So…..Dash is going to be integrated into the Decentralized Exchange THORChain. This has many implications. From our end, anything that makes it easier to buy, sell, stake or swap Dash is a good thing. But to get an idea of those implications, we have to get an overview of why THORChain is different and a worthwhile innovation.
Right off the bat, everything in THORChain happens on-chain and the code is open-source. It is the most, or perhaps the only decentralized way to do cross chain swaps currently available in the industry. This is the complete opposite of centralized exchanges operated by a company. It also gives access to stable coins. It will enable native swaps to occur within some wallets (Trust Wallet for example). By the way, Trust Wallet still yet to integrate swaps. Maybe use XDEFI instead as an example of wallet which does have the swaps integrated?
THORChain is often compared to UniSwap, but there are important differences. UniSwap only works for products that have been tokenized into the Ethereum ecosystem. You can’t trade actual Bitcoin for actual Dash for example. On THORChain, you can swap real BitCoin for real Dash. This is different and better than trading wrapped assets in my estimation.
Another key feature in THORChain is called Protocol Owned Liquidity (POL). This is the “secret sauce” that will make many of the novel and desirable features of THORChain possible. The big deal is that it solves the single biggest hurdle facing the development of a robust DEX market….not enough capital. Until recently, about the only way to attract enough capital was for project X to offer better yields then project Y. The big flaw in that approach was that the yields got so high it was impossible to sustain. The majority of those efforts have either failed, stayed very small, or run a high risk of failing in the near future.
Protocol Owned Liquidity provides good liquidity pools without the crushing expense of attracting outside capital. And it works even in a bear market. Another way of thinking about it is that DEXs must have substantial reserves. But a lot of the reserves just sit in cold storage “doing nothing”. The POL solution allows them to be useful and still function as reserves. POL allows for the creation and much greater use of Synthetic Assets with little additional risk.
Better, less expensive and deeper liquidity makes transactions less expensive, more efficient and faster than a DEX with poor liquidity. That leads to more transactions and bigger transactions and it becomes a positive feedback loop to build the THORChain ecosystem faster. Everybody wins here. There are a host of desirable features that will become available because of Synthetic Assets, like order books, limit orders, etc.
THORChain has also developed robust safety protocols. Node operators can pause the chain if they see an exploit developing. But other node operators can resume the chain if they feel the first operator was incorrect or malicious. This is another consensus mechanism to spot attacks. There is also an automated solvency check that would have prevented the multi-million dollar hacks last summer.
If outbound transactions with a lot of value start to happen quickly, they are delayed by the protocol, giving the operators more opportunity to intervene if it’s an attack. Operators also have to post a hefty bond in Rune to have the ability to push the pause or resume buttons which reduces the risk of malicious operators, hacks, etc.
They also offer insurance against Impermanent Losses*. Here is a quote from their website: THORChain fully insures liquidity providers against impermanent loss after 100 days. There is no additional risk compared to holding both paired assets.
Speaking of which, we should think about the risk associated with integrating with THORChain. THORChain is legitimately plowing new ground. Anything new in the crypto space brings risk. And the more complex and sophisticated the new thing is, the greater that risk. As noted above, THORChain has been successfully hacked for substantial amounts of money. But then what?
THORChain had the resources and determination to make good on the hacked funds and add substantial additional security measures. We must conclude that yes, there is risk. But we also need to think about the risk if Dash does not go forward with the integration. I call this opportunity risk. I think the risk to the Dash ecosystem is far far greater if we do not pursue the integration. In the crypto space, I strongly believe the idea that if we are not innovating, we will die.
This is starting to sound like a full featured crypto exchange, but decentralized and with reduced risk, better censorship resistance and better incentives for all the participants. I believe that is their goal and they are well on their way to achieving it. This is a rapidly developing project that is complex. It is possible I have not fully grocked all the moving parts. Feel free to correct me, and I thank you in advance. I alone am responsible for any errors.
*Impermanent Loss is more or less equivalent to opportunity cost. Here is an example. Let’s say you invest in Bitcoin, and one month later Bitcoin is up 20%. You sell the Bitcoin and have made a tidy profit, congratulations! However, if you had invested in Dash rather than BitCoin, and Dash goes up by 30% in that same month, you have lost money in terms of opportunity cost or impermanent losses. The important difference in THORChain is that for the liquidity providers, it’s a change and rebalancing of the ratio in the pool, not the price. See below.
Impermanent loss is also like paper losses. While you are providing assets to a liquidity pool, those assets can change in value. In the case of THORChain liquidity pools, then we are talking about changing the ratio of the two assets that make that particular pool, not the prices. If the ratio changes (in either direction from 50:50) your deposited assets will experience Impermanent losses. (Actually, the pool is always 50:50 in terms of the value of both assets. It’s the quantity ratio which changes, when price changes. For example, if RUNE is $5 and DASH is $50; then arbs will ensure 10 RUNE :1 DASH quantity in the pool. If DASH doubles to $100, then it will be 20 RUNE : 1 DASH. The value of both assets remains 50:50)