$RUNE- A Deflationary token?
$RUNE is the native token of the THORChain ecosystem and provides the financial incentive demanded to secure the network economically.
If we talk from a tokenomics point-of-view, $RUNE really has proved itself to be a solid project. The fundamentals surrounding $RUNE are really great and the project aims at maximum participation from holders and encourages them to contribute to the THORChain Liquidity Pool.
Keeping all that aside, how does $RUNE set a path to become a deflationary asset? Lets dive in…
$RUNE becoming a deflationary asset has a lot of to do with THORfi on THORChain. I will not be going in-depth, but will try and touch upon the more integral stuff that our article aims to talk about…
So unlike the other trade execution methods, THORChain does not use Limit Order Books to execute trade between buyers & sellers, but instead focuses on Continuous Liquidity Pool (CLP). CLP is super integral to the working mechanism of THORChain and offers the following benefits:
- Providing unending liquidity to all assets within the THORChain ecosystem
- Provides users access to the best prices on assets while executing trade without having any reliance on centralised 3rd parties
- It enables pool prices to be approximately close to prevailing market prices
- Scaleable to liquidity demand fluctuations without interrupting the network and asset trading
There is more mathematical madness to the whole mechanism of how CLP is derived and how it functions, but honestly it is absolute hardcore algebra & I am not someone who is great at maths 😂
So coming back to the $RUNE on its road to deflation discussion, we will first touch upon THOR.USD, a stablecoin pegged to the $ within the THORChain ecosystem. There is no official coin ticket yet, like USDT or UST, so we will be referring to as THOR.USD only.
THOR.USD is an algorithmic stablecoin similar to Terra’s $UST. The working mechanism is also identical as far as minting goes. $RUNE is burned to mint THOR.USD and THOR.USD can be redeemed against $RUNE. This burning and redeeming process incurs a small fee, which enters a USD savings vault.
So $RUNE becomes deflationary with THORfi in the following ways:
- Through the USD savings vault
- THOR Lending & Savings
- User can use their position within their Liquidity Pool on THORChain as a collateral for a loan
- The yield earning through the Liquidity Pool is forsaken with the above process
- In return the user is awarded with THOR.USD
- This process leads to RUNE being minted and swapped for THOR.USD
This is where Collateral Ratio (CR) comes in. The amount of THOR.USD a user receives against their Liquidity Pool position is directly dependent on the existing Collateral Ratio at the given time.
if RUNE is minted for THOR.USD during the loan process and new RUNE enters circulation due to the minting, how is then RUNE a deflationary asset? 🤔 Now you must be confused right? Let me explain…The maths behind this working mechanism is that the more number of loans are taken, the Collateral Ratio increases. This increase has a direct impact on the number of RUNE minted, the relation is inversely propotional.
Higher the CR, Lesser the number of RUNE minted for new loans
THORfi will be introducing single asset foccused vaults. Users can deposit Layer-1 assets into the vault and earn yield payout in the same asset only. So, if a user deposits Bitcoin into the vault, they will also be paid the yield in Bitcoin instead of another asset. Simple.
This yield is paid from the USD vault we spoke about previously. The Liquidity Provider collateral that a borrower forgoes when taking a loan.
The whole process works in the following way:
- The layer-1 asset gets swapped into RUNE
- The minted RUNE is burned and the corresponding Layer-1 asset is minted
- This burning again decreases the RUNE supply
So instead of RUNE becoming directly deflationary in nature, the deflation of RUNE will depend upon the number of Loans taken out on THORFi and a consistent increase of Collateral Ratio. Furthermore, users should also be staking their Layer-1 assets on the platform so the RUNE burn rate increases.
It is not a very straightforward process, but this kind of complex education is something that really keeps me motivated in crypto and explaining it to my crypto community!
A huge thank you to CoinDCX for giving me this opportunity to write such a detailed report and be a part of the #CoinDCXpathbreaker program, enabling me to share such knowledge with everyone in the crypto space.