Most recent update: [June 29th , 2022]
No securities regulatory authority has expressed an opinion about the Crypto Contracts or RUNE, made available on the VirgoCX Platform, including an opinion that RUNE is not itself a security and/or derivative.
What is RUNE?
THORChain is a decentralized liquidity protocol that facilitates the easy transaction of layer-1 assets like Bitcoin and Ethereum in a completely permissionless setting. Unlike its peers that function primarily on one or two blockchains, users can swap assets from many different blockchains on THORChain without the protocol needing to create a synthetic token. To accomplish these functions, THORChain uses its native utility token RUNE, which acts as the base currency in the protocol’s ecosystem while also being used for platform governance and security.
Who is behind THORChain?
The actual creators behind THORChain are anonymous. The protocol was originally conceived in 2018 during a hackathon and launched in April 2021 after initial prototypes were developed on test nets. Rather than having a CEOs or directors, the creators of THORChain want to make the protocol completely decentralized, with the direction of the development of the protocol being organized via GitLab with the blockchain’s nodes as the ultimate decision makers of where the project should go. This development process is a part of THORChain’s governance mechanism.
The team behind THORChain plan on handing over the project entirely to the community by summer of 2022.
How does it work?
Unlike other cross-chain protocols that need to wrap assets or generate synthetic tokens before performing a swap, THORChain uses an adapted version of another similar protocol, Bancor, in which the blockchain’s native currency is used as the base currency for all transactions. And, where many similar protocols struggle to find sufficient liquidity, THORChain mitigates this by using continuous liquidity pools (CLP), which allow traders access to liquidity without needing to find or contact another party. These liquidity pools are contributed to by the blockchain’s liquidity providers, one of the core users in the THORChain ecosystem.
Similarly to other decentralized protocols, contributing to the platform’s liquidity not only helps keep the protocol running smoothly, but is also one of the primary ways users can get rewarded for participating in the blockchain; these providers deposit their assets and earn portions of swap fees and system rewards for their contributions. Through the governance system, liquidity providers are also able to propose new asset pools, so long as the asset is a token of a supported chain within the ecosystem.
What makes THORChain interesting is that these liquidity pools, which may contain an asset such as BTC or ETH for example, are all paired with RUNE, the protocol’s base currency. When a swap occurs, the protocol actually conducts two transactions in between: swapping asset A for RUNE, then swapping RUNE for asset B. This unique function is how THORChain mitigates having to create an artificial token, and how users and liquidity providers of the blockchain maintain full custody of their assets whenever they want to switch from one asset to another.
THORChain is a Tendermint-based blockchain, which is notable for using the same architecture and consensus mechanism as Cosmos. In essence, it is a modified proof-of-stake (PoS) consensus mechanism that caps the number of validators in order to reach finality for a proposed block. This design also helps with security as becoming a validator requires staking a significant amount of RUNE tokens before being able to participate in the network’s consensus process. In a way, staking RUNE tokens to become a validator can be seen as a form of collateral to ensure that validators are behaving in the best interest of the network. If a validator were to behave maliciously, they risk losing their staked tokens. And, like becoming a liquidity provider, contributing the health of the network as a validator is another way to earn rewards in the form of swap fees as well.
The number of validator nodes in the network can vary between 100 to 300 participants. In order to keep incentives competitive, validators are churned out in cycles, which also helps with the network’s security as nodes cannot permanently control the network.
Additionally, some of the novel technologies utilized by THORChain include the Bifrost Protocol, which is allows the network’s cross-chain functionality by leveraging THORChain’s validators, and the Yggdrasil Protocol, which is a sharding mechanism to help mitigate any of the network’s scaling issues.
The RUNE token has a maximum circulating supply of 500 million coins. When the project initially launched, it was intended to have a maximum supply of 1 billion tokens, but the THORChain team opted to burn all of the unused reserve RUNE; this ended up being about 50% of the max supply and is the current max that THORChain operates under today. At the time of writing, there are around 308 million RUNE tokens currently in circulation.
RUNE itself has a variety of uses, the primary of which we have covered so far which includes acting as a base currency for transactions on the network, being used in staking to contribute to liquidity pools or to become a validator, to participate in governance, or to be given as a reward. In addition to this, all network transaction fees (what can be seen as similar to Ethereum’s gas) are also paid in RUNE. Actions that the network requires fees to be paid include executing transactions and any on-chain or cross-chain asset swaps.
Liquidity pools require a 1:1 ratio of RUNE tokens to the opposite asset; for example, if a pool contains $50,000 of ETH, then there must also be $50,000 of RUNE as well. Similarly, for a user to become a node, they need to stake twice as many RUNE as the amount they have contributed to a particular pool.
Drawbacks & Risks
While the THORChain network has a variety of novel features that protect investors and network participants, particularly surrounding any losses incurring during price shifts between assets in a pool as well as through the stringent barriers to entry when becoming a node, THORChain has stiff competition in the industry from other protocols that set out to do similar functions as itself.
Prior to listing RUNE on the VirgoCX Platform, VirgoCX performed due diligence on RUNE and determined that RUNE is unlikely to be a security or derivative under Canadian securities legislation. VirgoCX’s analysis including reviewing publicly available information on the following:
- The creation, governance, and location of RUNE nd and/or its primary development team;
- The supply, demand, maturity and liquidity of RUNE; and
- Legal and regulatory risks associated with RUNE.
Statutory Rights under Securities Legislation
VirgoCX is offering Crypto Contracts on crypto assets in reliance on a prospectus exemption contained in the exemptive relief decision Re VirgoCX Inc. dated May 30, 2022 (the Decision). Please be aware that the statutory rights in section 130.1 of the Securities Act (Ontario), and, if applicable, similar statutory rights under the securities legislation of each other province and territory in Canada, do not apply in respect of the Crypto Fact Sheet to the extent a Crypto Contract is distributed under the prospectus relief in the Decision.
For a more in-depth look at the THORChain network and its utility token RUNE, check out these useful resources below:
THORChain on CoinMarketCap
THORChain on Messari
THORChain on Binance Academy
THORChain on Decrypt
THORChain on Medium