Cryptocurrency enthusiasts often tout the benefits of decentralized finance (DeFi), which seeks to remove intermediaries from financial transactions and bring financial services to a broader audience. One significant limitation of DeFi, however, is that most decentralized exchanges (DEXs) are built on a single blockchain network. This creates a silo effect where users are limited to trading only assets on that network, which reduces liquidity and market efficiency.

THORChain is a cross-chain liquidity network that aims to solve this problem. In this article, we'll dive into what THORChain is, how it works, and what sets it apart from other decentralized exchanges.

What is THORChain?

THORChain is a decentralized liquidity network that enables trustless, non-custodial trading of cryptocurrencies across different blockchain networks. It was launched in April 2019 by a team of developers led by Rune Christensen, the founder of MakerDAO. The goal of THORChain is to create a truly decentralized and borderless financial system that is open to anyone, anywhere, regardless of their geographic location or the blockchain network they prefer.

THORChain operates as a network of liquidity pools, each of which contains a specific cryptocurrency from a particular blockchain network. For example, one pool might contain BTC, while another might contain ETH, and so on. Users can trade their cryptocurrency assets by swapping them between pools in a trustless and decentralized manner.

How does THORChain work?

THORChain is built on top of the Cosmos blockchain, which enables interoperability between different blockchain networks. To facilitate cross-chain trades, THORChain uses a combination of atomic swaps, threshold signatures, and TSS (threshold secret sharing) technology.

Atomic swaps allow two parties to exchange cryptocurrencies without the need for a trusted intermediary. When two users want to swap their assets, they lock them up in a smart contract that executes the trade automatically once certain conditions are met. This eliminates the need for a centralized exchange, which reduces the risk of theft or loss of funds.

Threshold signatures and TSS technology provide additional security for THORChain's liquidity pools. In a threshold signature scheme, multiple parties must come together to sign a transaction before it can be executed. TSS technology extends this concept to allow a group of nodes to collectively sign and execute a transaction, without any one node having full control over the transaction. This reduces the risk of a single point of failure or a malicious actor compromising the network.

To facilitate trades, THORChain's liquidity pools are incentivized through a network-wide token called RUNE. Users can stake their RUNE tokens in the liquidity pools, and in return, they earn a share of the trading fees generated by the network. This creates a self-sustaining ecosystem where users are incentivized to provide liquidity to the network, which in turn drives more trading volume and liquidity.

What sets THORChain apart?

THORChain is not the only cross-chain liquidity network in the market, but it does have several unique features that set it apart from other decentralized exchanges.

Firstly, THORChain is completely decentralized and non-custodial. This means that users retain full control over their assets and don't have to trust a centralized exchange to hold their funds. This reduces the risk of theft or loss of funds, which has been a significant issue for centralized exchanges in the past.

Secondly, THORChain is designed to be truly cross-chain, which means that users can trade assets from any blockchain network that is supported by the network. This creates a more inclusive and accessible financial system that is not limited by the technical limitations of a single blockchain network.

Thirdly, THORChain's incentive model is unique in that it rewards users for providing liquidity to the network, rather than