain like the rest of the sector, however THORChain’s security was never compromised. With 6 months of relatively smooth operations, THORChain developers declared Mainnet on June 22, 2022.

Mainnet is more of a moniker or milestone than a change in the protocol. The protocol itself did not change on June 22, 2022. It was an announcement by the THORChain community to say it believes THORChain has been sufficiently tested and is ready to be adopted on a larger scale. The declaration brought an end to Chaosnet and with it the protection from the treasury on any funds stolen or lost. Users now have to use THORChain at their own risk without any recourse.

THORChain declaring Mainnet does not mean it is impervious to attack going forward. Despite the significant improvements made, THORChain will always be susceptible to hackers. This is true of all software; cryptocurrencies are no exception.

Regulators

 

Three quarters of the market is non-securities, it’s just a commodity, a cash crypto.

MIT Professor Gary Gensler (prior to SEC Chairman)

I’ve made the argument that ether is a commodity… We would not have allowed the product, in this case the ether futures product, to be listed on a CFTC exchange if we did not feel strongly that it was a commodity asset.

CFTC Chairman Rostin Behnam

Your regulatory actions, and the CFTC’s regulatory actions, say that there is a great deal of uncertainty here. It is the intention of this committee to fix that uncertainty and actually provide sound legal basis for this.

House Financial Services Committee Chairman Patrick McHenry

Your regulatory style lacks flexibility and nuance and as a result you’ve been an incompetent cop on the beat doing nothing to protect everyday Americans.

House Financial Services Committee Member Tom Emmer

Is crypto a security?

It’s one of the biggest questions in the sector right now. Many people are worried about the SEC deeming crypto as securities and how that would affect them.

The reason no one wants crypto to be considered a security, is because each protocol would have to register with the SEC and the CEXs would have to trek through the mountains in the regulatory landscape to become compliant. The regulations would be so onerous that most would not do it, and the CEXs would close or delist many of their tokens. Liquidity would disappear. But just from U.S. markets.

Despite its best efforts, the U.S. is not the center of the universe. There are 194 other sovereign states in the world, each with their own unique regulations and interests. DeFi exists outside of all the countries in the world, and if anything, is easier to grasp if you view it as its own country. This is the whole point and value add of decentralization. Decentralization makes regulators impotent. No intermediary or centralized authority can stop a decentralized cryptocurrency. Permissionless systems do not have to ask for permission.

Let’s just assume that RUNE is considered a security by the SEC. What would happen to the protocol, to the RUNE price? RUNE could go down in price in the short term, but in the long term the protocol should function just fine.

THORChain has no head office, no CEO, no one to register with the SEC. Therefore, THORChain will never be registered with the SEC. If the SEC singled out THORChain and declared RUNE a security, then no U.S. CEX would list RUNE. But RUNE would still trade on foreign CEXs and of course on THORChain itself.

Most of RUNE’s volume comes from outside the U.S., on Binance and THORChain. Binance is not regulated by the U.S. and THORChain is a DEX! So, the price impact on RUNE may not be that significant at all.

The whole point of THORChain is to compete with CEXs. If all the CEXs in the world shut down, that would actually benefit THORChain as all the bitcoin trading volume would have nowhere else to go but THORChain.

Therefore, the only real threat from the U.S. declaring crypto a security is pushing the crypto market outside the U.S. and making it more difficult for Americans to participate in it. Prices would drop in the short term, but the market would carry on business as usual over the long term.

Despite the above, maybe you would still feel better if it were clear that RUNE is a commodity, not a security. You could spend millions on lawyers trying to get an answer, but you’ll get nowhere. 

The SEC and CFTC are in a turf war with each other to see who gets to regulate crypto in the U.S, and we’re caught in the middle.

Unfortunately, the SEC is taking a reactive approach and regulating through enforcement. Therefore, only after big court cases like Coinbase and Ripple get sorted out will we have any clarity from the SEC.

Fortunately, the CFTC has taken a proactive approach and has declared some cryptocurrencies as commodities. In various public statements, the CFTC has said bitcoin (BTC), ether (ETH), litecoin (LTC), tether (USDT), and others are commodities.

The CFTC would not make these statements loosely. If the SEC does deem any of these as a security, it would carve them out of the CFTC’s jurisdiction and any futures trading on the CFTC would become illegal. Therefore, the CFTC has their neck on the line too.

It’s important to note the SEC does not have an internally aligned view on crypto. Despite SEC Chairman Gary Gensler monopolizing the media with his opaque and obtuse statements, there are others in the commission who have suggested clear common-sense regulations with respect to crypto.

SEC Commissioner Hester Pierce has been public about the crypto industry deserving clear and modern regulations. Her February 2020 speech “Running on Empty: A Proposal to Fill the Gap Between Regulation and Decentralization” and her April 2021 statement “Token Safe Harbor Proposal 2.0” are good examples.

SEC Director William Hinman gave a speech in June 2018 “Digital Asset Transactions: When Howey Met Gary (Plastic)” where he said:

…putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.

SEC Director William Hinman

Many believe Ethereum is a security because of its ICO (initial coin offering) where Vitalik Buterin and other core developers raised money to build the protocol. The ICO itself may very well have been a securities offering, however as Director Hinman points out, that does not necessarily mean the ETH token today is a security.

THORChain core developers raised about $1.5 million through an ICO in July 2019. This transaction could be seen as a securities offering. However, like Ethereum, THORChain has become decentralized since then and current trades of RUNE might not be considered securities transactions.

Only time will tell. The best we can do right now is make do with the information we have at hand. Gary Gensler keeps saying no new regulations need to be created to encompass crypto. That the existing legislation is good enough. In that case, let’s review what the existing regulations say.

For RUNE to be considered a security, a transaction would have to qualify as an investment contract, and the method for determining such a thing is the Howey Test.

In the 1940’s, the Howey Company sold citrus groves to people, who would then lease the land back to Howey Company. Howey staff would tend to the groves and sell the fruit on behalf of the owners. Both Howey and the landowners shared the revenue. The SEC claimed this was an investment contract and needed to be registered as such. Therefore in 1946, the SEC took the Howey Company to court, and ended up going to the Supreme Court. The Supreme Court's final ruling determined the leaseback arrangements qualified as an investment contract and established the criteria for determining what constitutes an investment contract that is still used to this day.

Note: oranges, lemons, and limes are not securities. Citrus groves are not securities. Buying and selling a citrus grove is not a securities transaction. Owning a citrus grove and hiring someone to manage it for you is not an investment contract. However, pooling people’s money together to buy citrus groves and share in the revenue is an investment contract and therefore it’s considered a security.

So, the question we have to answer is: Are trades in RUNE an investment contract?

Lawyer John Deaton had a great rant on twitter answering this very question.

"INVESTMENT CONTRACT"

Is one of the most misunderstood legal terms in the law. The Howey Test must be the most misapplied legal test or doctrine on social media.

“Investment contract” is a legal term of art adopted from state law by Congress when it enacted the 1933 Act.

According to the Securities Act of 1933, the term ‘‘security’’ means:

“any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of de- posit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security’.”

DIGITAL ASSET IS NOT LISTED. SOFTWARE CODE IS NOT LISTED.

In all of these digital asset SEC cases (@Telegram, #Kik, @LBRYcom, @Ripple) the only relevant term is “investment contract.”

And the Supreme Court in the Howey case in 1946 defined what constitutes an investment contract.

A digital asset or cryptocurrency (software code), STANDING ALONE, is NOT a security. It can be marketed, packaged, offered and/or sold as an investment contract aka a security.

In Telegram it was made clear that the #GRAM token was NOT the security. #XRP is NOT a security. #ETH is NOT a security.

The #ETH ICO constituted an unregistered securities offering. Ripple may have offered or sold #XRP as an unregistered security on a specific occasion(s).

But even if true, it doesn’t make the underlying asset - digital code - a security itself.

Most important: when dealing with an investment contract, there hasn’t been a single case in U.S. history where the secondary sale of that asset was also found to be a security. NEVER.

When the investor in Howey bought the orange grove, he bought it directly from the Howey Company. If that same investor had sold the orange grove to a second buyer years later, a buyer with zero knowledge of the Howey company and its involvement, the subsequent sale is not of a security.

It doesn’t matter that the #ETH ICO was a securities offering - #ETH itself isn’t a security. It doesn’t matter if Ripple sold #XRP as a security sometime between 2013-2018 - #XRP itself isn’t a security.

Every Altcoin arguably starts out as a security when its first distributed, ICO or not. When Satoshi was the only miner of #Bitcoin (or one of a few) and had he offered 100K #BTC for sale for $100K USD, it would have been an unregistered securities offering.

The industry can’t allow Gensler and the SEC and #BTC Maxis to keep pushing an unconstitutional shortcut by calling the tokens themselves as securities.

John E. Deaton, Twitter Thread

There’s enough circumstantial evidence for me to assume the RUNE token isn’t a security. If I’m wrong, and the SEC specifically declares RUNE a security, I don’t believe it will have much impact on the operations and long-term survival of the THORChain protocol because it’s one of the most decentralized cryptocurrencies. The RUNE price could drop in the short term as some people panic sell on the news. However, the vast majority of RUNE is traded outside the U.S. and it should continue to trade, business as usual.

Design

There’s a concept called the Lindy Effect that suggests the longer something has existed, the more likely it will continue to exist. The longer something goes without failing, the more likely it won’t fail.

Bitcoin has gone a long time without any problems and has proven to be quite stable. This has led some people to advocate for no more changes to the Bitcoin code because every change to the code resets the clock on the Lindy Effect. This idea is called Ossification. The Ossification of Bitcoin is believed to secure the success of Bitcoin and not put it at any risk. In effect, Bitcoin is good enough as it is.

Interestingly, as the decentralization of Bitcoin continues to grow, it will become more and more difficult to implement changes on the code anyway, because it will become more and more difficult to get everyone to agree to adopt the changes. Like herding cats. Only when the network is small enough can you easily gain consensus on changes.

What does this have to do with THORChain?

THORChain is still in its development years. The protocol continues to be upgraded and improved upon. New features are continuously thought of, debated within the community, and implemented. This is great for increasing the value proposition of THORChain to attract even more users. However, any changes to the code or economic design exposes the protocol to risk and resets the Lindy Effect.

Changes to the code could introduce a new avenue for a hacker to exploit the network.

Changes to the economic design of the protocol are a bit different. A new feature could work exactly as programmed, not be a victim of any hackers, and still cause a failure in the protocol.

A prime example of this is the collapse of Terra’s LUNA and UST tokens - the Lunapocalypse.

The Lunapocalypse was not caused by a hack or failure of the code. The code for both LUNA and UST worked exactly as designed and intended. It was an error in the design itself that proved to be its downfall. Illiquidity of the UST token on secondary markets caused it to lose its peg to the U.S. dollar, the burn/mint mechanism on the primary market could not keep up, and it led to basically a bank run. The burn/mint mechanism on the LUNA token enabled it to hyperinflate by thousands of percent, crashing the price.

The THORChain community is working on a lending feature that will introduce a burn/mint mechanism to the RUNE token. Because of Terra’s failure, the community is very cautious about adding the feature. The burn/mint mechanism proposed on THORChain is radically different from Terra’s.

LUNA had no limit which allowed it to hyperinflate. Whereas total supply of RUNE will be capped at 500 million, eliminating the possibility of hyperinflation. However, this arbitrary limit could cause users behavior to change and introduce new problems we’ve not thought about.

In the proposed design, the only way the RUNE supply will inflate is if the RUNE:ASSET price ratio drops from the time a loan is taken out to the time it’s repaid. No one knows for sure how users' behavior will play out when the RUNE:ASSET price ratio is decreasing, therefore there is no way to know with confidence how the design will hold up during such a scenario.

The burns from the Lunapocalypse still sting for many. If there is any solace you can take from it, is for there to be a collapse from a burn/mint mechanism, there first has to be a huge rally. The RUNE token would have to be burned, driving up the price, before the risk of it being minted and driving down the price. Therefore, if there does end up being a problem with the design itself, you should have lots of time to take profits and reduce your risk exposure. 

Adoption

What if no one uses THORChain?

Trust Wallet alone has 25 million users. Why aren’t those users active? They don’t know they can swap inside their wallet yet. It will take time for the wallets to let their users know about the new feature. Whereas when people create an account with Binance or Coinbase, they’re consciously doing it to start trading.

Therefore it’s entirely possible that all the crypto wallets integrate THORChain and none of their users ends up utilizing it.

Since the wallets can program in their own commissions, they have a financial incentive to promote the new feature to their users.  But they’re not obligated to.

Maybe no new wallets integrate THORChain, and we’re stuck with the current ones.  These wallets still represent about 70 million people, which is over half the size of Coinbase and Binance.  This alone is enough to make a difference to the future of THORChain.

Adoption is on the rise so it doesn’t appear to be an issue right now.

Market

Beta is an indication of the volatility of a stock, fund, or portfolio in comparison with the market as a whole. All investments have beta. The only question is how much.

RUNE has a very high beta.

The value of RUNE is directly proportional to the value of all the cryptocurrencies in the liquidity pools, and since those various cryptocurrencies represent over 95% of the market as a whole, the value of the RUNE token is proportional to the market as a whole. This effectively makes the RUNE token similar to a market index fund. Therefore the RUNE price should be highly correlated to the overall crypto market.

You know how volatile the crypto market is. The RUNE price will be directly affected by that volatility and succumb to it as well.

Competition

As of December 2023, there is one other DEX that can swap layer 1 bitcoin with layer 1 ethereum. It's a friendly fork of THORChain called Maya Protocol.

Maya is about 2 years behind THORChain in network effects.

Since THORChain was first, it has a large head start on its network effects. The greater the network effects of an incumbent, the harder it is for a competitor to break into that market.

It took Trust Wallet 18 months to integrate THORChain. It’s reasonable to expect any new DEX that competes with THORChain will take a couple years to prove itself and get integrated into various crypto wallets. 

Forks may take away market share from THORChain, however they have the added benefit of approving THORChain’s design. The reason no one has been able to accomplish trustless swaps in over a decade is because it’s hard. If THORChain’s design proves to be the gold standard on how to do it, there could end up being many copycats. If so, that would just be a further vote of confidence in the technology and economic design.

Forks tend not to work out well anyway. Look at Bitcoin’s forks like Litecoin, Dogecoin, Bitcoin Cash, etc. There’s a plethora of competition for Bitcoin, however none of them have come close to being as successful. The first mover advantage is very real in crypto. The head start in network effects cements your place in the sector. 

Also, the DEX market is not a winner take all market. There’s lots of room for competition. Just like there’s room for Binance, Coinbase, Kraken, etc. amongst the CEXs. There’s lots of room for multiple DEXs to operate alongside each other. Add in the fact THORChain has a DEX aggregation feature, that connects other DEX’s with THORChain’s liquidity pools, it makes those DEX’s partners in a sense. Rather than competition.

Perhaps a completely new way of facilitating trustless swaps is developed and makes THORChain obsolete. That’s possible, but as far as I know there’s no one even close to proposing such a protocol. If one is developed, there should be enough time to see what threat it will pose to THORChain’s market share, if any, and react accordingly.

Overall, I see competition as a relatively low risk factor.


Youxia Crypto RUNE Fund

Satoshi Nakamoto statue from Budapest, Hungary

It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self-fulfilling prophecy.

Satoshi Nakamoto

Now you’re sold on THORChain and want to invest in RUNE. What’s the best way to do it?

Following are the three ways you can hold the RUNE token and what they offer.

Three different ways to invest in RUNE token. Hodl or Pool or Bond

 

Hodl

You can buy RUNE and just sit on it. Nothing wrong with doing that. However, there’s no opportunity to earn any yield on it and it does not help THORChain succeed. The best scenario for THORChain is having the whole RUNE supply in the liquidity pools and bonded with nodes. Nevertheless, hodling is good enough for the average investor looking for capital gains.

Pool

More advanced investors can buy RUNE and deposit it into a liquidity pool. In doing so, you contribute to the success of your investment by helping the Liquidity Black Hole play out. 

Adding RUNE to the liquidity pools increases their depth, making swaps cheaper, attracting more swap volume, increasing the yield, attracting more crypto deposited into the pools, making swaps cheaper, and so on. As the pools get deeper, the value of RUNE increases.

Anyone can add RUNE to a liquidity pool. However, you’re forced to take on price exposure of the other cryptocurrency in that pool too. If you buy RUNE and deposited 100% of it into a liquidity pool, you’ll be credited with 50% RUNE and 50% other crypto. When you participate in liquidity pools you are always exposed to two different assets. That’s okay if you want exposure to both different assets. Perhaps you have equal dollar amounts of RUNE and bitcoin, rather than have them sit there and do nothing, you could deposit them both into THORChain’s bitcoin pool and start earning yield on them.

There is, however, the risk of impermanent loss.

The pools continually rebalance themselves to maintain the 50/50 weighting by price which can have a negative impact on the value of your position. It’s possible the constant rebalancing could start to erode the value of your holdings and they end up being worth less than that which you started with. Add in the leverage caused by THORChain synths, the losses could become even greater. The leverage from the synths works both ways, so it could also work in your favor.

The math involved in providing liquidity to the pools is beyond the scope of this report. Suffice it to say, participating in the THORChain liquidity pools is for advanced investors.

Bond

For sophisticated investors, you can post your RUNE as a bond and run a node on THORChain. Running a node will allow you to collect yield on your RUNE and maintain 100% exposure to the RUNE price.

Bonding your RUNE also contributes to the Liquidity Black Hole because it increases the security of the network, increasing the depth of liquidity pools, making swaps cheaper, attracting more swap volume, increasing the yield, attracting more nodes, increasing the security of the network, and so on. As the pools get deeper, and new nodes buy RUNE to post as a bond, the value of RUNE increases.

Using your RUNE to run a node on THORChain is the best thing you can do to help facilitate the success of your investment.

However, you most likely don’t have the technical skills to run a node, or 1 million RUNE to post as a bond, let alone both.

Youxia Crypto RUNE Fund

Our Fund makes it easy for you to participate in running a node on THORChain. You don’t need technical skills or 1 million RUNE, you just have to fill out some paperwork and do a wire transfer. By investing in the Fund, you catapult yourself from being an average investor to a sophisticated investor.

The goal of the Fund is to achieve capital gains and yield. The fund will invest in the RUNE token and post it as a bond to run as many nodes as possible. The yield collected from running the nodes will compound within the Fund until the RUNE token goes up a significant amount, like a 10x return.

Your initial investment will be distributed back to you and then you’ll start receiving part of the yield as income. The remaining yield will stay within the fund to continue the compounding process, albeit at a slower pace.

The idea is to continue compounding while still collecting income. The goal is for every $1 invested today, to yield $1 per year, and eventually $1 per month. All while continuing to sit on a large capital gain, since the principal will remain invested.

The Fund will not be actively trading the RUNE token nor use any leverage. It has a buy and hold strategy. Think of it like commercial real estate but with higher upside potential.

That’s the plan anyway. Reality has a habit of getting in the way sometimes.

Crypto is volatile and there will most certainly be times when RUNE should be sold instead of bought. The Fund will monitor the market and may raise cash, or even go to 100% cash, if deemed prudent. A handful of well-placed trades would contribute to compounding and simultaneously reduce volatility of the Fund.

The Fund is open-ended and intends to exist for as long as THORChain exists. If THORChain becomes the core infrastructure for crypto, the Fund could last for decades.

The Fund can accept crypto, so if you already own some RUNE tokens, you can use them to invest in the Fund.

You don’t need any experience with crypto to invest in the fund. You don’t have to deal with any crypto wallets. You don’t have to learn anything new. You don’t have to worry about your taxes, you’ll get all the statements your accountant needs. You don’t have to stay on top of news or changes to the protocol. You can sit back, relax, and enjoy the ride.

A wild ride it will be!

To Access the Fund Offering Documents - Get in touch

 

About the author

About the author

Kenton Ralph Toews

Kenton is the founder of Youxia Crypto, an asset management company specializing in crypto. He can help you buy and sell precious metals too. He believes crypto is more than just about trying to make money, it’s about creating freedom for oneself and the rest of the world. Kenton is a contrarian, voluntaryist, and proponent of Austrian Economics. He enjoys downhill skiing, scuba diving, live music, yoga, and traveling.


Disclaimer

The Author of this report is invested in the RUNE token. Investment funds managed by the Author of this report are invested in the RUNE token. The Author has a financial incentive for others to buy the RUNE token and drive up the price. The Author has not been paid to write this report, it’s written based on his own volition.

Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions. Please refer to the offering documents for a more thorough disclosure of risks. Past performance is no guarantee of future returns.

The intended use of this material is for informational purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. The investments discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a total loss of the principal amount invested.

Youxia Crypto Ltd., a Cayman Islands exempted company, Youxia Crypto – RUNE Master Fund (CAY) Ltd., a Cayman Islands exempted company, Youxia Crypto – RUNE Fund (BVI) Ltd, a British Virgin Islands limited company, Youxia Crypto - RUNE Fund (US) LP, a Delaware limited partnership, Youxia Crypto - RUNE Partner (US) LLC, a Delaware limited liability company, are collectively referred to herein as “Youxia Crypto.”

The information contained in this presentation and other information furnished by or on behalf of Youxia Crypto has been prepared to assist the recipients hereof in conducting their own evaluation of Youxia Crypto and does not purport to be complete or to contain all the information a recipient hereof may require. Youxia Crypto and its affiliates make no representation or warranty as to the accuracy, reliability, reasonableness, or completeness of this information and shall not have any liability for any representations regarding information contained in, or for any omission from, this presentation or any other written or oral communications transmitted to the recipient during its evaluation of Youxia Crypto. Neither this presentation (nor any part hereof) nor any information or statement contained herein shall form the basis of any contract or commitment whatsoever. The definitive terms of the transactions described herein, if such transactions take place, will be described in the offering materials related to such transactions, when available, and the offering of notes in such transaction will be made only by way of such offering materials (the “Offering Documents”), which may differ materially from the information presented herein and in connection therewith. By accepting this presentation, you acknowledge and agree to the foregoing sentence. Prospective investors are advised to read the entire offering documents carefully, once available, and will be required to conduct their own independent investigation and analysis and consult with their own attorneys, accountants and other professional advisors regarding the merits and risks of any such investment. The information contained in this presentation is not investment or financial product advice and is not intended to be used as the basis for making an investment decision. This presentation has been prepared without considering the investment objectives, financial situation, or particular needs of any particular person. As such, this presentation should not be relied upon for the purpose of evaluating the performance of Youxia Crypto or for any other purpose.

This presentation shall not, and is not intended to, constitute, or contain an offer or invitation to sell, or the solicitation of an offer to buy, and may not be used as, or in connection with, an offer or invitation to sell or a solicitation to buy, any notes or securities of Youxia Crypto or any financial instruments related thereto in any jurisdiction. Neither the U.S. Securities and Exchange Commission nor any federal, state, or provincial securities commission of any jurisdiction has approved or disapproved of the securities or passed upon the adequacy of the offering documents. Any representation to the contrary is a criminal offense.

Certain market data information in this presentation is based on management's estimates. Youxia Crypto obtained the industry, market and competitive position data used throughout this presentation from internal estimates and research as well as from industry publications and research, surveys and studies conducted by third parties. While Youxia Crypto believes these sources to be reliable, this information may prove to be inaccurate because of the method by which Youxia Crypto obtained some of the data for its estimates or because this information cannot always be verified due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. Statements contained herein describing documents and agreements are summaries only and such summaries are qualified in their entirety by reference to such documents and agreements.

Certain statements in this presentation constitute “forward-looking statements” or “forward-looking information” within the meaning of applicable securities laws.

Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of Youxia Crypto to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements or information. Such statements can be identified by the use of words such as "may", "would", "could", "will", "intend", "expect", "believe", "plan", "anticipate", "estimate", "scheduled", “next”, "forecast", "predict" and other similar terminology, or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. These statements reflect Youxia Crypto’s current expectations regarding future events, performance and results and speak only as of the date of this presentation.

Although the forward-looking statements or information contained in this presentation are based upon what management of Youxia Crypto believes are reasonable assumptions, Youxia Crypto cannot assure investors that actual results will be consistent with these forward-looking statements. They should not be read as guarantees of future performance or results. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under "Risk Factors" in Youxia Crypto’s offering documents. These forward-looking statements are made as of the date of this presentation and are expressly qualified in their entirety by this cautionary statement. Subject to applicable securities laws, Youxia Crypto does not assume any obligation to update or revise the forward-looking statements contained herein to reflect events or circumstances occurring after the date of this presentation. Youxia Crypto’s actual results could differ materially from those anticipated in these forward-looking statements.

Youxia Crypto and its directors, officers, partners, employees, agents, affiliates, representatives, and advisors expressly disclaim any and all liability based, in whole or in part, on the information contained in this presentation or any related offering and marketing materials received by any recipient hereof (which only speak as of the date identified in the footer of this presentation), errors therein or omissions therefrom.