Could THORChain’s Decentralized Digital Asset Trading Transform Crypto?

THORChain aims to enable cross-chain digital asset trading without the need for a centralized company. Many would say this has been one of the key missing pieces in the jigsaw of a truly decentralized ecosystem. In this article you'll learn why this might be important for traders, investors, developers and the wider financial ecosystem.


Impact on investors

While the prospect of trading without the need for a centralized exchange is certainly important, one of the most important implications of THORChain’s success might be the effect it has on dormant digital assets.

This is a long standing criticism of crypto by traditional investors. One of Warren Buffett’s (many) criticisms of Bitcoin is that it is an unproductive asset. Unlike a dividend paying stock, cryptocurrencies do not reward the investor for simply holding them. They rely on the investor being able to sell them at a higher price in future.

Could THORChain change Buffett's mind? Probably not but the potential of increased revenue streams for digital asset investors is real.

By participating in the THORChain network, they can establish new revenue from previously dormant digital assets. By providing capital in a THORChain pool, investors can start to generate revenue from these digital assets. As part of an asset liquidity pool, they witness transactions coming into and out of the network, confirming what took place and being rewarded every time a block is created.

When you consider the transaction volumes of existing centralized exchanges, the effect of individual investors taking even a tiny proportion of these revenues could be enormous. Binance, for example, had an average daily trading volume of over $2.85billion in 2019 and booked $183.5million in Q3 2019 alone.

Of course, it’s very difficult to say how much of this market THORChain might swallow up. But would investors be interested in making more from their digital assets? And would they prefer to bank trading fees rather than see a third party exchange do so? Undoubtedly yes.

There will also be arbitrage opportunities for the best traders to take advantage of. In fact, this is crucial to THORChain’s success. The price of THORChain liquidity pools solely comes down to arbitrageurs trading to bring them in line with external markets.

Impact on the financial ecosystem

An ongoing paradox within crypto is the fact that the biggest beneficiaries of the decentralized dream have been centralized exchanges.

As the saying goes “during the gold rush it's a good time in the pick and shovel business”. With the rise of Bitcoin and other digital assets, centralized exchanges have made enormous profits from providing the exchange infrastructure equivalent of picks and shovels.

However, while almost all crypto investors have used a centralized exchange at one point or another, they know it runs completely contrary to the idea of disintermediated money. After all, if “it’s not your keys, it’s not your coins”.

THORChain provides an alternative for those that want it. It provides digital asset trading without the need for a centralized entity. Traders can exchange in a totally decentralized way by making special transactions into the THORChain network, which state the asset they want, where they want to receive it and what price they will pay. This is serviced by the virtual liquidity pools, which deposit and remove assets, charging a slip-based trade fee for the transaction.

How many will take up the offer of decentralized trading? Who knows, but there’s no doubt that truly decentralized trading will appeal to those who have always used centralized exchanges through gritted teeth.

THORChain has other beneficial implications for further decentralization as well.

Over recent months, as Proof-of-Stake networks have risen in prominence, there have been some worrying signs of centralization, with exchanges using customers’ custodied assets for staking. This has resulted in these exchanges being able to provide 0% validators, which many see as a likely first step towards over-centralization. In fact, we’ve already seen the effect this can have on governance with the centralization scandal that engulfed Steem.

In the case of THORChain, nodes remain anonymous, are regularly cycled off and take no part in governance, which will likely add up to more positive steps towards greater decentralization.

It’s also worth noting that, if THORChain does grow as intended, it could power a stablecoin. Based on the assets in its vaults and maintained by liquidity in its pools, the stablecoin would be secured by RUNE and rebalanced by its state machine. The idea would be that Continuous Liquidity Pools would provide manipulation-resistant price feeds while collateral could be liquidated through pools automatically.

Impact on developer opportunities

What will be possible in the cross-chain world post-THORChain?

Clearly a lot depends on how the network progresses but the big story is cross-chain liquidity. We can identify some possible outcomes from what is already occurring in other ecosystems.

Looking at the existing DeFi market, Uniswap has already enabled a number of use cases because it unlocks permissionless liquidity.

Two of the most important DeFi projects right now are Synthetix, a derivatives platform, and Maker, a credit facility. Uniswap currently has a liquidity pool of roughly 18,000 ETH for Synthetix and almost as much in Maker-related (MKR and DAI) pools.

Could the rise of THORChain be a critical piece of infrastructure for a cross-chain Maker or Synthetix?

These are two of the biggest success stories on Ethereum so developments of this kind would be enormously significant for the entire crypto ecosystem. Furthermore, they would provide vast opportunities for developers.

A game changer?

THORChain offers the tantalizing prospect of new revenue streams for individual investors. The prospect of receiving a small but lucrative slice of the transaction fees that centralized exchanges have cornered will attract many.

The user engagement that this will drive could result in a major shift to the decentralized ecosystem, with cross-chain liquidity pools spawning almost limitless opportunity for developers using it to build new applications.

Of course, this imagined future is less predictable the further ahead we look but the implications of THORChain could be huge.

Jay Bowles · 19 Apr 20
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