THORChain is a decentralized, cross-chain liquidity network that operates as its own independent blockchain. It is uniquely designed to facilitate seamless swaps between native assets across different blockchains without the need for wrapping or pegging tokens. This capability allows users to directly exchange assets, like swapping Bitcoin for Ethereum, without relying on centralized exchanges such as Binance. By mitigating the complexities associated with cross-chain swaps and addressing the fragmented liquidity within the crypto ecosystem, THORChain offers a robust, decentralized, and crypto-native solution to one of the industry’s biggest pain points. 

In line with its mission to enhance the trading experience, THORChain has introduced several new features over the year, with the most recent being Bridge Assets. Bridge Assets were formerly known as Trade Assets and targeted toward arbitrageurs, but the THORChain team quickly realized their potential beyond simple arbitrage. They are still designed to offer high-frequency traders and arbitrageurs the benefits of centralized exchange trading within a decentralized framework but, as discussed in future sections of this report, can offer additional benefits. Bridge Assets not only improves upon THORChain’s existing synthetic assets by offering double the capital efficiency but also ensures faster execution and minimal transaction costs. As a result, Bridge Assets are set to play a crucial role in driving the next phase of THORChain’s growth and ultimate end state as one of crypto’s only fully sustainable, revenue-generating ecosystems.

Bridge Assets

Bridge Assets are a new class of on-chain assets introduced by THORChain. They are designed to be the next iteration in improving the THORChain trading experience, improving upon the previous Synth model. Synths on the THORChain blockchain are digital assets that derive their value from liquidity pools (LP). Each Synth, such as BTC/BTC, is backed by an equal split of 50% L1 asset (BTC) and 50% RUNE within the LP. Historically, Synths were utilized for cost-effective and rapid arbitrage opportunities due to THORChain's lower gas fees and faster block times compared to external L1 chains. However, they were not perfect. The drawbacks of Synths include 

• Minting a Synth involves swapping the native token in the LP and incurring slippage and fees. 
• Synths are limited to 60% of the LP's depth, ensuring their security through the RUNE bonded by node operators.
• The need for a secondary token (RUNE) in the process.

‍

Bridge Assets, on the other hand, are essentially wrapped tokens, fully custodied by the THORChain protocol, and held within a dedicated module on the blockchain. Unlike THORChain’s synthetic assets (Synths), which are backed by liquidity pools, Bridge Assets are backed 1:1 by native assets, ensuring that each Bridge Asset is equivalent in value to the underlying asset it represents. See vaults here. 

‍

Because they are custodied by THORChain, Bridge Assets are conceptually similar to having a deposit on a centralized exchange, but with the added benefits of decentralization, transparency, and security. While centralized exchanges have the right to hold assets behind closed doors, custodied assets on the blockchain are different as everything is fully transparent to the depositor. This eliminates any potential risks with centralized custody, such as the potential for mismanagement, as in the cases with FTX or Celsius.

Bridge Assets are specifically designed to cater to the needs of arbitrageurs and high-frequency traders, particularly those who operate bots for trading and arbitrage. High-frequency trading (HFT) in cryptocurrency is a rapid trading strategy that leverages advanced algorithms and artificial intelligence to execute large volumes of trades within nanoseconds. Traders utilize these automated systems to monitor multiple exchanges and perform trades based on pre-set conditions, often concluding all positions by the end of the trading day to avoid overnight risks.

The primary objective of HFT is to capture small, time-sensitive gains, although cryptocurrencies' inherent volatility can also lead to losses if market conditions change unpredictably or if the algorithm misinterprets price patterns. These users require a trading infrastructure that offers speed, efficiency, and low transaction costs—qualities that Bridge Assets provides in abundance.

‍

HFT is often integrated with several cryptocurrency trading strategies, including:

1. Crypto Arbitrage: Buying and selling the same cryptocurrency across different exchanges to profit from price discrepancies.
2. Market Making: Placing simultaneous buy and sell orders to profit from the bid-ask spread, where HFT algorithms execute trades based on slight price differences.
3. Scalping: Executing a high volume of trades throughout the day, each aiming for small profits, which cumulatively contribute to the trader's daily returns.

For arbitrageurs, executing trades quickly and efficiently is critical to capitalizing on market price discrepancies. Bridge Assets' enhanced capital efficiency means that these traders can use less capital to achieve the same results, thereby increasing their potential return on investment. Additionally, the low fees associated with Bridge Assets make them ideal tools for high-frequency trading strategies, where minimizing costs is essential for maintaining profitability. In the future, Bridge Assets could go beyond the simple HFT use case and, in fact, serve as the standard/primitive for THORChain’s AppLayer. Should the AppLayer on THORChain see meaningful growth, Bridge Assets and their CosmWasm-based smart contracts could also see increased adoption. 

Performance Benefits of Bridge Assets

Bridge Assets are held within a protocol-controlled module rather than individual user wallets, enabling near-instant finality for transactions, with block times of approximately 6 seconds. This is a significant improvement over the longer finality times associated with other blockchains, including Bitcoin, Ethereum, and others, where higher volumes can lead to delayed transaction processing. Rapid finality is crucial for high-frequency traders and arbitrageurs who rely on quick transaction settlements to capitalize on market opportunities.

‍

As mentioned previously, one of the standout features of Bridge Assets is their enhanced capital efficiency compared to synthetic assets. Synthetic assets, while useful, require more capital to correct price deviations within liquidity pools due to their impact on only one side of the pool. In contrast, Bridge Assets allow for twice the capital efficiency, meaning that the same amount of capital can achieve greater arbitrage effects.

‍

For example, where a $100 RUNE to BTC swap using synthetic assets might require $200 of synthetic BTC to maintain price equilibrium, the same swap using Bridge Assets would only require $100. This increased efficiency makes Bridge Assets particularly appealing to professional traders and bots engaged in arbitrage activities.

Minting and Burning Process

The creation and redemption of Bridge Assets are facilitated through a straightforward process involving specific transaction memos. To mint a Bridge Asset, users send a transaction to the THORChain protocol with a memo prefixed by TRADE+. This transaction results in the creation of a Bridge Asset that is credited to the user’s THORChain address, with no slippage fees involved—only the Layer 1 (L1) gas fees apply. Similarly, burning a Bridge Asset, which involves redeeming it back to the native asset, is accomplished by sending a transaction with a TRADE- memo. This process ensures that users can seamlessly switch between Bridge Assets and their native counterparts, maintaining the flexibility and efficiency required for high-frequency trading and arbitrage.

Revenue, Fees, and Network Demand

THORChain’s revenue model is fundamentally tied to its role as a decentralized cross-chain liquidity network. The protocol generates revenue primarily through transaction fees and liquidity provision. These fees are distributed among the various stakeholders within the network, including liquidity providers (LPs), node operators, and holders of the RUNE token. The THORChain protocol has multiple revenue streams, though transaction fees are most relevant to this discussion. 

‍

There are two prominent transaction fees on THORChain - swapping fees and outbound fees.

‍

• Swapping Fees: Whenever a user swaps one asset for another using THORChain, a fee is charged. This fee is typically a small percentage of the transaction amount and is split between the network's liquidity providers and node operators. The fee structure is designed to be competitive, ensuring that users are not deterred by high costs while still generating sufficient revenue to reward participants.
•  As of 2024, THORChain has surpassed a cumulative trading volume of over $70 billion, with most days seeing $70-100 million in value traded. Before the launch of Bridge Assets, most transaction fees were generated through synthetics on-chain, which also heavily dominated total trading volume (~80-90%) and the rest simply being Layer-1 transaction volume.

Part of THORChain’s network usage consistency stems from its continuous pursuit of new and lasting integrations with the THORChain protocol. Some of THORChain’s most prominent new and existing integrations include:

‍

• Trust Wallet
• THORSwap
• THORWallet
• ShapeShift
• Xdefi
  Asgardex
• Li.Fi (new)
• Cake Wallet (new)
• OKX Wallet (new)
• ZenGo
• Bifrost Wallet
• BitPay
• Ethos Wallet
• Unizen
• Rango 

‍

Since the launch of Bridge Assets, nearly all of the trading volume dominated by synthetics has effectively flipped. Bridge Assets now hold the majority share of daily volume at over 70% and have racked up impressive numbers, having already surpassed a depth of $13 million, cumulative swap volume of nearly $5 billion, and cumulative transaction count of over 1.3 million.

‍

‍

With the massive flip in activity to Bridge Assets clearly shown in the data, it is clear that THORChain’s latest innovation has been readily and happily adopted by its power users, indicating there is demonstrable demand for enhanced trading capabilities within a decentralized environment. Additionally, THORChain’s constant push for efficiency and improvements has been noticeably beneficial for the protocol itself as well, with total transactions making a significant rise since June 2023.

‍

‍

Plus, because Bridge Assets operate similarly to centralized exchange deposits, any arbitrageurs or advanced traders attempting to realize profits will incur transaction fees (both swap and outbound fees should they withdraw from THORChain), so Bridge Assets still actively drive revenue. However, as noted previously, because Bridge Assets do not rely on liquidity pools to operate, traders no longer have to incur additional fees associated with swapping within LP-backed pools.

Bridge Asset Demand

Bridge Asset demand comes from several different pairs, including:

‍

• BTC-BTC
• ETH-ETH
• ETH-USDC
• ETH-USDT
• BSC-BNB
• LTC-LTC
• AVAX-AVAX
• ETH-WBTC

‍

By far the most utilized Bridge Asset pair is Bitcoin, with a depth percentage of 65.4% of the entire float. This is followed by Ethereum pairings that add up to a combined ~20%.

‍

‍

Bitcoin utilization in a DeFi protocol has been arguably the most critical value driver for THORChain to date -  and the current performance and demand analysis of Bridge Assets continue to cement that sentiment. Unlike many other platforms that rely on wrapped versions of Bitcoin, such as WBTC (Wrapped Bitcoin) on Ethereum, THORChain allows for direct trading of Bitcoin in its native form. This means that users can swap BTC directly for other supported assets, such as Ethereum (ETH) or Binance Coin (BNB), without needing to trust a centralized custodian or third-party provider to issue a wrapped token.

‍

WBTC is far from trustless like native Bitcoin, evidenced by the recent controversy surrounding BitGo’s decision to transfer control of WBTC to a joint venture with BiT Global and Justin Sun. This move has sparked concerns among major DeFi protocols, leading some, like MakerDAO, to limit or stop their reliance on WBTC. THORChain's Bridge Assets have emerged as potentially the most compelling alternative to WBTC and are arguably the closest thing on-chain to holding native Bitcoin itself.

L1 Swap Fee Increase

Recently, THORChain implemented a strategic fee increase of 0.15% on all Layer 1 swap transactions. The primary objective of this adjustment was to boost protocol revenues and enhance value for all stakeholders within the ecosystem. Thus far, these goals have been met with significant success, as evidenced by a substantial surge in swap fees, which have increased approximately 5x.

‍

According to data from THORCharts, this fee increase has amplified revenue and maintained steady demand across the platform. Despite the higher fees, L1 swap volumes have remained largely consistent, indicating that the increase has not deterred users from utilizing THORChain's services. This resilience in demand, even with elevated fees, underscores the network’s robust utility and the value it provides to its users.

‍

Moreover, a notable milestone has been achieved in the wake of this fee adjustment: for the first time in THORChain’s history, liquidity rewards have surpassed block rewards. This shift marks a crucial step toward achieving true sustainability as a decentralized financial protocol. By successfully balancing increased fees with continued demand, THORChain is positioning itself as a more self-sustaining and financially viable network, further solidifying its role in the DeFi space.

Incentive Pendulum Changes

THORChain employs a unique mechanism known as the Incentive Pendulum to balance the economic relationship between liquidity providers and node operators. The pendulum adjusts the distribution of block rewards between LPs and node operators based on the ratio of bonded RUNE to the value of liquidity in the pools. 

‍

When more RUNE is bonded than the value of liquidity, rewards shift towards LPs to encourage more liquidity provision. Conversely, if liquidity exceeds bonded RUNE, rewards are adjusted to incentivize more bonding by node operators. This dynamic system helps maintain the network’s security and liquidity, ensuring that RUNE remains an integral part of the ecosystem.

‍

‍

With the introduction of Bridge Assets, the dynamics of the Incentive Pendulum have been adjusted to account for these new types of assets. Bridge Assets, unlike synthetic assets, are held outside the traditional liquidity pools and are instead stored within THORChain’s Asgard Vaults. This shift necessitated a recalibration of the Incentive Pendulum to maintain the network’s economic security.

‍

The Incentive Pendulum now considers the total value of all assets in the vaults, including Bridge Assets, rather than just the liquidity in pools. This adjustment ensures that the rewards distribution remains balanced, even as the value of Bridge Assets grows within the network.

‍

Since Bridge Assets bypass liquidity pools and are not paired with RUNE in a 1:1 ratio, additional security measures have been implemented. If the value of assets in the vaults, including Bridge Assets, exceeds the total value bonded by node operators, the network could become under-secured. To prevent this, the Incentive Pendulum can trigger a negative interest rate on Trade Accounts, effectively redistributing liquidity from Trade Account holders to Active Node Operators. This safeguard ensures that the network’s security is maintained, even as the economic dynamics shift with the inclusion of Bridge Assets.

Conclusion

THORChain’s evolution into a robust and sustainable decentralized financial protocol is evidenced by its continuous innovation, strategic adjustments, and growing user base. The introduction of Bridge Assets, along with the carefully calibrated L1 fee increase and the refinement of the Incentive Pendulum, highlights THORChain’s commitment to enhancing its platform's efficiency and security. These developments have been quite successful in 2024, driving significant increases in trading volumes and protocol revenues.

With an average of 8-10k active monthly users throughout 2024, THORChain has a claim to being a protocol with real, engaged, measurable users who find tangible value in its offerings. Unlike other projects that may struggle with user retention or rely heavily on unsustainable incentives, THORChain has proven its ability to generate genuine demand for its services. This demand is further reinforced by the growing preference for Bridge Assets over synthetic assets, the resilience in user activity despite higher fees, and the successful integration of Bridge Assets as a core component of the network’s economic model.

‍

‍

Disclaimer: This report was commissioned by Thorchain. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.