THORChain: Analyzing Accretive Developments

Introduction

THORChain is the leading DEX for native-to-native crosschain asset swaps, having settled over $74B in cumulative trading volume. THORChain is built as a layer-1 blockchain utilizing the Cosmos SDK and is secured by its native asset RUNE. In recent months, a number of highly accretive developments were implemented across the protocol to improve fee capture and expand product functionality, with more upgrades on the immediate horizon. These developments include hiking the minimum swap fee parameter to increase revenue, adding a Burn System Income Lever to reduce the RUNE supply, the addition of COSM-WASM smart contracting and IBC to enable an application layer, new chain integrations, and more. 

Key Developments

Fee Hike

On THORChain’s liquidity pools, every $1 of non-native assets is paired against $1 of RUNE. Every LP provides liquidity at this ratio, and every supported non-native asset is matched against RUNE. Rather than holding a, for example, BTC <> ETH pool, the protocol implements a BTC <> RUNE pool and an ETH <> RUNE pool. By implementing RUNE as this intermediary asset for crosschain swaps, the liquidity of a non-native asset is available for swaps from any source chain, rather than a constrained route.

THORChain implements a slip-based fee model, which prices an inbound swap fee as a function of the size of the swap and the depth of the liquidity in the pool. Swappers pay higher fees for larger swaps or for utilizing liquidity from shallower pools. This fee is dynamic and sensitive to the liquidity available in the underlying pool and the extent to which that liquidity will be utilized in a swap. The slip-based fee model can be more attractive for LPs, as trades that result in higher price impact pay more in fees.

Originally, the minimum swap fee parameter on this sliding scale was set to 0 bps. Small swaps on deep pools would effectively pay negligible fees. In recent months, the minFee parameter was first hiked to 5 bps, and subsequently up to 15 bps. As such, regardless of the size of the swap or the underlying pool depth, the minimum fee a swapper will pay is 15 bps, and the fee will increase beyond that as a function of swap size and pool depth.