The Delphi Podcast Host and GP of Delphi Ventures Tom Shaughnessy and DV MP Yan Liberman host an expert group for a fun and exciting conversation on Thorchain’s Multi-Chain Chaosnet Launch. Thorchain now enables real, trustless, non-wrapped exchange of assets, cross chain.
The Delphi Podcast Host and GP of Delphi Ventures Tom Shaughnessy and DV MP Yan Liberman host an expert group for a fun and exciting conversation on Thorchain’s Multi-Chain Chaosnet Launch. Thorchain now enables real, trustless, non-wrapped exchange of assets, cross chain. Guests Include:
- Chad Barraford: Technical Lead At Thorchain
- Erik Voorhees: Founder of Shapeshift
- Yan Liberman: MP at Delphi Ventures
- Tushar Jain: MP of Multicoin Capital
- Rob Paone: Founder Proof of Talent
- Michael Perklin: Chief Information Security Officer of ShapeShift.com
- Jon: Co-Founder and former COO of ShapeShift.com
- Tyler Reynolds: Angel Investor and Founder of HackalertIO
Delphi Ventures and members of the team are long $RUNE.
We would like to thank Cosmos for making this podcast possible through their sponsorship! Cosmos is on a mission, link one million blockchains. Name brand projects like Terra, Band, Kava, and Secret use Cosmos and the Cosmos Hub to connect to every other chain in our network. The Cosmos Hub is the port city that delivers Inter-Blockchain Communication today. Learn more at cosmos.network.
Every Delphi Podcast is dropped first as a video interview for Delphi Digital Subscribers. Our members also have access to full interview transcripts. Join today to get our interviews, first.
(1:57) – (First Question) Jon’s Background.
(2:14) – Michael’s Background.
(2:45) – Erik’s Background.
(3:36) – Rob’s Background.
(4:09) – Chad’s Bakground.
(4:31) – Yan’s Background.
(4:44) – Tushar’s Background.
(5:10) – What is Thorchain / Impact of the multichain launch.
(6:35) – How does Thorchain work with ShapeShift.
(9:36) – Tushar and Michael thoughts on Thorchain.
(13:54) – Chad thoughts on multichain launch.
(16:43) – Overview of the different stages that THORChain has been in.
(21:18) – RUNE’s token.
(28:34) – How the validators work.
(32:46) – Use of the Cosmos SDK for Thorchain / Benefits.
(40:27) – Difference between how Thorchain liquidity pools work and how Atomic swaps work.
(44:33) – Thoughts on Wrapped Assets.
(54:17) – Thoughts on Thorchain in the future.
(01:00:39) – Chad’s thoughts on Yield Farming.
(01:02:40) – The project Decentralizing the Community / Timeline / Who takes over.
(01:22:00) – Thorschain’s biggest competition.
(01:29:10) – Closing thoughts.
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Hey, everyone. Welcome back to Delphi’s Clubhouse. I’m your host, Tom Shaughnessy. Today I have on quite the fun power crew, kind of a moment we’ve been waiting for for a long time, which is THORChain’s main net launch, MCCN. We have a handful of people on. We have Yan from Delphi, we have Rob, we Tushar from Multicoin, we have the whole ShapeShift crew, Erik, Jon, Michael, and we have Chad himself from a THORChain. I think we’ll just go in order of the Clubhouse room. Everyone will just a 30-second intro or less, and then we’ll dive into THORChain. Jon, we’ll start with you.
Sure. Hey, everybody. My name’s Jon. I’m a chief product officer and co-founder here at ShapeShift. Yeah. I’ve been at this for about seven plus years now with ShapeShift, and just really excited to be here. I’m excited to talk about THORChain.
Michael. You’re up.
Hey. Yeah, I’m Michael Perklin. I’m the chief information security officer of ShapeShift. I focus on the security side of things, but I also dabble a lot in research and development, which is what ultimately led me to THORChain. My passion over the last six months has been purely THORChain on the personal side. When ShapeShift made the decision to get involved, I couldn’t have been happier. I’m happy to be here on stage.
Awesome. Thanks so much.
Hey, guys. My name is Erik Vorhees, founder and CEO of ShapeShift. Suffice to say, ShapeShift is one of the coolest entire projects in the crypto world that I have seen ever since 2011 when I first learned to Bitcoin. It had that same magic that I felt when I learned about Bitcoin for the first time, and that was a very special feeling to come back. It’s been very, very fun to be integrating this behind the scenes in ShapeShift as we migrate to a DEX paradigm ourselves. It came along right in time for us to start doing that. THORChain, I think, is one of those projects, which is kind of difficult to understand at first. My hope with the Clubhouse here is that the basics can get covered and people can understand what this is and why it’s important.
Hey, everybody. What’s going on? My name is Rob Paone, and I am the founder of Proof of Talent, which is a blockchain recruiting firm, but prior to that, I worked at AirSwap, which is a decentralized exchange built on Ethereum. I actually came across THORChain through the Delphi research, and it just immediately clicked for me. I am just a pretty passionate, I guess you’d call, community member, not really building too much on it, had been participating in the ecosystem really since September’s launch. I’m pretty excited for it today and for the future with everything.
Hey, everybody. My name is Chad Barraford. I’m the technical lead on the THORChain project. Most of my time and effort is in designing and building the core protocol and the blockchain itself. I’m here to talk more about the project. Obviously, today’s a really exciting day, the launch of multichains, so I’m super excited.
Thanks so much, Chad. Yan, what about you?
Yeah. Hi, My name’s Yan. I’m a co-founder and managing partner of Delphi Digital. Yeah, we’ve been long-time fans of THORChain. I’m really excited to see it really come to life now and launch with mainnet.
That’s awesome. Tushar?
Hello, everyone. My name is Tushar Jain. I’m co-founder and managing partner at Multicoin Capital. We’re an investment firm devoted to the crypto space, and we’re big supporters of THORChain. We recently published a report describing why we’re excited about THORChain, and you can read that on our website at multicoin.capital.
Awesome. Thanks so much, Tushar. Well, guys, let’s keep this conversational. Feel free to ask each other questions, the whole nine yards. Chad, why don’t you just give us your 60 seconds on what THORChain is and just the impact of the multichain launch today?
Yeah, sure. THORChain, in many respects, it’s bridging between chains in a decentralized way, and I think this is a first in the industry. Well, in some sense, blockchains themselves are isolated islands. They exist unto themselves and have very little or no relationship with any other blockchain in the crypto space. This is inherently a major flaw in the entire ecosystem of crypto. THORChain is effectively creating highways between these blockchains so you can easily move your assets or your wealth from one chain to another without needing to ask permission or worrying about being censored or any of these things. It is a completely decentralized protocol.
In some ways, you can think of it from a more simplistic perspective of cross-chain swap. You can swap Bitcoin to Ethereum, Ethereum to Litecoin, Litecoin to BNB, and BNB to Bitcoin Cash without going through any KYC process. That’s a very significant contribution, at least in my view, to the greater crypto sphere, allowing it to be a more unison ecosystem rather than isolated islands. That’s what I’m really excited about, and to see how the community as a whole takes that and runs with it.
That’s awesome, Chad. In ShapeShift crew, I don’t know who wants to take this, but can you kind of contextualize what Chad’s describing on THORChain and how it works with ShapeShift? Because I feel like you guys could just really… just easy examples for people to understand on how this all works.
Yeah. I’ll take that. I’ll go down history lane here a little bit. ShapeShift launched in 2014 as a way of converting digital assets in a non-custodial way. This was back in the wake of Mt. Gox, and I wanted to build something that would protect people by design by not holding their funds. While ShapeShift was non-custodial, the way the trades worked was that a user would send coin A, like Bitcoin, to us, and we would send the coin B, like a Litecoin, back to them from our own wallets. It was vastly safer, but we were still an intermediary for the time of the trade. That pulled us into the whole regulated world of KYC and compliance. We have been desperately searching for a way to solve that problem.
DEXs in the Ethereum world have been around for awhile, and so we had been integrating those in the end of last year. We didn’t have a way of allowing people to trade in a decentralized manner unless they were only doing Ethereum tokens, which is not sufficient. That’s leaving out the most important asset of all. THORChain’s integration basically allows us to get back to our roots of what we used to do of having this frictionless experience where someone can trade one asset on one chain to another asset of another chain, no custodial risk, no intermediary at all, no financial regulation applying to that model. Because THORChain works across chains, we can do this for all the major assets. For us, just from a selfish perspective, this is incredibly helpful to our business. I imagine that the this infrastructure is going to help a lot of people
Yeah. Just to add onto that, THORChain to us is really the type of thing that I think when we first built ShapeShift, we didn’t… This wasn’t necessarily possible yet. A lot of the techs that THORChain is being built on just didn’t exist in 2014. Our goal with ShapeShift was always to allow people to trade in the most non-custodial, trust-minimized way possible. Some of that was a reaction to things like Mt. Gox and just the convenience factor that crypto should allow. I think the THORChain is really kind of realizing that vision. As we realized what it is and what it could do, it just became obvious to us that this is exactly what ShapeShift should integrate with to allow these kind of cross-chain to centralized non-custodial swaps. Yeah, we’re very, very excited as a result of that. In many ways, I feel like THORChain has helped bring about the vision of ShapeShift that we had all the way back in 2014 that made something like this a reality.
Yeah. No, you guys have reinvented ShapeShift and are absolutely crushing, and just adopting THORChain is just incredible. Just switching over, Tushar, from the kind of investment perspective, what got you first excited or most excited about THORChain to begin with?
One of my core investment PCs is I really like looking for self-reinforcing loops or cycles, and I saw that with THORChain in a way that was pretty exciting. I think most people in DeFi are pretty aware of the feedback loop that exists when you have liquidity mining rewards, which then increases liquidity in your DeFi protocol, which then attracts more volume and attracts more fees to the system, which can then help make the liquidity mining rewards more valuable and so on and so forth. I think that was pretty valuable. But in addition to that, THORChain had another very important feedback loop, which was attractive for me, which was around security, where as there is more transaction volume in the THORChain network, that drives more fees to the actual node operators who then basically create more demand for RUNE in order to compete to earn those fees.
That makes the system more secure, which then makes it safer for more people to transact using the system. When I saw the dual feedback loops there, that got me pretty excited because I saw them feeding back into one main thing, which is more transaction volume on THORChain. That, plus the fundamental just love of the product, of having these decentralized trades that existed across various blockchains without a trusted intermediary, like Erik was talking about, really combined to give us a lot of conviction in this.
Tushar, I know what you mean when you say that everything just sort of aligned. When Erik mentioned earlier that he had a feeling after learning and understanding THORChain that he hadn’t felt since Bitcoin, I have to say, I agree 100%. I also felt the same thing. I think it’s because Bitcoin itself is more than just the tech it’s built on. Yes, there are elliptic curves, yes, there are digital hashes, and there’s some kind of a database that stores of variety of block records, but Bitcoin is a hell of a lot more than just the tech that it’s built on. That’s because the way that Satoshi put Bitcoin together, he figured out a way, or she or they… Satoshi figured out a way to align incentives along with these technical components that made the whole system of Bitcoin worth a hell of a lot more than the sum of its parts, and that incentive alignment piece… If I ever was in a room with Satoshi, I’d love to ask him, her, them, “How did you figure out this particular set of incentives?” Because it is the incentives of the people who interact with Bitcoin that keep it in check.
When I was going down the rabbit hole with THORChain at first blush, “Okay, a lot of this tech… Okay, well, there’s threshold signatures here. Okay, it’s observing a chain there,” it wasn’t really that interesting. But once I started to see how the four types of actors that interact with THORChain and how they interact with THORChain, whether you are a swapper who just wants to trade A for B, or you are a liquidity provider who wants to earn yield on your Bitcoin, or you are a node operator who wants to run the infrastructure to earn fees that way, or you’re an arbitrager just looking for opportunities to make a little bit of money balancing the books, the incentives that went into the design of THORChain make all the THORChain worth a hell of a lot more than the sum of its parts.
One of my first questions was, “Well, why the hell couldn’t this all be done on Bitcoin? Why did the RUNE token come into play?” But once you understand how the RUNE token works within those four actors, you realize that this truly is worth a hell of a lot more than the sum of its parts. That feeling of just a beautifully designed system, that this is really going to work when it takes off, I think is what gave me that reminder to Bitcoin back in 2010.
That’s great color, Tushar and Michael. Chad, just to circle back to you, I don’t exactly know what to ask you at this point. We’ve all been talking to you for so long. What’s your take on multichain launch? What are you feeling? What’s the status? Have you slept? The whole nine yards.
Well, it’s been a long road for sure, and a lot of hours. I remember when I was living in Australia with some of the other team members, and I was working 9:00 AM to midnight seven days a week, just trying to progress and push this project further and deliver on what the white paper was promising… because we all knew that if we could actually deliver this thing, that it’s a unicorn. It is solving a hair-on-fire problem within the crypto sphere that needed to be solved. Somebody had to solve it, and the sooner, the better. We felt we had a design that did that, and not only from a technological perspective, but also from an economics perspective. It’s been a long road for sure.
I joined the team myself in mid… I think it was June or July of 2019. At that time, the project had an earlier attempt in 2018 that didn’t pan out, in part because they didn’t have the right team at that time, in part because the technology wasn’t there yet. We hadn’t had [inaudible 00:14:53], for example, quite yet at that point. We just needed some more maturity in some sense of the greater sphere. When I came in, there was kind of a rebirth of the concept, and a lot of the design and implementation stuff has changed significantly since the first implementation, but it’s been such a long road for us. It’s been so exhausting in some sense, but also extremely exciting. This is the vision we’ve all had, and it’s finally before us. I can’t even mention how many times I saw on Twitter or whatever where people were saying, “If it works, it’s going to be huge. It’s going to be ginormous. Who knows if they can pull it off or not?”
[inaudible 00:15:32] in my head, I knew that we were going to pull it off, not just me, but just the greater community around THORChain. It’s comprised of probably over 12 different teams doing all sorts of different components to this larger ecosystem of the THORChain network and that entire system. I just contribute to one particular component of it per se. It’s so exciting to finally see a launch. I am exhausted. Actually, my wife’s going to give birth probably in a few days, so I’m going to be more exhausted in the near future, but I’m so, so excited, but also so nervous at the same time, because it’s a live network. It still needs time to prove itself and prove its reliability and security, its resiliency, and all these things. The first few weeks are going to be probably the most [tentious 00:16:22] in some ways, and to make sure everything operates exactly how it was designed and how it was implemented.
Hey, Chad, going off that for a second, could you give the quick overview of the different stages that THORChain has been in? Because I think that’s been confusing for a lot of people, because it’s been in different kinds of networks that weren’t quite testnet and weren’t quite main net. Can you kind of run people through those phases?
Yeah. The earliest form, I guess you could say, the first stage, if you want to call it that, was testnet for single-chain chaosnet, which was, I think, 10 months ago or so, or 11 months ago, something like this. That was actually building an environment that you could actually do swaps in a testnet environment and churn and have new operators come into the system and old ones leave, and the whole kind of process fundamentally works. Then as a team we wanted to put something out there earlier on and not just kind of sit in a closed room by ourselves for two long of a period, so we decided as a team to release what we called single-chain chaosnet, which was about nine months ago. That only interacted with Binance Chain.
The reason why we selected Binance Chain for this was because, one, it didn’t really have any DeFi at the time. It was an entire community of people who had no access to DeFi at all. Two, it had several coins within that ecosystem, various [inaudible 00:17:50] assets. Three, it was arguably one of the easiest coins to… or blockchains, rather, to integrate with because you don’t have to worry about double-spend attacks necessarily or reorgs or any of these really kind of complicated aspects of proof-of-work chains like chains like Bitcoin or Ethereum, for that matter. It was just a lot simpler to do it and kind of a lower hanging fruit in some sense, but it could be launched in a way that we could actually show that the technology legitimately works. We could show that the economic model that is designed to secure the assets would work. I think [inaudible 00:18:29] we had over $500 million locked up in TDL on the single-chain chaosnet.
We could show that the slip-based fee actually does yield higher ROI for liquidity providers, yet actually have a smaller average transaction size or transaction cost, a swap fee, for your average person who’s swapping in that network. We wanted to be able to show that in real life, not just on a white paper or on an audit, but, “Does it actually work in when the rubber meets the road?” in a sense. Over the last nine months, that’s just kind of firming up that that part of the technology and that part of the economic design, and in the meantime, we’ve been working on major new features for the new net that we just launched today. [inaudible 00:19:14] that was support for more chains, so that’s Bitcoin, Litecoin, Ethereum, Bitcoin Cash, and BNB. We wanted to be able to support single-sided asset staking so you can just provide the Bitcoin, and you don’t need to touch or RUNE it all if you don’t really want to. It’s completely up to you. We wanted to actually move the RUNE asset off of Ethereum and Binance and move it onto its own native chain, which actually made things a lot simpler in some ways. We wanted to do lots of different changes [inaudible 00:19:42] permanent loss protection, all of the stuff that we thought was going to be key to make THORChain not just a great cross-chain exchange and be able to move your Bitcoin to Ethereum or your Ethereum to Bitcoin, but also provide a system that is going to last for many years because it has really great features that most other… even Ethereum-based DEXs, like permanent loss protection, for example… most of them don’t have that. You’re removing the risks involved with providing liquidity to networks such as this by offering something like that.
We had that vision to do so. We launched a testnet for this thing. We built the chain a month or two ago, found a bunch of bugs and squashed them all we found, and we kind of tapped that tree as much as we could in terms of what fruit it could give us. Then I said, “You know what? We found everything we can find at this point. The only way you can find more issues or bugs is to actually launch it in the real world.” That’s what we did today. We’re also encouraging people not to make humongous swaps across the network at this time. Let’s give the network some time to see how it behaves in the real world with real assets. Maybe we’ll find some bugs we haven’t discovered in testnet or before. We encouraged people not to go too crazy off the bat, but I think over the coming weeks and months, that will [inaudible 00:21:06] be less and less the case.
Hey, Chad, it was an excellent overview. One thing that I think we need to talk about here, and I’ll throw this over to Yan, and we’ll see who could go off afterwards, but just token econ [inaudible 00:21:21] is so important to projects. We see so many where it just doesn’t make sense. It doesn’t work. Yan, could you go off a bit on just RUNE’s token econ, about not only the incentive pendulum, but why this token is [inaudible 00:21:33], how it’s used nodes, how it’s used in pool? That’d be helpful.
Yeah. Absolutely. I think when we first stumbled on it in late 2019, this was kind of before DeFi was really as much of a thing as it is now. The idea that you’d be able to earn yield on idle assets, regardless of what chain they’d be on, was really fascinating and really drew us in as just an initial use case. Then as we dug in, we understood the token design, starting with the incentive pendulum, and in terms of how security and fees can skew depending on whether or not there’s too many assets being used for liquidity provision relative to the amount of kind of RUNE staked in nodes. This was also, I think, when you started to see application-specific blockchains come into play, and I think those really had issues with security, particularly in terms of how security would scale with adoption price and everything.
Most things were built on Ethereum at the time, so they were able to leverage the security of Ethereum, whereas these had the advantage of throughput and fees, but had to have their own security models. When we started to dive in further and we realized that not only does this security model work, but it also scales with adoption where as more assets are added for liquidity provision, naturally the nodes will have to gain a certain amount of value based on the amount of RUNE locked up and the amount of fees that are diverted to them to kind of… going back to that, the pendulum idea. I think we were really blown away by how it all worked, and we thought the reflexivity worked really well in terms of ensuring that as users came in, it grew liquidity and grew pool depth, which then it all…
Another facet that I think was really interesting at the time when this was… AMMs were, I’d say, still in their infancy, and we saw XYK was kind of the understood norm. We had the CLP model that kind of came about. Just as a kind of a small summary, the fee model for THORChain, the fee that you pay LPs is dynamic, and it scales as a function of your transaction size relative to the pool. As pools got deeper, your fee would actually decrease over time. We thought that was really brilliant to allow for THORChain to really take advantage of the competition by having lower fees as these pools scaled. In our analysis, we kind of remodeled a lot of existing pools and kind of the dynamics there and ran them through the CLP model.
It was fun to see a lot of the skepticism on Twitter, but it ended up being fairly unfounded based on just kind of the lack of DD that was done and also the results that we’ve seen with the existing design. We thought the novelty of all of these elements was really kind of outstanding. That’s kind of why we really dove in, and I do think that the CLP model itself also helps with… or not that I think, but it does really improve the permanent loss situation where rather than having this path-independent element, there is path dependency, but the ability for arbitragers is kind of hindered by the fact that the arb can’t be closed in one trade and so we thought that that was a really interesting element that required patience out of the arbs and then made for a better experience for LPs, both in terms of ILs and the fees that they saw. And so we thought all of that combined was what was really compelling value proposition when a lot of this really didn’t exist at the time.
To build on that, I remember when I first looked at Thorchain, there were a few things that really attracted me in terms of mechanics. The first was like Yan mentioned, the CLP, which is a fancy way of saying your fees on your trade change based on how much slippage you cause. And I saw that as a really interesting way to protect liquidity providers in the system from impermanent loss suffered by arbitragers coming in.
And I thought that was really cool. But then everyone’s concern was, well, if you’re going to make the fees higher for larger trades, then won’t everyone just break up their trades into small trades? And actually the answer is no, because the system actually orders the trades based on how much fees they’re paying. And it couldn’t do that if it was building on another platform because you don’t control the order that the transactions go into a block on Ethereum, if you’re units swap. You just don’t have that power. But on Thorchain, you can. And so the combination of slippage based fees and then ordering transactions based on how much slippage and fees that they generate was a really, really fascinating combination. And I think it created the right incentives for the system.
And so we were really interested in that. And then the other big mechanism that I found to be inspiring and really powerful was the incentive pendulum, and the way the system rewards liquidity providers versus node operators in a variable proportion based on what the state of the network is at the time. If there’s too much capital in pools and not enough bonded, well it’ll reward nodes in order to improve security. Or if there’s too much security and everyone’s bonded, but no one is actually providing liquidity? Well it will reward you for providing liquidity more. And it comes back to the incentives.
And so those were some of the most important innovations in my opinion, about the design that got us pretty excited. And I still remember having a call for the first time with Chad and the rest of the team, and they described how all of the different mechanics interplayed with each other. And my mind was just completely blown.
To add one more thing to what Tushar was saying about the queue. That queue is… Not only does it ensure that this puts pressure on people to prioritize larger swaps over smaller swaps. But it also makes sure that validators themselves can’t like front run, right? You can’t actually front on this network and be able to manipulate trades as you can on… And what we do see on other indexes on Ethereum, because it’s not a first come first serve system. The network orders the swaps in order of what provides the highest value for the network. And that’s the one that gets swapped in that particular order. You cannot manipulate that order at all. And so that’s actually another one the really kind of innovations of this project that do something that I don’t think anybody else is, is actually protecting against front running entirely.
Yeah. On that note, Chad, I think it might be worth, too, for the audience, spending a little time just talking about how the validators actually work. To me, this was one of the things that I think was most interesting when I first learned about Thorchain, was everything about how these validators are anonymized, how they bond Rune and how that protects the network. How the churn process works. Maybe just going into a little more detail about how the validators work would be useful, because I think that’s really the key to what allows this thing to operate in a truly decentralized manner that really didn’t exist before.
Yeah, sure. So the first thing about validators is that they’re anonymous. Nobody’s is exposing who they are. Anybody who’s running a node in the world, we encourage them to not expose who they are. I don’t know who the operators are at all personally, which I prefer it that way, to be honest. That’s the first important part. We don’t want people to be back-channeling and back room making conversations and having brunch on a Sunday, which has happened for other chains out there, like Cosmos base chain. So we don’t want to see that. We also advocate the team. We advocate against… Of collecting people’s collateral into a single node. That is against the economic system degree, to be be encouraged as well. Not do that, rather. But each validator has come up with running a node and running nodes is actually very complicated.
So we don’t encourage people who are Linux savvy or tech savvy to get involved. It’s a lot more complicated to run one of these nodes than it is to run a Bitcoin node, for example. For sure. But you [inaudible 00:30:26] walk up with your rune as your bond. And that bond is solely used really to pay secure the network because it effectively, in some sense, is like an ax hanging over your throat, that if you don’t do what you’re supposed to be doing, the network will come down on you hard and at great cost to you if you don’t behave in a way that is in the best interest of the network itself. So that’s a really important concept as well.
The churning is introducing a thing that’s very unique to this chain. I don’t think anybody else is doing this quite yet, but because the non-sword chain assets that the Bitcoin, the Ethereum, the Litecoin, all these things are managed through with personal signatures, whenever the network chain changes and new people come in, or old people leave the network, all those funds have to be migrated to a new wallet. I’ll call it that. And migrate all those funds. And so every time the network churns and people come into [inaudible 00:31:31], the new wallets or new Asgard vaults are created. The old ones are retired and all of the funds are programmatically moved from old retiring vaults to new active roles in order to this whole system to actually function and maintain its security. Yeah, that’s it in a nutshell, I think.
Yeah, the important pieces of the design that I think really make it work well, is that out of all of the nodes that are running, and each node again has its own copy of Bitcoin, its own copy of Ethereum, its own copy of everything. So each node is independently observing all the Ethereum transactions that come in and all of the Bitcoin transactions that come in. And every time they see one, they write a small transaction to the Thorchain blockchain. And using Tendermint, which is what Cosmos is based on, there’s now consensus amongst all the nodes that are operating that, “Hey, this Ethereum transaction really does exist and we can prove that somebody sent Ethereum in.” Now it’s just a matter of sending them the Bitcoin out to affect their swap. It’s a really novel way of using Tendermint consensus, which has already been proven with something like Cosmos, but in a way that allows for swapping of any supported asset without trusting any middleman company or without dealing with any kind of wrapped tokens, like the WBTC or the REN/BTC that you have in Ethereum land.
So brilliant, brilliant design.
Yeah. I’m kind of curious, Chad, just from the… At what point was the decision made to actually use the Cosmos SPK for Thorchain? Or how did you all make that decision versus forking off something else? And what are the major benefits that that allowed? Because that seems like a huge monumental decision at this point, looking back.
Yeah. That decision was made very early on. I think that was largely guided because I think the Cosmos project is a very innovative project, in my opinion. When the first version of Thorchain was attempted in 2018, Cosmos was around, but it wasn’t quite what it is today. It was still very early days in many respects. And even PolkaDot was way too early, even in 2019 to consider as a viable option at that time. I’m sure that’ll change.
Yeah. I don’t think cosmos launched until 2019.
It wasn’t quite ready then. And so Cosmos in some sense, how I see it, is it’s almost like it’s doing for blockchain what Ruby on Rails did for web apps, in some sense. And that it abstracts away a very complicated aspect of building blockchain versus a consensus aspect to it, the Tendermint aspect to it. And so you don’t have to have a very deep understanding of like how consensus is actually reached in order to build a Cosmos app. Just like you don’t need to actually understand the complexities of how HTTP actually functions to build a web application that uses HTTP, right? And so it lowers the bar in some sense to build your own sovereign chain. Whether or not we wanted to fork off of something else. I think that was… Because this design is remarkably different from pretty much everything else out there in terms of how it’s going to be structured, to kind of fork from something else like Bitcoin, for example, wouldn’t be very viable.
It would cause like a humongous rewrite and not to mention that the block time of it wouldn’t be fast enough, the transaction per second wouldn’t be fast enough, because this chain needs to be faster than more or less most chains put together in some sense, right? Because you have transactions coming in from all the different chains, Bitcoin, Ethereum, Litecoin, [inaudible 00:35:29], all these things coming in, and it needs to be able to process those things as fast as they’re coming in. You can’t be the slowest chain out there like Bitcoin is. Just wouldn’t actually hold up and be practical in the real world. So it was decided early on to be Cosmos and that was definitely a right choice from my perspective. It’s a very strong ecosystem, a great framework and something I’m sure I’ll continue to use for future projects.
I was just given a question and I think it’s also another part of the cool mechanics of how Thorchain keeps all these swaps possible and keeping them secure. And I wanted to ask it to Chad because it goes right along with that last question about the choice for Tendermint. So all of us here in this room, we’ve used Bitcoin before, or we’ve used a variety of different blockchains before. And on most blockchains, there’s the risk of a reorg, or an orphaned block, where a block may have one confirmation then all of a sudden it gets orphaned. And some other… A tip of the blockchain takes over. Systems be to account for this. Now Thorchain straddles a variety of different blockchains each with a completely different architecture. The Thorchain blockchain itself uses Tendermint, but it’s observing the Bitcoin blockchain, which it uses Proof of Work. And the Ethereum blockchain, which use a different style of Proof of Work.
How does Thorchain keep it all together, so that when an orphan happens, which is somewhat common in Bitcoin world, it doesn’t wreck the system? Because I can imagine if you’re sending a swap of Bitcoin in to get Ether out and all the Thor nodes detect that Bitcoin has gone in, so, “Hey, let’s send the Ether out.” But then that Bitcoin that came in gets reorged out of the main chain, now the Thorchain system itself is insolvent. So can you speak to the security of how a Thorchain solves this?
Yeah. I mean, that’s a good question. It’s one of the complexities with dealing where a cross chain platform like this, is dealing with these kinds of complexities. In this case, how Thorchain deals with this is that it’s trying to evaluate how many confirmations you need to wait on a chain before you say, “Okay, this is a very safe transaction.” Say this is not going to get reorged out. And how do you do that in a way that not only applies to Bitcoin, but the logic also applies with Ethereum and Monero and anything else out there, right? The stance that the team has taken on this as effectively, the amount of funds being sent to the system, relative to the amount of rewards of that chain, relative to that of the number of confirmation needed.
So for example, Bitcoin has a block reward of 6.25 Bitcoins per block. And so if somebody were to send in 6.25 or less, that would just be one conf. And why is that one conf? It’s because if you were to attack the network in this way and a whole bunch of miners to build up multiple… Two blocks, three blocks or four blocks, the amount of money that it would cost to do so… actually lose money in the end. That’s the general thesis. Now on Bitcoin, it’s much more secure than something like Ethereum classic, for example. You only really need one conf in the vast majority of cases and from a practical perspective. But the team actually takes a much more conservative perspective and actually [inaudible 00:39:25] more confs required.
But if that ever does happen and something does get slipped through, that’s what triggers what we call it a [inaudible 00:39:31] transaction. And the [inaudible 00:39:33] transaction is another type of observation that the validators can make and say, “Oh, we acted upon this thing before, but now we’re saying it’s been removed or undone. So go ahead and undo the transaction.” So if somebody were to provide liquidity to the network, that liquidity would be removed, for example. In the situation when somebody swaps, the swap is gone, the money is gone and then the system is no longer solvent. In which case how the code works as it today, if I’m not mistaken, is that the loss becomes socialized within the liquidity providers of that particular pool.
That’s what makes it important to decide upon what chains adding gives this network when chains do not get added to this network. Ones that are very secure, like Ethereum and Bitcoin, for example, you really don’t want to worry about too much. It’s very, very consistently in the green in a sense. But start adding smaller chains that don’t have the economic power behind them. They become oftentimes less stable or less reliable and more likely to have this situation. So if you have add a chain that’s very insecure in some ways, an attacker could theoretically drain Bitcoin out of the system by using that weak point of that chain. So it’s all got to be taken into account when the network decides, the community decides, what chains to allow, what assets… Not assets, but what chains to allow into the network and which ones not to allow. Which ones are secure? What’s the risk for reward of this individual chain? And everybody’s got to come to a consensus of what that’s going to be.
Speaker 4 (00:41:14):
Changing topic a little bit. One of the things that I noted today in the Twitter-sphere, upon announcing this… I’m trying to convey to the world that this is like a brand new thing, that this has not been done before. And one of the major responses from people who are skeptical of that is they say, “Well, this has been done for years.” And they inevitably cite various Atomic swap projects. To anyone who wants to take the question, what is the main difference between how Thorchain liquidity pools work and how Atomic swaps work, which have indeed been around for several years?
Speaker 5 (00:41:54):
I could talk about this maybe from a less than technical perspective, but that was actually what I was pretty interested to diving into, because I actually looked at your tweet, Erik, and saw a number of people responding and saying, “So-and-so technology has been around since 2017 or 2018 in doing this.”
Speaker 5 (00:42:11):
And while that may be true, I think the real key here is the concept of peer to peer versus peer to pool. And when you think about peer to pool in seeing the success that something like Uniswap had in comparison to other indexes previously built on Ethereum, I think that goes to show the success that Thorchain will likely have because of that structure. Prior to Uniswap, and you think about a lot of the… Dex is built on Ethereum. The 0x relayers, the kind of [inaudible 00:42:50] out… Basically the order book models or the peer to peer models, those really struggled to bootstrap liquidity.
Speaker 5 (00:42:54):
They struggled to scale, and they really had a difficult time finding any type of use case. And as Uniswap came around and showed the innovation that is basically having liquidity pools, that is really the key differentiator versus how you’ve seen some of the maybe previous attempts at having peer to peer Bitcoin trading working in the past. Just because there isn’t the liquidity there. And you can have maybe a great structure of a trading system, but if you can’t fill a one BTC order, who’s going to use that exchange. Nobody is.
You’re absolutely right with the difference of peer to peer versus peer to pool. While the common swaps have been around for a long time, they require both participants to agree on two variables. The relative prices of the two assets they’re swapping and a quantity that they can both agree on to do that swap. Chances are people need to swap a lot more than that or a lot less than that, and finding two people to agree on both of those variables is a lot harder than having them agree on only one variable. And that is the relative price of these two assets. Pool based systems only match that relative price. And they don’t care whether one person is swapping a Satoshi or another person to swapping an entire Bitcoin. It’ll just get done at the current price.
Speaker 3 (00:44:19):
Yeah. I remember really in ShapeShifts… After we had found a ShapeShift in 2014, and we had a lot of people saying like, “Hey, this is just going to be replaced by Atomic swaps. Atomic swaps will replace this.” And that was always kind of the meme of like, “Atomic swaps are coming and they’re going to disintermediate ShapeShift.” And we always followed that tech because kind of I think as we’re proving today with integrating Thorchain, it’s not that we didn’t want to be disintermediated. In many ways, we wanted that decentralized tech to exist.
Speaker 3 (00:44:47):
But there was always this problem with the Atomic swaps of… It solves the exchanging this one asset on this chain to another asset on this chain, but it never solved the liquidity problem. And so I think what Thorchain has done is they’re not just solving the swap one asset to another problem, they’re also solving the liquidity problem at the same time using the AMM technology that something like Uniswap has pioneered. And that was really the missing piece, because it wasn’t just about “How do I swap from one asset to another without trust?” That was part of the problem, but it was never the entire problem. The important problem was how do you do that in a way and make sure that liquidity is always available and that no one needs to worry about that. And that’s the beauty I think of what Thorchain has done here.
Speaker 4 (00:45:32):
Yeah. So I’ve had this conversation with many people. And the next question that they always asked me is, what about wrapped assets? I can trade WBTC on Uniswap. Or I can trade wrapped versions of other assets on other automated market-makers. How do you usually respond to them?
I usually tell them that it’s a different asset. And that requires a totally different aspect of trust. If you’re going to be using WBTC, at some point you convert your Bitcoin to WBTC. How are you converting that? In the case of WBTC there’s a company that sits in between. They accept Bitcoin on one side, they issue WBTC on the other side. And that WBTC is as good as that Bitcoin, as long as that company sits there in the middle. Because you know that at any time, if you want to go back from WBTC to your old BTC, you can just send it to that company. But what happens if that company gets hacked? What if they go bankrupt and shut down? Or run into some other kind of an issue where they’re no longer available? Now, suddenly the price of WBTC diverges from BTC because there’s additional risk involved. So yes, wrapped assets are great in some respect, but they do require a whole other set of risks.
Thorchain has risks, too. I mean, you have to trust that the code is written properly. Just the same as you have to trust the code for Uniswap is written properly. But you don’t have to trust with Thorchain that some entity is going to exist tomorrow, like you would have with WBTC.
I think even if you look at the single chain version of Chaosnet, which I think was great in terms of proving the concept, but I think you also saw the limitations when you of operated exclusively on Binance Chain or [inaudible 00:47:25] assets, because with wrapped assets, there’s typically some type of bridge or onboarding, off-boarding choke point, which right now for, finance coins is, obviously finance itself or Solana type tokens, it’s FTX itself. And I think that often limits the number of potential users of a product. And when you’re able to have these native assets, it definitely expands the pool and the accessibility of these assets for way more people than when you have to perhaps go into a centralized exchange, KYC, or for other individuals, do something else. So I think it really expands access significantly.
Speaker 3 (00:48:10):
Yeah. With the wrapped assets, I’ve always just kind of viewed that as like moving the problem off another level. And I think Michael described that well, but it never really solved the fundamental problem of “I want to be able to go from this one chain to another chain.” And wrapped assets are a solid solution if you think that the future is not multi chain. I know at ShapeShift our perspective has always been, since 2014, that the future is multi chain. That there will be at least more than one useful blockchain. And these things will need to be able to connect and interact with each other natively, without anything in between. And wrapped assets will never solve that problem. So as long as you believe in a multi chain future, wrapped assets will just never quite be enough.
There’s also the question of the different parties using the system, right? So a trader who might want to move out of Eth into Bitcoin from a price exposure perspective, maybe that trader is perfectly fine with the WBTC for some period of time. But I’ll tell you who’s not fine with WBTC. The long-term Bitcoin holder who only wants to ever hold his Bitcoin and never wants to trust any other party. That person is not going to be comfortable putting a significant amount of Bitcoin in a wrapping and then putting it into Uniswap’s liquidity pool. In Thorchain, they don’t have to do that. They only have the protocol risk. So they can put their native Bitcoin into a native Bitcoin pool and never have to worry about the wrapping. And I don’t think that will attract every Bitcoin owner to want to do that with all of their Bitcoin of course, but it certainly moves to bar to be larger. And that means a deeper liquidity pool and that begets further liquidity.
And that deeper liquidity pool is sort of magnified on Thorchain compared to how to Uniswap works or SushiSwap works. With these AMMs on Ethereum. You can create a variety of different pairs between a whole bunch of individual tokens, a USD token to the UNI token, or the UNi token to some other token. That means that all the liquidity that you’re going to be trading on all of those pairs, it’s fragmented across all of those pairs. There could be a significant amount of Ethereum available, raw Ether to be swapped, but when it’s divided amongst 100 different tiny pools paired with 100 different assets, you lose that liquidity. With THORchain’s design, instead of pairing a whole bunch of different assets together, everything is just paired against a RUNE. If it supports 10 assets, that means that there’s only 10 pools, period. That concentrates the liquidity into fewer but larger pools making the slip fee less for everybody and making trades much more frictionless for everybody.
I think the thing that people miss about the whole wrapped asset thing is that the only reason why we even talk about wrapped assets is predominantly because Ethereum kind of is the king of DeFi right now, right? It is mostly apps that are there. So, we’re just trying to get our different assets to fit into our square shaped assets into the round peg of Ethereum. You know what I mean? That doesn’t actually make any sense at all from a fundamentalist perspective or a first principles perspective. It’s almost like saying I’m going to pave a street and only Ford cars will be able to drive down the street. But if you have a BMW, you have to buy a really large skateboard made by Ford and put your BMW on the skateboard and then you can drive it down the street.
It’s a ludicrous concept. It makes no real sense other than the sense that you just [inaudible 00:51:53] people have already kind of said that Ethereum has to be the king of all DeFi and that’s not the case at all. And so, what the very critical thing that I think people are missing and it was in the space generally, is that it makes no sense to bring your various assets to a DeFi application and rather bring DeFi itself to your assets or to your chain. We shouldn’t have to treat Bitcoin as a second class citizen and say, okay, you’re on Bitcoin, so you need to go through these extra steps and you need to do all this wrapped assets. And then you have to add additional risk to your profile by trusting WBDC or whatever bridge you’re going to be talking about and then you have to take on the risk of that ERC-20 card contract of that WBDC ERC-20 contract, then you can get access to various DeFi applications. That is treating Bitcoin, which is the most important chain in crypto, as a second class citizen.
That is horseshit. That is despicable. We should not be doing that as a field. It makes no sense to me. Instead, what we should be doing is building DeFi applications that allows anybody to walk up with any asset, from any chain and get treated identically the same as anybody else. That’s how it should be designed and I think that’s what THORchain is pushing forward conceptually in a larger sense from the industry is this idea. I think that’s why THORchain will inevitably, in any chain that’s similar to this will inevitably win because it’s going to have the liquidity. Any chain that can support the total $2 trillion worth of crypto assets we have today is going to win out in terms of liquidity than some DeFi application on Ethereum that only supports 450 billion out of over 2 trillion worth of assets.
It’s just the inevitable math of it. So, anybody who wants to create a DeFi application should really start thinking about going more difficult, but more substantial route of building your own chain from scratch that allows you to interact with any chain across the sphere.
Oh I was going to say, I think what Chad said is so important. I would say the big thing that got me excited about THORchain is the same thing that got me really excited about Uniswap, which is its ability to support the long tail. And especially for the long tail, liquidity fragmentation is much more painful so it naturally concentrates into a single area in the beginning. So, if you want to trade one specific asset, the first place you should go should be THORchain. And if you look at the way that Uniswap really rose, it wasn’t because it had the best ETH/USD pair. It was because it supported the most number of tokens and same thing happened with the axis right? Which is that Binance and the other centralized exchanges that grew basically out of nowhere in 2017, 2018, etcetera, came from supporting the most number of assets as quickly as possible so there was no need to go anywhere else.
And I think that’s going to be a real advantage for THORchain because it has the most liquidity and given the unique bonding having RUNE as the pair asset, it makes it really seamless for a LP to provide that liquidity in a way that you wouldn’t necessarily want to do it on a centralized exchange.
Just for a fun thought I said is kind of at the risk of getting it a little ahead of ourselves. I know Chad and I we’ve talked before about some of the kind of primitives you guys would like to build on top of THORchain in the future. So let’s kind of get your thoughts there.
Yeah. So as of today, the THORchain project has effectively solved probably one of the most difficult problems of being able to pitch in a centralized way to go cross chain, which is took the team a year and a half or more whatever the hell it was to do so. That’s a difficult problem to solve. Nobody else has solved it yet. And there’s a reason why nobody else has. That’s a lot of reasons why we oftentimes see other cross chain products today just connect to EVM based chains like Binance smart chain and Ethereum, because those are kind of the low hanging fruit, easier way of going forward while completely ignoring the most important asset of all, which is obviously Bitcoin.
But now that that problem has been solved and we have that kind of core fundamental, that kind of that base layer, there’s all sorts of very interesting things we can do on top of that, that nobody else can do in this space. We can talk about having a synthetic asset that is that we can give into the greater ecosystem of cosmos. We can talk about composites that have an ETF like indexes. We can talk about having lending and borrowing similar to Ivan compound, but do it in a way that actually allows you to do a cross chain. We can do six interest rates for those lending and borrowing platforms. There’s all sorts of things that uniquely THORchain can do that anything Ethereum simply just cannot do. This is fundamentally, the way it’s designed. It’s called itself into a corner and it cannot compete in that sense.
And so in the near future, over the coming six months or so, the team is very interested in moving forward and not just solving swamps across chain, but also doing really important things in this space like lending and borrowing.
I think that aspect of yields, especially when it comes to native Bitcoin is underappreciated with THORchain. I mean, I think THORchain is still probably relatively under appreciated across the entire crypto community, other than those who have been following it for quite a while, but it’s not just about that ability to decentralize swap. By combining with this AMM tech, it really allows people to gain yield on their Bitcoin. And that is something that I know a lot of Bitcoiners are interested in. We’ve seen that with services like BlockFi Celsius, and some of these places where people are either depositing their collateral to gain interest or to also borrow against it. But being able to do that in a non-custodial decentralized manner is such a big deal that you don’t have to trust a centralized company to get yield on your Bitcoin and potentially have far higher yields.
I think that that is going to become the actually major narrative of THORchain over time that people don’t understand about it. It’s not just about the swaps, it’s about everything else that it allows.
Yeah, that’s true. I think this surprised a lot of people when I talk to them with the project is the yield that you earn is always paid out in the assets that you provide. So we’re not forcing upon you to hold a particular asset like RUNE whatever. If you want to provide Bitcoin and get Bitcoin back, that’s great. Go for it, more power to you.
And then in these cases of you mentioned, BlockFi and Celsius, they’re a centralized interest bearing system that is currently struggling. I think it’s like Bitcoin is at half a percent interest, somewhat this, because largely because GBTC is, let’s just say it’s struggling in a sense. And if BlockFi is interested in getting back a higher yield to their users, I think they should seriously consider using THORchain as a backend to providing Bitcoin on behalf of their users to the THORchain network, earning an interest on that. What that interest is, we’ll see probably around 30, 40%. And I guess 50% maybe, and take that yield and give it back to the customers.
I think that’ll do them well as a company [inaudible 00:59:45] do really well for their user base as well.
Speaker 7 (00:59:48):
I’d like to add something to that that I think is really important. The whole ethos of Bitcoin generally is about immutable permission-less money. And the moment that you deposit your Bitcoin to BlockFi, you lose that attribute. And that’s really tragic, right? So with THORchain, someone can now deposit Bitcoin without losing the immutability that makes Bitcoin so great. When you put Bitcoin into a THORchain liquidity pool, the code and only the code governs what happens to that and governs who can pull it out. There is no human intervention there. There is no policy or terms of service that can change while your money is in that pool. I think this is massive and the Bitcoiners who come to realize this, I think will start to strongly prefer an immutable open borderless system like THORchain versus a central custodian that is bound jurisdictional rules, such as BlockFi.
Speaker 6 (01:00:55):
And now you’ve touched on probably my favorite aspect of THORchain and it’s a unique aspect that you can’t find in any other blockchain. And that’s the fact that you can use THORchain without ever touching the RUNE token. That’s never existed before. If you want to use an Ethereum smart contract, you need ether to interact with it. If you want to use something on the light coin network or any network, you need the native token for that blockchain, but not so with THORchain. It is possible for you to swap Bitcoin to ether without ever touching RUNE. It’s possible for you to earn yield on your Bitcoin without ever touching RUNE. And that I think is one of the coolest aspects that we’ve never seen before in the blockchain space.
That’s actually a very important thing. And conceptually, the only thing you need to be able to use this network is possibly a Bitcoin signature, right? You don’t need to give anybody your email address. You don’t need to acquire some token or some coin. You don’t need to download some specific UI. Actually, the only requirement of the system is that you can make a Bitcoin signature. If you could do that, you have complete access to the system, same as anybody else in the world. That is a very important thing that I think a lot of people don’t quite grasp yet. That is freedom in its truest form, in my opinion.
Hey, Chad, what do you think [inaudible 01:02:19] yield farming here? Do you think that THORchain is the state where people deposit their idle assets and they hold them there for actually long periods of time versus just jumping farm to farm? Because I feel like you guys might usher in an era of long-term passive not staking but liquidity version.
Yeah, I think so. I wouldn’t say people should do that today given the network some time to kind of mature and prove its resiliency in this kind of thing. But eventually yes, I absolutely believe that to be true. I think what’s unique here is that not only does a slip based model produce more ROI than the standard X, Y K model that you see in other implementations of axis, but you also have a block of words. There’s a reserve in the THORchain network called that has 200 million RUNE in it out today, but it will ramping up to that point slowly over time as the network gets more reliable. And so all that 200 million RUNE, which is worth over $2 billion is sitting inside the network and creating block awards to the node operators into the pools and give them additional yield on whatever, however they provide the query to the network.
And then on top of that, downstream, once we had lending and borrowing to system, you’re going to have even more returns on that. And that’s all done in a way that’s completely sustainable. That is not a flash in the pan kind of thing that we sometimes see in the yield farming world of the, Oh, you can provide here and get high yielding to quickly move over there. You can actually reliably move assets into this network and reliably move and earn interest in a way that’s completely sustainable. And that’s pretty huge from my perspective. I don’t want to have the stress personally of trying to move my liquidity from contract A to contract B. That’s just too much for me personally, but I’d rather just put into some sort THORchain where I know is as well designed system that will reliably earn yield for me for literally to the end of time.
And Chad, one last question from my end and I’ll leave it to everyone else to keep going because this is incredible. One thing we haven’t really talked about is just the project decentralizing the community. How do you guys plan to “leave the project,” I guess and who takes over? What’s that process like, and what’s the timeline for that?
Yeah, sure. So the core team is actually rather small, if you want to call them that. It’s around eight people or so, eight or nine people. It’s really not that much. You don’t really need that many people, to be honest with you. But more money is actually spent today out of the treasury of the project on funding other teams, whether that be block explorers or UIs, or also dashboards all sorts of different stuff. And if you’ve got really good idea that you want to get funding for, reach out to the team here, we will be interested to talk to you. And so over time, the intent is to educate the community as a whole. How the whole system works, get more contributors to the code. So people have more Mindshare system.
And then the intention is on in July of 2022, there’s a plan obsolescence of the team. And effectively the treasury is dispersed to a whole host of different groups and teams to continue building on different aspects of the ecosystem and let the greater community take more and more control of the system. I don’t see this to be terribly different than the ways that Satoshi did it. In the earlier days, Satoshi didn’t almost lose a lot large chunk of the work in the Hearst they selves. And then over time you cannot pull away and eventually just step back entirely.
I expect myself and other members of the team to do the same in the coming year two or three, depending upon what makes sense. But the intention is that it’s a community led project and it’s going to be a community maintained project. And I, myself and other individuals that were a part of it, the earlier phase of it will phase themselves out and we will not have a single face or Jesus-like figure that other products seem to have, or love on this project and myself included.
That’s awesome, Chad. I know we’re gearing up over the hour. If anybody has to hop, feel free. I’d love to keep going if you guys want to.
Speaker 7 (01:06:51):
Yeah, happy to go on.
Yeah, I’ve got to hop off. See you later. All right. Thanks guys. Cheers.
Thanks for joining.
Speaker 7 (01:07:02):
All right, Chad, we gave you 30 seconds to get your breath. Who’s next?
I got a question if you’re up for it.
Yeah, shoot, Jon.
So I was wondering if you guys have done any war gaming around what might happen as the lending markets for RUNE becomes more liquid. One of the things that’s concerned me is as it becomes easier to borrow RUNE, the two thirds threshold for needing honest nodes may not be enough. I’m just wondering how your team has worked through that problem when someone could actually borrow RUNE, run potentially enough nodes to corrupt the network, steal assets and not actually have potentially as much as they could gain by stealing the assets locked.
This is a fun one.
Are you saying in the context of if THORchain would have lending and borrowing people just borrowing a lot of RUNE and then using that to effectively cyber attack the network. Is that what you mean?
Yes, because they could presumably steal their own collateral they placed to borrow that initial RUNE in the first place.
Yeah, sure. So, well, so first thing is the structure of an environment hasn’t been solidified quite yet. There’s an article or an issue on getting people to read if they want to know the current thinking of the implementation. That is a big change in the coming months or so. So it hasn’t really been quite solidified quite yet, but in order to do the attack vector that you’re talking about is you’d have to borrow enough room to a cytotech network. So that let’s just say that’s approximately maybe 50% of the circling supply room, something like this, or you can take 25%, it doesn’t matter, but you would have to lock up 2X or 3X there depending on how the lending and borrowing markets are designed at an interest rate.
And so it would actually be cheaper and more effective for you to just buy the RUNE and then attack that place. That way you wouldn’t have to spend three times the amount of money to do so.
But yeah, if you’re going to deposit, let’s say that the network is worth 10 billion and you have 30 billion of Bitcoin that you deposit into the network in order to get enough collateral, what I’m saying is, is that you can actually steal back the collateral you posted. So this whole thing actually costs you nothing, arguably.
Go for it, Michael.
Yeah. So I gained theory this out a little bit and thanks to Chad answering a lot of my questions. He helped me see and understand why a simple attack on the network won’t work. So if you are Mr moneybags, and you do have $30 billion and there’s $10 billion locked up in a THORchain, you could in theory, run enough nodes so that you’re able to steal all of the funds in the Asgard. Well, let’s add some numbers to this to see how this works out.
You would need to buy RUNE on the market or borrow RUNE from somewhere. So sure. Let’s say you deposit a crap load into liquidity pools and now you borrow enough RUNE so you can run a lot of nodes. First of all, it’ll be difficult to get all of your nodes in at the same time, because of the way that churns work. If there’s going to be 100 nodes, you can’t just Yolo 66 nodes into the network at the same time. You will need to, at some point, get two thirds of the nodes in order to steal funds from the network.
But let’s say you’re very patient and churn after churn, you get one or two nodes in, you get one or two nodes in and over a protracted period of time, maybe it will take you four months or six months, you manage to get that sweet spot. And you’ve got 66 nodes out of the 100 that are operating. You have bonded a lot of RUNE to make that happen. Now all the nodes have to bond approximately twice as much funds that are in all the pools. So if you steal every last Sitoshi and every last way out of all of the pools, you would’ve still had to bond twice as much RUNE in order to steal everything out of the pools.
But hey, this is borrowed and you still have the backing token. So that’s fine. You can just start selling everything and make it up on the other end. The problem is when two-thirds of the nodes have dumped all of the Asgard contents, everyone will look at that and say, THORchain has failed. There’s some kind of an event, THORchain has failed. The price of RUNE will plummet through to the grave and now as you try to sell it or return it somewhere, you will end up with less than what you started with.
Speaker 7 (01:12:20):
It sounds almost like it’s more likely you’re going to see a centralized exchange hacked than that entire string of events that you just described actually occur in real life.
Well, to Tyler’s point though, I think partly what he’s trying to say is that if you’re doing lending and borrowing to get the RUNE, you’re actually not acquiring the RUNE, you’re not actually buying the RUNE. You’re just lending something. And then when it gets handled, you steal back your initial collateral that you used to attack the system. In order for that to be, I have to think about that more, but I think that’s almost for that to work whenever you lend yourself the RUNE, you put a bunch of Bitcoin in or whatever, the asset might be are going to be synthetic. They can potentially actually won’t be this Bitcoin SB liquidity units or synthetic Bitcoin or the [inaudible 01:13:09] RUNE.
In this case you wouldn’t use RUNE, but in order to do so, whenever you take out the RUNE of the pool, somebody else needs to put that RUNE back in, right? We give you a 1000 RUNE full to say this particular lending contract, somebody else do the put a 1000 RUNE back in effectively to arbitrage the pool. And as you do this, the scarcity of RUNE would increase over time because you’re just huddling 50% of the RUNE somehow some way, because you have, I don’t know, apparently you have tens of billions of dollars to do all this. And it increases the price of RUNE and therefore the value of the asset that you’re using to attempt that will probably be worth more than the collateral that you put into the system. Do you know what I mean? Because you’re actually increasing the value of RUNE more so than the value of the collateral that you’re putting, because you’re sucking more than half of all the RUNE in that circulation into your own personal wallet.
That’d be an interesting [crosstalk 01:14:06].
Speaker 9 (01:14:05):
I think the other difficulty is also because I totally understand in terms of that exact factor, I think if you were to get into that situation where you actually did have two-thirds of the network, and then you pulled it off, obviously the price of RUNE would crater, and then you could return what you borrowed for pennies of the dollar and then that’s how you kind of turn the profit. But I think it’s incredibly difficult to actually get two thirds of the nose in the network because of the fact that the oldest goats shovel out. And so it’s the element. I think the hardest part is actually having the two thirds of a nose simultaneously, because you think there’s a beat out everyone else and maintain. It’s like you basically have to be two out of every three coming in for as long as it takes for the entire network to cycle through.
And hope your old notes don’t churn out before you’re done getting all 66 in.
Speaker 9 (01:15:00):
You’re of the next 99, you have to be two thirds of that.
Speaker 10 (01:15:00):
Of the next 99 that come in, you have to be two-thirds of that, and that’s insanely difficult.
Yeah, there’s that factor of the churn that really makes this hard. You have to actually assume that you’re going to be able to get both two-thirds into the network, and keep everything else there at first. And it’s not like you can churn them all in at once either. Only so many nodes churn it at once, so this would have to be almost like a month long attack, as you basically churn in node after node to get all your nodes in, and hope that none of them churn out at that time, which diminishes your chances greatly of ever pulling this off.
Yeah, I guess there are two points. The first, to Chad’s point, which is because you’re borrowing the token, I don’t think it should have much effect on the actual circulating supply of THORChain at all, because again, you’re borrowing the token, but you’re not selling it on the open market. So even if the price of RUNE were to increase disproportionate to whatever asset you used for collateral, you always have that ability to pay that down or deposit more, because you’re not actually selling the borrowed RUNE. So I don’t know what effect that would actually have on the market, but that could be very interesting to game out.
Obviously, the borrowing price, the interest you’d be paying to borrow that amount of RUNE would skyrocket, and having something where the interest rate is not capped, the very artificial rates that [Van Compound 01:16:30] have could be a really good defense mechanism against someone trying to conduct this attack.
I would also say that we keep saying two-thirds in order to really take control of the network, but you don’t necessarily, and I may be wrong here, you only need two-thirds to really be sure that your in full control, but if you could get 40%, I believe you could still wreak enough havoc, maybe that’s wrong, but to make your short position very valuable by threatening the perceived stability of the network and causing the price of RUNE to tank. And that may lower the-
But you’re not short.
Speaker 10 (01:17:13):
The thing in that situation though, in order to wreak that havoc, your RUNE that you’re borrowing has to be locked up. And realistically, if you want to make it a profitable situation, you have to wreak havoc, and be able to exit, and then buy back cheaper, and profit that way. But if you’re wreaking havoc without actually stealing assets, then you’re just going to return the same quantity of RUNE at a potentially lower price, but there isn’t really a-
Speaker 10 (01:17:43):
You’re removing assets for yourself.
If you had one-third of the nodes, the havoc you could wreak is halting the network, stopping the chain. And if the chain stops, then any RUNE that happens to be on any exchange will start selling, because THORChain is suddenly less useful. You would need two-thirds in order to spend from the Asgards. The TSS threshold is set up so that no individual node, and no microcosm of the nodes, can spend from the Asgards. Only a two-thirds majority can spend from the Asgard, so anybody who does have a minority of the nodes and wreaks havoc, they’re just shooting their RUNE price in the foot.
Gotcha. So realistically, the only way this could be profitable would be either getting two-thirds of the nodes, and I think just the logistical difficulty of pulling that off is quite a good defense. Or, you could actually halt the network if you had 35% of the nodes, but that would also require that you have an off change short of RUNE, that you would hope at least to then close at a lower price than what you started.
Speaker 11 (01:18:59):
Either way, I feel like this would take a long time, and it would be pretty much visible on chain, and probably off chain, if you’re talking about centralizing changes through the fund area. And this person would probably get short squeezed into oblivion.
And all that to the capital they have locked up in the nodes that they’re running to cause this havoc, they had to buy those RUNEs, or they had to borrow those RUNEs from somewhere. There’s an economic cost to having those RUNEs in those 33 nodes, and when the price tanks, all of that economic setup that they just built goes down to the floor.
What’s interesting as I think about this … This is an interesting question, thanks for asking it. I think what’s interesting to me is that the more RUNE that is actually put into the network, either on the bond side or the LP side, the more difficult it is to do this attack that you’re talking about.
Theoretically speaking, let’s just say that 100% of the RUNE was either bonded or provided as liquidity on the LP side, then this attack would be not economically feasible or possible. If it’s only 10% of the network at any given time, then it becomes more viable. But I’m hoping that over time, people who are holders of RUNE will want that capital to be not dead capital, but active capital that actually produces a yield for them, and so the incentive will be put more and more in the LP, or more and more on the bond side. And the more that happens, the less there will be free RUNE to acquire to do that, I think, if I’m not saying it clear.
Yeah. I think it will be really interesting to see how that works, especially with the lending markets. If the incentive pendulum is effected by the amount of capital in the lending pools, that could be a defense mechanism against this attack factor as well. But yeah, I think it’ll be interesting to see it play out.
Hey guys, one interesting thing here is in most Cognos chains, in order to attack the network, you just need not a super majority of nodes, you need a super majority of the bond, of whatever the coin is of that network. So in that case, it’s actually easier to attack those systems because of that. You can just have the one node and just put two-thirds of the bond in that one node, and then boom, you have basically more or less “route access” to do what the hell you want to do. And none of the other nodes can do much about it, because they have to adhere to the same rules of what you’re deciding, because you have most of the votes in a sense.
But THORChain is different this way. We have to enroll our own staking module, if you want to call it that, or bonding module, if you want to call it that, and it’s done by nodes, and that just makes it a whole lot more difficult, at least in my opinion, to get to that place to attack it, for sure. But it’s still viable, it’s still possible to do it. You just have to outbid everybody else to get, as Yan said, two-thirds of the time, which would be astronomically large, and you don’t want to do that.
Any economically rational actor wouldn’t do it, but an economically irrational actor could.
And it also assumes that there are other nodes that stay in there. I guess if you get two-thirds, you could do it. But I think it’s a rational assumption to assume that some degree of these nodes are actually just aligned with the mission of THORChain, that they’re basically intuitively on the same page, and they want to see this thing succeed. And so that also makes it much more difficult.
If there are any validators, or any actors, or some sufficient number that are basically intrinsically aligned in that way, it just makes that attack that much harder. And I think that’s definitely the case in the early days, maybe that won’t remain the case over the long period as it becomes more economic games. But I just think it’s a really hard attack to pull off. It’s not impossible, definitely feasible, but very, very difficult.
Even if they’re not aligned with the mission, they are likely economically rational. Every single node operator has invested tens of millions of dollars in their own capital to do this. If they see some other actor is gearing up a bunch of nodes to try to do something like this, you can bet that they’re going to act together to try to protect the network, not just for ideological reasons, but for personal profit.
Yeah. And that’s really the game that we need to see play out over time. That is the experiment that THORChain is bringing into this sphere, it’s the economic experiment, are the economics aligned in such a way to keep the network safe and to keep the validators acting rationally? I think many of us on the stage are betting that yes it is, that we’ve studied this well enough to think that this is well-designed enough, that we do think the economic incentives will keep this thing safe. But that is very much an experiment, especially when the community just launched a Multichain Chaosnet today. So we’ll have to see how that plays out over time, but I think it’s a pretty good bet that it will remain safe.
Something that’s actually really interesting, and it’s counter-intuitive, but it’s kind of fascinating to think about, if there is an actor that’s trying to cyber attack the network like we’re talking about, they might go for that attempt to do so, which is very difficult, as we’re discussing, if there’s two actors trying to do it, it actually makes the network more secure. And so the more individuals who are out there all trying to cyber attack the system, they’re actually fighting each other and making each other’s tasks more difficult. And so, actually, the more people attack the network, actually it is the better for the network.
Speaker 10 (01:24:29):
That is a great point, Chad.
That’s a great point.
Speaker 10 (01:24:32):
Yeah, it really … Sorry, go ahead, Tom.
Just to switch gears, because I had a couple of people ask me, and I know we all know the answer, but for those who don’t, what do you guys view as THORChain’s biggest competition? Down the line, are there any scenarios in which THORChain can’t be successful? Like let’s say we live in an ETH only world and everyone’s just using Uniswap. Obviously, I don’t think that’s going to be the case. What do you view project-wise is the most competition? And then what do you view steady state areas of the world where it might be not the best environment for THORChain?
Is that one for me?
Yeah. Anybody who wants to take it.
To be honest, over the past year and a half, two years, my head has been down in code, and I haven’t keep my finger on the pulse as tightly as other members of the team have. But whenever I poke my head up and look at some other competing projects, and I’m not going to name names or any of these things, but I find that their economics is just done in a way that is not going to work. Either because it’s going to force them to become centralized, because they can’t get centralized, because if they get centralized, the way the economics work, it’s actually possible and economically viable to cyber attack that network.
In my opinion, it would only be a matter of time, because someone could look at that DeFi application, or chain or whatever, and say, “Oh, if I spend $ 400 million, I can actually walk away with $700 million.” And I think somebody would make that choice to do so, just because it makes sense from an economic perspective for them to do as a rational actor, to some degree.
I haven’t seen any other competitor actually implement the safety of the assets in a viable way. RUNE is actually designed in a way that the bond that secures the assets goes up and down with the value of the assets that it’s securing. And so you can’t get into a situation where if the plane goes crazy high, and now the Bitcoin is worth, and the pool is worth more than the bond, and therefore now somebody could attack it and walk with more money than they walked in with.
That can’t really happen in THORChain’s case, but I see that particular problem in almost every other project that I look at that’s trying to compete with what THORChain is doing. And in some of these cases, those projects today are actually centralized, and the team runs all of their nodes, and they have no viable way, that comes to my knowledge at least, to actually decentralize. Because I know if they do so, they will really put the user’s funds at risk. I’m not actually aware of anybody that’s actually really has an honest go, and actually has a good chance of providing competition at this point.
Speaker 12 (01:27:26):
I think the biggest competition is our centralized exchanges. The competition is actually against exchanges like Binance, or Huobi, or Coinbase and the other centralized exchanges. And I think they realize that too. I mean, if you look in Coinbase’s S-1, they talk about it as a risk factor. And you can tell from what Binance is doing with Binance Smart Chain, that they clearly understand that these centralized exchanges are a risk factor. I really think that’s where the volume is right now, and I think that’s what THORChain is really competing against.
I did a bunch of research back in August, and then I did it again in February, on this exact topic. What other projects are out there that are doing the same thing that THORChain is doing? And I typed as many keywords into Google and into other search engines to just find things. And I settled on five projects. Three of them had some kind of legs, but all three of them were failing in one way or another. Probably the most laughable one, it was … Two of these three were projects, just like THORChain is a project, not a company. And then one of them was a company. And on this company’s website, they make a big song and dance about how evil cloud computing is, like AWS and DigitalOcean, so they’re going to make things a lot more decentralized by running their own hardware. And it’s real metal, in a real data center, with an HSM, and they’re going to have this decentralized network, but they control every single one of these nodes.
And I was curious, so I contacted them and I said, “Hey, I’m interested in running one of these nodes. How can I get involved? I believe in your ethos of this project. What do I need to do?” And they essentially told me, “Well, we’re not really accepting external nodes right now. Maybe in the future, we’re going to start to decentralize it then, but for now we’re going to run everything.”
And I just thought that was laughable compared to how THORChain is doing it, where everything is in the open, all the code is available for everybody to see, anybody can participate in the telegram channels or discord rooms to get a sense of what the current problem is of the day and how they’re solving it. There really is no other project out there that can come close to what THORChain has done today.
Yeah. We actually, as a team, we talked about the idea of running all the nodes ourselves for Single-chain Chaosnet months and months and months and months ago, because if we run all the nodes, we don’t have to worry about some of the complexities of churning and all this stuff that we add functionality to.
And we decided as a team, we’re not going to start centralized and then try to decentralize later, but start from a decentralized perspective from day one, at least to a large degree, to a vast majority of degree. And that caused us to launch the network at a much later time, by a few months, to launch Chaosnet by that decision, but we felt that was the right decision.
And looking back now, and looking at other bridges and how they’ve designed their systems, they’ve started centralized, and now they’re trying to figure out a way to go decentralized, and they’re really struggling to find a viable means of doing so, which is really unfortunate, because they always said from the beginning, “We’re going to be this decentralized thing that does this thing, whatever it was.” And now, they don’t really know how they’re actually going to deliver on that promise. In fact, there was … I shouldn’t say this, actually, but it would have been a funny story.
We always just said from the beginning that decentralization is an important component of how we wanted this thing to be run from day one, but we didn’t want to be 100% decentralized, because that would be somewhat irresponsible. And so the team has actually implemented administrative rights over the network, to some degree, to allow us as a team to be able to halt trading for example, or in case of some sort of problem arises, we can immediately address the situation, where nobody has access to funds or anything like that, no one can take any money or any of these things. Just the ability to be able to say, “Okay, we need to halt trading because of some sort of exploit in the system that needs to be addressed quickly before additional funds are lost like that.” But there is a plan, probably within six months or so, to take away that administrative regime and delete it from the entire system.
So guys, we got to wrap up a bit. Frankly, I have to eat dinner at some point. This has been amazing. Let’s just go around the room, give everyone 30-60 seconds just closing thoughts, what you’re excited for, whole nine yards. This is incredible. Jon, we’ll start with you.
Yeah. It’s been a great discussion. Obviously, for those who didn’t know, we didn’t actually talk about this, but ShapeShift actually launched THORChain integration today, and you can find all sorts of media on that. We’re just super excited to be part of this ecosystem.
What I’m really looking forward to is not just the ability to do the swaps with THORChain, which we talked about, which is obviously critical and super important, but how this will bring DeFi directly to Bitcoin. Tyler down there actually tweeted something about this, or reTweeted something that he had posted, and I think it’s a very salient point about that. I’m just very excited for Bitcoin to basically enter the real world of DeFi, as Ethereum kind of isolated it for the last year. And couldn’t be more excited about the possibilities there.
Hey Jon, before Michael goes, I just give you guys so much credit for having to keep that a secret for so long. I don’t know how you guys did it. Congrats.
It was very hard. I’m very glad I don’t have to dodge that question anymore, so thanks.
Sure. Yeah. I hear their security guys is a real asshole, so that’s probably how it happened. I don’t know.
My closing thoughts, I guess I’d say … I’ll close it the same way that I’ve closed other clubhouses about THORChain. There’s a lot of really cool technology being built on top of Bitcoin, doing a lot of really cool things. The Lightning Network, Liquid sidechains, Blockstack, Rootstock, but out of all of the technologies that are building on Bitcoin, I think that THORChain will have more impact, and we’ll change the space far more than all those others combined. THORChain really is a game changer when it comes to crypto, and when it comes to Bitcoin. Bitcoin gave the model to replace banks. And I think THORChain gives the model to replace centralized exchanges. And I can’t wait to see what’s built on top of that.
Chad, you might take the whole 60 seconds, but shoot.
My final thoughts are, it’s been a long road to get here. I’m super excited that we finally launched. We finally delivered on the promises of the white paper. I’m super excited to see how this pans out over the next few months. Hopefully, it goes just as well as Single-chain Chaosnet went. And I’m also super excited about the future, in the sense of lending and borrowing, and all these other primitives that I think THORChain network will supply to the greater ecosystem of crypto.
To Michael’s point, I totally agree that I think THORChain is probably doing more for Bitcoin, more for Bitcoin Cash, more for Litecoin, more for pretty much every large chains than any other layer two chains, or things built on top of … that we’re seeing today. And I’m super proud of that.
Speaker 10 (01:35:21):
Yeah. No, it’s really exciting to see all the hard work that the team has done over the years, and the culmination of that in the launch here. I’m excited for THORChain to function as this liquidity vacuum that it’s designed to be, and really bringing a lot of utility to Bitcoin. Realistically, I think [Maxis 01:35:42] are going to be running out of ammunition in terms of FUD and how DeFi doesn’t necessarily make sense, but excited to see how much Bitcoin really comes into this, and finally see a true decentralized way to earn yield on idle Bitcoin.
Speaker 11 (01:36:03):
Yeah. I could build on that for my final point. I think that maximalism of [multi-firms 01:36:10] is just the wrong answer, and especially when you look at blockchains, it’s very obvious to me that we will have many blockchains that do different things. And most people don’t yet realize that, because they’re crafting this tribal mindset. To me, THORChain is the way that people are going to break out of that tribal mindset. And I think this is going to be a sea change in the emotions and beliefs of the crypto community, to realize that the future truly is across many different blockchains.
Cool. Yeah. I think just to wrap it up, and just following up on the thing I retweeted while we were talking, is I really think that the launch of the cross-chain DEX is really just the first step. And the bringing of the rest of THORFi to not only Bitcoin, but to the rest of cryptocurrency, it really means that we’re looking at a brand new project, because it ends up being the glue between all other projects.
It has no analog to date. I think competitors are going to have a very difficult time. And one of the things I’ve told various people is that I think that, for the first time, liquidity may actually be a sustainable mode in THORChain, in a way that I think that we’ll see as transaction fees go to zero, that liquidity won’t be a moat on any DEX that isn’t its own L-1. So I think the future for THORChain is very bright, and I’m very excited to be a part of this experiment.
That’s awesome. And for everyone listening, that was Tyler Reynolds. Tyler didn’t get to give his intro, because he joined a couple minutes late. I just want to thank everyone here for coming on. Awesome discussion. Frankly, I just got to sit back and listen for most of it, which is incredible. And just a few disclosures, obviously Delphi Ventures, I’m sure a bunch of people on this call own RUNE outright, we have for a couple of years. So we’re hugely optimistic, and we’ll back the team well into the future. Thanks again everyone for joining. Can’t wait to share this on the pod channels as well.
Thanks for hosting, Tom.
Speaker 10 (01:38:19):
Yeah, great discussion.
We appreciate it. Thanks again.
Thanks guys. See everyone soon.