THORChain: Valuing RUNE

This report proposes a valuation model for RUNE, the native token of THORChain. THORChain is a layer 1 blockchain built using the Cosmos SDK that operates as a cross-chain DEX, enabling swaps between native assets without the use of a centralized third party. Readers can find further details in the THORChain Asset Profile on Blockworks Research.

With the rise of alternative layer 1 blockchains, demand for cross-chain interoperability has never been higher. Over the last seven days, more than $3 billion has moved through cross-chain bridges. Effective cross-chain bridges must prioritize security, but we have seen numerous occurrences where existing solutions have fallen short. The Ronin Bridge exploit resulted in a loss of $625 million due to the centralization of validator keys. Furthermore, the Wormhole exploit of $320 million occurred because of its use of wrapped assets. THORChain defends against centralization with over 100 anonymous nodes that require ⅔ consensus to move vaulted funds, and it is less susceptible to the risks of anti-network effects as it only transacts with native assets.

THORChain facilitates cross-chain swaps using the continuous liquidity pool AMM model, where each asset supported by the network is paired dollar for dollar with RUNE. The chain uses an economically incentivized proof-of-bond consensus mechanism to secure the native asset liquidity pools it uses for swaps.

THORChain’s security design and tokenomics establish an intrinsic value for the RUNE token. The demand for RUNE is multifaceted, as node operators (NOs), liquidity providers (LPs), traders, and arbitrageurs all require RUNE to participate in their respective areas of the network. The asset is essential to four areas of the network: settlement, security, governance, and liquidity.

The supply-side tokenomics of RUNE are sound, with a maximum supply of 500 million and roughly 303 million in circulation as of May 10, 2022. RUNE inflation is emitted from block rewards (paid to LPs and NOs) at a rate that targets 2% per annum after 10 years. Thus, it is possible to forecast the future supply of RUNE.

Security and Economics

THORChain’s proof-of-bond consensus mechanism requires would-be node operators to deposit RUNE  in return for a slot in the active validator set. The size of the bond is dynamic but is always targeting 2x the amount of RUNE in the liquidity pools. This ensures nodes are risking at least $2 of RUNE for every $1 of assets they could theoretically steal, making an attack irrational. This sum of all RUNE bonded by node operators is referred to as the Total Active Bond.