Introduction to THORFi
THORFi is a specific niche within the DeFi space related to use-cases involving THORChain, built on the Cosmos Blockchain. THORChain is a decentralized liquidity network by design that facilitates everything from synths to native layer-1 swaps and liquidity pools and so much more in the future; borrowing with 0% interest and no liquidations, interest-bearing accounts, and THOR.USD.
THORFi is a vastly complex topic, and the most up-to-date information relating to it can be found on GitLab. Even though the mechanics are a work in progress, there is a lot to look forward to in the upcoming updates, including long-horizon features like exporting derived bitcoin (THOR.BTC) to other ecosystems.
What may seem like a tiny step for THORChain is one giant, astronomic leap for the entire crypto-verse. The focus of this article will be on “derived assets,” the underpinning force behind this revolution.
Synths vs. Derived Assets
What is a ‘Synth’?
A THORChain synthetic asset is minted by providing assets to the synthetic liquidity pools. The primary use case for synths is to arb pools and change L1 pool depths, enabling a trustless arbitrage system whereby traders can use these pools to swap in and out of positions quickly. The minted synths can always be redeemed in a 50:50 proportion to their underlying assets.
Synths are designed to remain within the THORChain ecosystem. While these tokens are fundamental in arbing, they serve a dual purpose by enabling liquidity providers to earn higher yields due to the volume and collected fees. In other words, synths typically have built-in incentives that reward those that provide liquidity to the network.
What is a ‘Derived Asset’?
The critical difference with derived assets comes down to the token backing. Derived assets such as THOR.BTC and THOR.USD are minted by burning RUNE only — no other native asset component is involved.
For derived assets, there is a burn/mint mechanism that you need to be aware of, which should sound familiar if you happen to know about the LUNA/UST relationship, i.e., LUNA is burned to mint UST. In this case, you need to burn RUNE to mint THOR.BTC or THOR.USD.
Crucially, these derived asset tokens will be IBC-compatible, meaning that you will be able to export them to different ecosystems within Cosmos based on user demand.
Theoretically, there is no restriction on the number of derived asset tokens that can be created. The supply of RUNE is the only limit. They are minted by burning RUNE, which has no supply cap, as with ETH and ATOM.
Why are ‘Derived Assets’ needed?
The three main advantages of derived assets can be summarised as follows:
- They are decentralized.
- They are compatible with ERC20/CW20 tokens.
- They utilize RUNE.
Decentralized
Decentralization is one of the cornerstones of the Web3 space. Recently, the integrity of wrapped tokens (i.e., a token representing a cryptocurrency from another blockchain with equal value to the original one) has been questioned.
For example, wrapped bitcoin (wBTC) is an ERC20 token with the same value as a native bitcoin token. Fundamentally, the native bitcoin is held in a multi-sig wallet and custodied by many individuals, presenting several concerns.
What if there was a trustless alternative?
You guessed it. Enter derived Bitcoin: an engineered solution to some of these issues. THOR.BTC is a derived asset-backed by RUNE’s MC and 1:1 redeemable for native Layer-1 Bitcoin — all on-chain. In the future, an individual will be able to acquire THOR.BTC and utilize it within ecosystems such as Ethereum and Cosmos, all trustless and seamless.
ERC20/CW20 Compatible
THORChain plans to become the biggest exporter of derived Bitcoin — THOR.BTC. In theory, these derived assets could be deployed in liquidity pools in different ecosystems.
Imagine if you could head over to Osmosis (Hint: Lendscape) and acquire/deploy THOR.BTC in a decentralized manner or farm THOR.BTC on AAVE to earn a yield? This would inevitably create a considerable cross-chain demand for derived Bitcoin, resulting in deflationary pressure on the RUNE token.
RUNE Utility
As noted previously, when derived assets are minted, the equivalent value in RUNE is burned. This genius design principle would make any investor bullish on RUNE once the market discovers the ability to acquire THOR.BTC, in a decentralized fashion, derived Bitcoin will burn significant amounts of RUNE within other ecosystems, potentially leading to positive price action and raising RUNE’s public profile.
Derived Bitcoin Mechanics Under The Hood
The most attractive use case for THOR.BTC will likely be the savings vault offering. Suppose you look at some protocols with the highest total value locked (TVL) on DeFi Lama. In that case, many successful applications such as Anchor and AAVE offer individuals the ability to save.
By the same logic, when derived Bitcoin is used for THORSavings, a person could go to Lendscape, rock up to their Bitcoin wallet, and deposit their Real Layer-1 Bitcoin to earn Real Layer-1 yield, all in a decentralized groundbreaking manner.
The mechanics under the hood works as follows:
- The user enters Lendscape and deposits Layer-1 Bitcoin (BTC.BTC).
- Lendscape swaps the Layer-1 Bitcoin (BTC.BTC) to RUNE.
- Lendscape burns the RUNE and mints derived Bitcoin (THOR.BTC) for the user.
Holding derived Bitcoin (THOR.BTC) always has a 1:1 claim for Layer-1 Bitcoin (BTC.BTC).
Effectively, the RUNE supply acts as a backstop for the derived assets. This is because you can always redeem the THOR.BTC 1:1 for BTC.BTC.
Concluding Thoughts
In summary, how typical synthetic assets and derived assets are backed is the critical differentiator. Synthetics have a 50:50 backing of RUNE and the native asset, whereas derived assets are minted by burning RUNE and are backed by the liquidity of RUNE.
Bitcoin is the most complex and most neutral digital asset in the crypto-verse. Ambitiously, THORChain plans to leverage the strengths of derived assets to create a derived equivalent of bitcoin backed by RUNE and export this to many ecosystems in Cosmos and beyond.
We are at a watershed moment in DeFi. With the unlimited possibilities of derived assets, who’s to know how far and wide derived Bitcoin could take us.
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