RUNE's Value Capture

Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.

Editor's Note: This article comes from

Blue Fox Notes (ID: lanhubiji)

, reprinted by Odaily with authorization.

One of the purposes of Bitcoin's existence is the permissionless de-intermediation of value transfer, because Bitcoin has its own ledger, protected by cryptography and PoW game mechanism, it can do this. But the problem today is that there is not only one chain of Bitcoin, but also multiple chains such as Ethereum and EOS, and the ledgers of each chain are different. How to achieve value transfer between different chains?

This involves the issue of cross-chain, and the traditional solution is often through a centralized exchange, such as exchanging BTC for ETH. This exchange method requires the participation of a centralized exchange. Alternatively, value can also be transferred on Ethereum by tokenizing BTC into an ERC20 token.

So, is there a way to disintermediate without permission, which can directly realize the exchange of assets between different chains? That is, the transaction of cross-chain assets is realized without going through the central organization.

This is what Thorchain is trying to do. Blue Fox Notes has been paying attention to Thorchain before, mainly whether it can become a cross-chain Uniswap. The Uniswap model has achieved some success, but can Uniswap with the cross-chain model succeed? worthy of attention. The Thorchain mainnet is not yet live, and it still needs to prove itself in practice.

Thorchain: wants to be a cross-chain Uniswap

Uniswap is a token exchange protocol based on the Ethereum chain. It is a decentralized model without permission. Anyone can provide liquidity or exchange tokens through its automatic market maker model. This model has been successful so far. However, this success is currently mostly based on Ethereum. Other public chain assets cannot be directly market-made and exchanged on Uniswap.

To put it simply, in order to realize the cross-chain exchange of assets, the participation of nodes is required. Thorchain is a network composed of nodes that realize cross-chain exchange of assets. These nodes run Thorchain's software and are anonymous. They cannot know each other's identities to prevent collusion. In addition, in order to prevent the network from being controlled, active nodes run periodically. After a period of time, some nodes will be randomly kicked out of the network, and new nodes will join in. Nodes that are kicked out can also rejoin. Finally, these nodes do not participate in governance and cannot change the rules of the system.

RUNE's Value Capture

Thorchain's nodes create addresses on different chains to receive assets on different chains such as BTC, ETH, and EOS. When these addresses receive assets, nodes log these events on Thorchain. Thorchain will synchronize the transaction status of the external network, and the system will track the transferred assets, relevant information such as transaction ID, sender address and receiver address, etc. However, not all external network transactions are tracked, only transactions related to Thorchain are synchronized.

• After a node sees a transaction related to Thorchain, it sends transaction information ("witness transaction") to the network. "Witness transactions" have a standard structure, so no matter which network the transaction comes from, it looks the same to Thorchain. Nodes need to reach a consensus on the "witness transaction". If 67% of the nodes in the network agree, then the "witness transaction" will be confirmed. Nodes that submit incorrect information will be penalized. If the node is running normally, it will receive block rewards and some transaction fees. Nodes leave the network and get their initial deposit back along with the rewards they earned.

RUNE's Value Capture

• RUNE is Thorchain's native token. It is the basis for Thorchain security and the key to cross-chain asset exchange. So, from the perspective of value capture, what is the use of RUNE?

RUNE is Thorchain's settlement asset

To exchange assets on Thorchain, all must go through RUNE. For example, if a user converts BTC to ETH, it will be done through RUNE.

RUNE acts as a node's margin and liquidity pool assets

Thorchain is a network of nodes. Thorchain is a PoS chain, and its nodes need to lock deposits to participate in block generation. There is no identity restriction on becoming a node. Anyone can become a Thorchain node, just send their native token RUNE to Thorchain's main storage repository (the address where the deposit is stored). When the node deposits enough RUNE, it will be randomly Elected to be an active node.

• In order to ensure the security of the Thorchain network, 67% of the RUNE assets participating in the Thorchain network are used as deposits for nodes, and 33% are used as liquidity pool assets. RUNE's liquidity pool includes external assets and native assets of RUNE. All external assets are connected through RUNE. Due to this role of RUNE, as the liquidity pool assets rise, the value of RUNE also rises. In addition, similar to Uniswap, the share deposited by liquidity providers will be calculated to obtain corresponding rewards and benefits. The model for users to exchange tokens is similar to that of Uniswap.

This means that RUNE is not only an important basic asset to realize Thorchain security, but also an important asset to realize its liquidity. This will bring a lot of RUNE locks. At present, it is still impossible to know how large the RUNE lockup will be. However, there is a correlation here. With the growth of liquidity pool assets and transaction volume, the value of RUNE will also increase, otherwise it cannot guarantee Thorchain's network security. In order to ensure the security of Thorchain, the node deposit must be higher than the assets of the liquidity pool, otherwise the nodes will have the motivation to steal the assets of the liquidity pool. Of course, it is not that the higher the value of the deposit, the better. If the node locks too much funds, it will not be conducive to the liquidity pool to provide more liquidity. In Thorchain's design, it believes that its optimal allocation is 67% of RUNE as a margin, and 33% of RUNE enters the liquidity pool.

At the same time, this also means that the improvement of RUNE's value is deeply related to the development of its basic business. Of course, there is also a problem of scalability. If the value of RUNE is not improved, then its liquidity pool cannot be expanded. If the value of RUNE increases as liquidity increases, it is a win-win situation.