When blockchain technology first started its operation back in 2009 with the launch of the flagship cryptocurrency, Bitcoin, it was believed by the experts and crypto analysts that this model would not sustain because it wasn’t relevant to what the present financial enterprise is providing in terms of their services to the world. Centralized financial elements work on a potential system that has a central command, and each and every change for their policy or any little maneuver that these enterprises take should first be verified and authenticated by that central command, or the change won’t take effect at all.
This gives that central command an imaginable power over the money of people, and in a plain sense, it is not something that can help in furthering the cause of justice and providing constant financial solutions to everybody out there; that is why decentralization and blockchain technology was inaugurated in the first place.
The very purpose of these technologies is to provide each and every person out there with transparent and abrupt access to a decentralized financial world that is extremely scalable, interoperable, and transparent in the sense of not only the transaction fees that are incurred by the user but also other aspects to which the centralized world remains extremely biased. After a decade, all started to come around to the prospect of blockchain technology and decentralization; they were finally accepting these technologies for what they were; with these technologies on your side, you are able to connect with the financial world on your own terms and not on by the agendas of a centralized lobby.
After that, multiple situations and offerings of the crypto world were revealed, it was not entirely limited to transactions and transfers of money from one place to another. There is so much more that can be done which includes the non-fungible tokens, decentralized apps, staking options where you stake a certain amount of crypto into the dedicated mining pool and then earn rewards on the investment made along with the swapping that has become much more favorable and popular among the masses.
Because it provides them with the ability to swap out whatever token they have at hand with some other without having to deal with crypto exchanges and paying them heavy transaction fees because of their role as an intermediary.
Today we shall be talking about one such service which allows people to swap out their crypto tokens in real-time without having to work with a crypto exchange at all. THORChain is a decentralized liquidity protocol that provides its services to multiple users across the globe, allowing them to swap their crypto assets in real-time without having to ask for permission from any centralized lobby.
Even layer one native tokens such as Bitcoin could be swapped with other altcoins options present within the pool where THORChain acts as a vault manager itself. For the sake of securing the network, THORChain is employing the services of Cosmos-SDK and Tendermint. Other than that, it is also using the threshold signature schemes to keep the network as permissionless as possible and allowing people to interact with the service that is entirely leaderless.
Significance of Swapping and THORChain
You might not believe it, but swapping has become an elite business model within the decentralized world as people end up with all kinds of crypto tokens at their hand, trying to invest their money into something which would yield them a huge profit down the line but for some people it doesn’t pan out the way they intended to.
That is why they want to either convert their crypto tokens which they have at hand, back into the Fiat currencies, or they want to approach other lucrative options presented before them in terms of other crypto coins so they can finally get rid of what they have on them and invest the equivalent of its value into some other token of their choice. Now to do that, they have to approach decentralized exchanges and sometimes centralized bodies as well, and these might incur them heavy conversion fees, which they are not ready to pay.
This is where the prospect of THORChain comes into play, it was invented back in 2018, and since then, this enterprise has remained in service, helping people who swap their tokens in real-time without incurring heavy penalties or high transaction fees to them. There is completely no need for an intermediary of any kind to carry out or execute the deal between the intended parties. A definitive mining pool is developed, which contains multiple crypto tokens and a limited number of seating/available slots for people who want to swap out their tokens.
Only if you have a token at hand and seriously want to swap it out with another token only then you would be able to connect or send a request to join that specific mining pool carrying the intended token that you want to acquire. Upon receiving the request, the network will validate that you truly have the tokens on you by verifying the authenticity of your wallet that you have earlier connected with the domain. Upon receiving successful authentication, you would be provided with a limited time window where you can select the tokens that you want to acquire for the tokens that you want to give away.
A calculator will calculate the value of tokens that are to be exchanged with that of the mining pool, and once the value is calculated, the system will then provide you with an exact equivalence of the tokens that you have selected to grab from the mining pool without any complications.
This way, you become eligible to swap out tokens in real-time without having to pay heavy transaction fees; you can swap Bitcoin with Ether or Ether with XRP, and so on so. The process is extremely simple, efficient, and very fast-paced; this is the kind of service that you won’t be able to get at any centralized avenue due to backlashing and slow service, which might require a conversion process that might take days if not weeks to be completed on top of you paying high transaction fees for the conversion to occur.
Working of THORChain
As explained earlier, THORChain is a layer 1 blockchain network that works on the prospect of Cosmos SDK and Tendermint. It is working as a cross-chain decentralized exchange that is completely permissionless, having access to leaderless vaults containing crypto tokens that are up for grabs or swapped should a user submit a request to do so. It also incorporates the use of threshold signature schemes for the sake of securing the asset vaults.
On top of that, the Cosmos SDK and the Tendermint protocol provide access to the Byzantine Fault Tolerance consensus mechanism to secure the conversion process and to make sure that no errors or complications occur before, during, or after the completion of the process. To make things even more secure, a two-thirds majority is needed by the community for a particular request of conversion to even take place; got you need this to happen if you want your funds to submit and then exit the threshold signature schemes vaults.
As for the type of users that can interact with the THORChain platform, there are one too many. First of all, there are swapper communities; these are the users who want to use the service of the platform and want to engage with one of the liquidity pools for the sake of swapping their assets. They might have a dedicated type of crypto token at hand, but they would want to choose another one which is why they require the use of liquidity pools to do just that.
Liquidity providers, on the other hand, are the people who choose a particular mining pool and then stake their crypto tokens in that for a specific period of time in which they are not allowed to take these back or break off the contract in any potential way. These people continually pour liquidity into the mining pools, and for this service, they are running nodes. Next, we have the node operators; these are the people who are put in charge of validating all the requests that the network receives.
These have the duty to make sure that a request is legitimate and comes from a potential user who seriously wants to acquire the services of the platform and is not spamming the network in any potential way. These are paid in native tokens of THORChain for their service of securing the system. Traders are the people who are continually making trades with multiple mining pools at hand, they are entering their money into some, and then they are withdrawing their money from others; these are the players who are seriously rebalancing the pools for the sake of making some profit for themselves.
Other decentralized and cross-chain protocols out there might wrap trading assets before swapping can occur, but this isn’t the case with THORChain. That is why it is using its own native crypto on the platform for the sake of performing transparent swaps for crypto assets in an autonomous way. The liquidity pools enable the crypto swaps, and these pools contain liquidity provided by the liquidity providers, whereas the node operators or validators secure the premise of liquidity pools along with every inch of the network in question.
Liquidity providers will be tasked with depositing their own assets into the liquidity pools for the sake of earning potential yield overtime; during this time period, they are not allowed to withdraw their tokens or investment because they have already made it legally binding that they would not touch these assets for a certain period of time. If you want to become a liquidity provider, then you can do so by signing up with the THORChain network and choosing your role as a liquidity provider.
The next steps involve linking your crypto wallet with the system and generating a ticket that contains all the information, such as what kind of crypto you are going to submit into the mining pool and for how much time. But if you want to become a node operator, then the rules are a little bit different and more strict about making sure that the security of the system remains intact because these are the node providers who would be taking care of this very mission. So, to become a node operator, you have to provide the network with the bond of RUNE; this will work as collateral and would ensure the network that a node operator will work in favor of the network and will not execute their own personal agendas while securing the network.
The asset swap that takes place on the platform is also a bit complicated to understand because it is not a direct transfer or conversion from your crypto to the crypto that you require. Let’s take the help of an example to better understand this concept; first of all, let’s assume that you have Bitcoin at hand, which you want to convert into Ether, now you would have to submit your Bitcoin tokens into the THORChain platform by attaching your wallet and signing up for an account with the service.
After you have done that, the next step involves the transfer of Bitcoin into Ether but wait; it is not going to happen in a direct fashion. First of all, your Bitcoin tokens would be converted into the native crypto of the platform, which is RUNE, and then it will be converted into Ether; this Ether would then be sent to a swapper trying their level best to get their request entertained from the THORChain vault. This allows THORChain to be able to perform the conversion without having to wrap these assets at all; the end result is that you get your crypto in a consistent fashion without having to pay extra fees whatsoever.
Now you will be wondering about the conversion rates and how this thing is taken care of. To provide users with transparent rates, arbitrage traders take care of regulating the market prices, which would, in turn, assign a value to your crypto assets which are ready for the swap. These traders might also try to watch for assets that are not priced right because then they have an opportunity to make profits due to the price differences that exist between the asset itself and the present price of that particular asset on the market.
This way, all the prices get adjusted in a regular and natural fashion on the platform, and this mitigates the need for a third party that would be able to take control of this situation, obviously for a fee. This specific model allows THORChain to take control of the swapping technique and to provide people with the most elegant rates for whatever swap options they have at hand.
The proper worth of an asset could be determined with the help of pool balances and the arbitrage traders, which would, in turn, reveal the total amount of tokens that should be awarded to the user in terms of swap for the initial tokens that they are providing to the network. THORChain works as a vault manager in all conversions, which makes it monitor all the deposits and withdrawals, contemplating all ratios to price assets. Decentralized liquidity is created this way which then completely mitigates and neutralizes the need for any and all centralized intermediaries whatsoever.
How is THORChain Better than its Competitors?
As stated multiple times throughout the article, the most elementary and unique aspect of THORChain is the fact that even being a decentralized exchange; it doesn’t require you to wrap assets for the sake of offering swaps; other than that, there are various other benefits that this particular swapping blockchain has. First of all, it has the ability to call for swaps for layer one blockchain native assets across various environments, and that includes Bitcoin and many other top-tier crypto tokens. You don’t require any kind of authentication or registration with the service at all for the sake of initiating a transaction; anyone with access to the network can execute the swap.
Also, there is absolutely no need to wrap the assets for swapping because THORChain is going to use its own native vaults for the sake of offering swaps to any and all crypto tokens. The prices are fair and completely transparent; without adding any more hidden costs into the fix, you will be getting absolutely great ways for whatever swaps you are up for. You could have liquidity increased or decreased on demand at any particular time that you like, and this is one of the key significance of the THORChain platform. You can earn a great yield on native crypto-assets such as Bitcoin, Ether, LUNA, and various other crypto coins as well.
There are no holding periods which means that there is the flexibility of subjecting your stake for a particular period of time and then withdrawing all the assets if you feel like it. Another great benefit that THORChain proposes and no other competitor of this service does is the fact that you don’t have to deal with third-party providers or intermediaries of any kind as all transactions are orchestrated right here on the platform, and there is absolutely no need to include third party individuals and paying even more money than it originally would have cost for swapping to occur.
The node operators make sure that the platform remains as secure as it ever could be, and they are always monitoring the incoming and outgoing traffic of the network and standing through each and every segment of data parsed over the platform itself to make sure that nothing out of the ordinary is taking place and everything is spotless.