Tokenomics 101: THORChain

How To Swap $BTC for $ETH Without a Centralized Exchange

Article by Florian Strauf


This piece is part of a series of articles (Bitcoin & EthereumTerra & Luna) regarding the tokenomics of various blockchains. Therefore, the “Background” section is a quick intro to tokenomics, and familiar readers might want to jump right into the “Importance of THORChain” section.

Tokenomics Primer

The term ‘tokenomics’ is a hybrid of token and economics and its meaning is quite similar to economics. Tokenomics studies how people interact with tokens. More specifically, the issuance, distribution, and burning of tokens of a cryptocurrency.

Similar to how monetary policy applies to the management and control of fiat currencies, tokenomics relates to the policies that manage and control cryptocurrencies. These policies are the core of a cryptocurrency. Without careful planning and implementation of such rules, the cryptocurrency is likely to fail.

The rules of tokenomics are implemented through code and are quite difficult to alter. This is because such changes typically require agreement from a majority of network participants. Moreover, such cryptocurrencies are often more predictable than their central bank-issued counterparts due in large part to these decentralized agreement protocols. For example: issuance rates and schedules are pre-set, and burn rates (i.e., removal from circulation) are somewhat predictable. These traits make investing and owning cryptocurrency more transparent when compared to traditional fiat currency.

The key design considerations of tokenomics are: how tokens are created, how tokens are brought into circulation, and how tokens are removed from circulation. Incentives play a major role in this process too. Incentives help with the fundamental question of how to get network participants to do what you want them to do. If you want transactions to be added to the blockchain, then you will need to pay miners to include them. If you want people to stake their tokens and validate the network, then you will have to pay such stakers a fee. The design aims to direct how people interact within the network so that the cryptocurrency can (hopefully) thrive and become self-sufficient.

Photo by Manuel Salinas on Unsplash

Importance of THORChain

THORChain fills a gap seen in today’s exchanges by allowing users to swap assets without an intermediary (in other words, decentralized). Uniswap, an automated market maker on Ethereum does this too, however, Uniswap only provides such swapping for ERC20 tokens. THORChain enables users to exchange native, non-wrapped, assets across chains. You can swap BTC on the Bitcoin network for ETH on the Ethereum network out of your own BTC wallet. You can also receive ETH back into your ETH wallet without transferring your tokens anywhere else. Centralized exchanges, on the other hand, typically require you to send tokens to them, meaning they will have custody over your tokens for the transaction.

If you want to swap one crypto token for another, why give up custody to a centralized exchange? If you already use a DEX, why would you hold a wrapped asset where you’re not quite sure what backs it? For example, WBTC involves a custodian according to their website.

THORChain has great memes

THORChain had some recent ups and downs, with a hype phase in May and a hack a while after (read more about the hack here and here). The project is still recovering, but, as of writing this article, all supported chains (BTC, ETH, BNB, LTC, BCH, and many ERC20 tokens) are back up for trading. It will take time for users to rebuild trust, add liquidity, and engage in swapping again.

The trade volume of the major centralized exchanges (CEX) and decentralized exchanges (DEX) shows their importance. Exchanges are the places where users buy tokens and swap tokens for other tokens. Binance, the largest CEX, has a daily trade volume of about $26 billion. Uniswap, the largest DEX (but only for ERC20) has a daily volume of $1.7 billion. THORChain currently operates way below the trade volumes of such popular exchanges with a daily trade volume of roughly $30 million. THORChain just recently relaunched their beta network “Chaosnet,” and I wouldn’t be surprised to see its trade volume moving towards that of the other big exchanges once mainnet launches in Q1 2022.

THORChain wouldn’t even be visible compared to other big exchanges

Looking at Uniswap, I can’t imagine there won’t be a demand for also swapping to other chains such as ETH to BTC or ETH to BNB. Centralized exchanges will continue to play a big role, but DEXes are bringing in a lot of trade volume due to benefits such as no-KYC and allowing users to retain custody and control over their tokens.

Let’s look at how THORChain and its native token (RUNE) power decentralized cross-chain peer-to-pool trading.

Tokenomics of Thorchain

For the end-user, THORChain won’t look much different than any other decentralized exchange. Yet if you take a look under the hood, there are a few novel things happening to enable the swapping of assets across chains, namely, THORChain is a proof of bond blockchain.

THORChain Protocol

  • RUNE has a total supply of 500m tokens. The distribution at its initial launch was approximately: a little under 220.5m allocated to the protocol reserve for paying node operators and liquidity providers; 52.5m allocated to operational reserve for staff incentives, sales, etc.; 52m allocated to the community; 50m allocated to the team & advisors; 26m allocated to seed investors; and a little over 99m in circulation.

THORChain supply distribution

  • RUNE can be used for priority signaling of an asset to be listed on THORChain. This means that if a large enough group of RUNE-holders votes for a new chain to be added, then it will be prioritized to be listed before other chains in the queue.

  • The protocol also enables a pendulum functionality to balance capital in liquidity pools against capital bonded by THORNodes. This has to do with the control that THORNodes have over liquidity pools. A large enough deposit from node operators will ensure the safety of the network (more on this in the “THORNodes” section below).


  • Users connect to THORChain via exchanges. THORChain is the L1 solution providing all the infrastructure to make the decentralized exchange process work. Exchanges can use this infrastructure via APIs (Midgard) and implement their own solutions (see THORSwap and Shapeshift).

  • Fees for swaps are paid by the user in RUNE and such fees are then distributed to the liquidity provider and THORNode operators. Users are required to use RUNE in order to pay for swaps on THORChain.


  • Liquidity pools are a common concept of other automated market makers (AMMs) such as Uniswap and Sushiswap. The key difference with these AMMs is that THORChain makes it so that every pool is matched to RUNE. Accordingly, THORChain’s ETH pool will have an equivalent amount of RUNE, instead of being matched to the currency it might be swapped to. For comparison, Uniswap has pools for every possible trade pair (like USDT:ETH, USDT:SUSHI, USDT:UNI, etc.).

  • Fewer pools means that the pools are going to be deeper. All ETH can be in one pool, regardless of the currency it is swapped with. It just needs to be matched to RUNE.

  • Liquidity providers (LP) can deposit an equivalent amount of RUNE or have their deposit token converted into RUNE automatically. The protocol will sell half of the LP’s deposit (e.g., ETH) for RUNE in order to ensure that the proper balance is maintained.

  • Technically, liquidity pools are just wallets for different chains that are controlled by THORNodes.


  • To control the wallets of liquidity pools, THORNodes have to run a node for each blockchain that they support plus an additional THORChain node.

  • In order to execute a swap between ETH and BTC, a THORNode will observe the Ethereum network for locking of funds, and will then release funds in the Bitcoin wallet once the lockup on Ethereum is completed.

  • Once completed, the THORNodes sign the outgoing transaction using a threshold signature scheme (TSS) that works with cryptography instead of smart contract logic. This allows the THORNodes to interact with chains like Bitcoin (which does not support smart contracts). In principle, TSS is like a multisig wallet and requires a majority of THORNodes to sign the transaction.

  • Similar to staking, THORNodes have to deposit a bond of RUNE in order to become active validators. The bonding amount depends on the total amount of RUNE in the liquidity pools. The total RUNE bonding of all THORNodes needs to be twice as much as the amount of all RUNE held in liquidity pools. Remember, pooled amounts are matched 1:1 with RUNE.

  • In summary, every $1 of assets is backed by $3 in RUNE.

  • The functionality creates protection from sybil-attacks, where an attacker tries to take over the majority of a network to get access to pooled assets. The amount of RUNE bonded and in pools helps prevent this attack, since RUNE would accordingly drop in value on the occurrence of such an attack and thereby make the attack unprofitable.

  • An incentive pendulum keeps bonds and pools in balance by incentivizing liquidity providers to pool more assets when over-bonded, and incentivizing node-operators to bond more assets when under-bonded. The current stats can be found here or here. As of writing, bonding yields ~15% and pooling ~20%.

The incentive pendulum has three different states (optimal, unsafe and inefficient) described below:

Optimal distribution

Unsafe distribution

  • The opposite would be over-bonding (as demonstrated in the image below), which is considered inefficient, as a large amount of capital is bonded to secure a small amount of pooled capital. Therefore, in order to counteract this, rewards would be increased for liquidity providers (referred to as “stakers” by THORChain).

inefficient distribution

  • These three states are an interesting way of using tokenomics to achieve a desired behaviour.

  • The fees are currently supported by protocol inflation (issuance) but are planned to be fully paid by swap fees obtained in connection with swapping.

Other Projects on THORChain

THORChain is not just about cross-chain swaps, as it is building an ecosystem around pooled cross-chain assets.

One interesting project is THORStarter, which provides an initial DEX offering platform (IDO platform) or launchpad. THORChain currently only supports economically significant assets (BTC, ETH, BNB, LTC, BCH) and that makes it impossible for any smaller tokens to trade on THORChain. THORStarter tries to bridge this gap by adding a new token, xRUNE, to THORChain. xRUNE will be pooled with RUNE, like all other major assets, and can thus be accessed by swaps on THORChain. xRUNE can then be pooled on other exchanges paired to the smaller tokens, thereby providing liquidity for such token protocols at an earlier stage.

THORSwap was one of the IDOs on THORStarter, and launched the THOR token, which is mainly used for governance and driving adoption on THORStarter.

Closing Thoughts

A decentralized exchange, as an alternative to Binance or Coinbase, is what crypto users really need. Decentralised exchanges offer custody over your tokens during the whole process and reduce the risk of having to trust in a centralised entity to take care of your funds. THORChain might not offer all of the tokens that one may want to trade, but it is a big step in the right direction. Based on demand, more will follow and could turn THORChain into THE place to swap tokens.

With the audit and subsequent relaunch of its beta Chaosnet, THORChain has regained focus on delivery of new features and growth of its ecosystem. When competing with Binance and Coinbase, it will be important to add new up and coming tokens and for THORChain exchanges to support a wider variety of wallets. The easier it is to swap one token for another, the more users will want to use the protocol, which will also serve to attract more liquidity.

To be honest, THORChain has a whole list of hurdles to conquer and it will be challenging to get security under control, grow user adoption and increase the number of supported tokens.

However, with inter-blockchain-communication (IBC) and Wormhole, cross-chain collaboration is increasing and transferring of tokens between chains is becoming easier. Let’s see what the future brings. Perhaps it will involve Binance-like token availability but with decentralization, no-KYC, and self-custody.

Author Bio

Florian Strauf is a technical writer exploring and visualising the tokenomics of various web3 projects.

BanklessPublishing is the publishing arm of BanklessDAO. Top shelf educational Web3 content.

BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.

Read More on this Topic:

Tokenomics 101: Terra Ecosystem by Florian Strauf

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This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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