Op-Ed: An Independent Analysis of THORChain Tokenomics

By Boone Wheeler (https://x.com/boonew)

The opinions expressed here belong solely to the author and do not necessarily reflect the views of THORChain University.

The tokenomics of RUNE have gotten quite complicated. I’m going to break them all down, so people can understand all of the dynamics in play.

Overview

If you think of TC as a black box, there are three reasons capital enters it:

1. To pay for swaps
2. To get a piece of (1)
3. To speculatte on (1) & (2)

First, let’s make sure we understand in what way supply matters for price.

Circulating Supply

Tokens that are locked or otherwise unable to be moved obviously can’t respond to price. There is no price at which a locked token can be sold, nor bought. Thus locked tokens can’t impact or move the price. Therefore only circulating tokens can affect price.

It then follows that it is circulating supply and only circulating supply that affects price. If you wanted to be technical you could say that the market also anticipates changes in the circulating supply, since it understands the dynamic we’re discussing here.

Market Capitalization as proxy for demand

To make things easy, we’re going to use Market Cap as a proxy for demand/value/liquidity. If MC goes down, we will assume that our asset is being sold for other assets. If MC goes up, we will assume that other assets are being sold for our asset.

MC = Price x Circulating Supply

Therefore, it follows that:

Price = MC / Circulating Supply

We now clearly see that there are two variables that determine token price: MC (which is a proxy for market demand) and Circulating Supply, and that they have an inverse relationship to each other.

Solana

The market currently is giving us a great example of this with SOL. It’s basically sitting at the previous ATH, yet MC is double what it was then. This is because Circ Supply is also double. Twice the demand divided by twice the supply equals the same price.

BTC

3.125 BTC is minted every 10 minutes. $312,500 @ $100,000 BTC = $45M every day

In order for the BTC price to stay the same, there must be $45M more buys (demand) than sells every day. I.e. buying pressure greater than selling pressure just to maintain price flat.

Supply analysis of RUNE

To understand the $RUNE circulating supply we’re going to think in buckets (nested buckets actually).

Buckets, from most inclusive to least inclusive:

1. Max Supply
  A. Current Supply
    i. Reserve (non-circulating)
   ii. Circulating Supply
      a. Bonded Rune
      b. Pooled Rune
      c. Liquid (i.e. freely circulating) Rune

Okay bear with me, because RUNE supply has gotten way too complicated due to THORFi, which is thankfully being wound down.

Let’s start by looking at Current Supply.

Current Supply

Current supply is the total number of all $RUNE currently in existence. There are two main buckets that together comprise Current Supply — the System Reserve and the Circulating Supply.

And yes, this is the same Circulating Supply from our MC framework we developed earlier. Thus the System Reserve is by definition non-Circulating Supply.

System Reserve

You know how fresh BTC is mined every block? Those are the BTC block rewards. TC also has block rewards that serve the same purpose — to incentivize network participation — however TC created them all at once at the very beginning, and slowly doles them out over time. These future block reward tokens are held in the System Reserve. The important thing to note about the System Reserve is that it is NOT circulating and thus price indifferent.

Circulating Supply

The rest of the RUNE tokens in existence are in circulation, free to be bought and sold at will.

Even here though, there are two more sub-buckets worth considering: Bonded RUNE and Pooled RUNE. Both of these buckets consist of RUNE that has been put to work inside the system to provide security and swap liquidity. While the RUNE in them can be freely removed and sold, in practice this is less common. THORChain Node Operators (Bonded), Bond Providers (Bonded), and Liquidity Providers (Pooled) loan their liquidity to the network in exchange for a share of its profits and take on RUNE price exposure in order to do so. They are de facto believers in the protocol, with a longer time horizon, and are less likely to be swayed by short term price movements.

The RUNE in the Circulating Supply that isn’t pooled or bonded can be thought of as freely circulating, and is likely held for speculative purposes.

RUNE Supply Summary

Working backwards now, let’s review the composition of RUNE supply.

The Circulating Supply of RUNE is composed of the freely circulating RUNE, Pooled RUNE, and Bonded RUNE.

The Circulating Supply and the System Reserve together comprise the total amount of RUNE currently in existence.

h/t: @familiarcow https://rune.tools/supply

Current Supply vs. Max Supply

You might note that I wrote ‘currently in existence’ just now. This is because the amount of RUNE in existence can change. We will explore how and why shortly.

RUNE Demand

Now that we understand the composition of RUNE’s supply, let’s look at where demand for RUNE comes from.

Once again, if we think of TC as a black box, there are three reasons that capital enters it.

1. To pay for swaps
2. To get a piece of (1)
3. To speculatte on (1) & (2)

Paying for Swaps

If you hadn’t heard, THORChain offers the best swap rates in all of crypto. For this amazing service, the protocol charges a very small fee (usually .16%). However those small fees add up, and TC just had its most profitable week ever, earning $1.5M in fees.

These fees are the primary source of demand for the RUNE token. The fees are collected in RUNE, which is bought with the assets being swapped. If you recall, this is how we defined MC going up, other assets swapped for ours. These fees are then distributed to TC participants.

Earning Yield

The fees collected go to two sets of participants in the TC ecosystem, Bond Providers (BPs) and Liquidity Providers (LPs). In order to earn a share of the fees, BPs and LPs must buy RUNE and commit it to the functioning of the protocol.

This is the secondary source of demand for the RUNE token. If someone wants a piece of the income TC brings in, they must buy and hold RUNE.

Speculation

As with virtually all financial assets, there is also a speculatory premium on top of the two real sources of demand above. People will buy RUNE in anticipation of the demand from the above, hoping to sell it at a higher price than which they paid. This is a third source of demand for RUNE.

Rujira

There’s actually soon to be a fourth source of demand for RUNE, which is the imminent launch of the Rujira Network. This will be a set of DeFi primitives that can access TC’s native L1 liquidity — most notably BTC. These protocols will charge fees, half of which will be used to buy RUNE and fund TC BPs and LPs.

Capital Flows of the TC System

Okay, this is where things get really complicated.

As we covered earlier, the two factors that impact price are demand and circulating supply. TC has multiple dynamics that impact each of these factors.

Swaps

As mentioned earlier, TC charges fees for swaps. You’ll hear these fees referred to as Liquidity Fees (LF). The collection of LF is good for price (MC up, supply flat).

The first thing that happens to LF is that 5% of it is permanently burned. This burn reduces the Circulating Supply, the Current Supply, and the Max Supply. This burn is also good for price (MC flat, supply down).

Another 5% is sent to the Developer Fund. This is bad for price if they sell, good for price if they hold.

The remaining 90% of LF then gets shared between BPs and LPs. How the LF is split between the two of them is itself dynamically determined based on the relative depths of the Bonds and the Pools. This dynamic determination is known as the Incentive Pendulum (IP). Currently ~70% goes to the LPs and ~30% to the BPs.

The LF that goes to the LPs goes directly into the swap pools, where half of the RUNE is then sold for the paired asset. This is because liquidity in the pools is always split 50:50 between RUNE and the paired asset. This is bad for price (MC down, supply flat). Under current conditions, ~⅓ of LF is sold for exogenous assets, though those assets do stay in the TC swap pools. We’ll see shortly that this is good for RUNE price in its own way.

Lastly, there’s a small portion of the swapped assets that go to the Reserve for the Outbound Fee. This is good for price (MC flat, supply down). Outbound fee (less gas reimbursement) has been averaging ~1k RUNE/day to the Reserve from circulating. This only applies for L1 swaps (not Trade Assets).

Overall, the flows from swap fees are very good for RUNE price. Again, this is the primary source of demand for RUNE. It is also one of the largest flows.

Block Rewards

Block rewards are the mechanism by which RUNE goes from the Reserve to the BPs and LPs, i.e. non-circulating to circulating. Block rewards are split between BPs and LPs at the same ratio as LF (set by the IP). Block rewards are bad for RUNE price (MC flat, supply up).

Furthermore, same as with LF, block rewards that go to LPs go directly into the pools, and thus half of the RUNE is sold for the paired asset. This is also bad for price (MC down, supply flat). Another way to think of block rewards is that they transfer value from passive holders of RUNE to BPs and LPs.

As you can see, block rewards are strictly bad for RUNE price.

Block rewards have been averaging about 25.5k RUNE/day in outflows from the Reserve.

Quick Summary

Swap fees and block rewards are the biggest flows (in terms of value moved) in TC. They kind of battle over the price. Swap fees push price up (MC up, supply flat) while block rewards push price down (MC flat, supply up). These two flows are the main dynamics impacting RUNE price.

If we consolidate all of the above into System Income vs System Expenses, we get the following chart. It compares weekly income vs expenses for the last six months.

Looking at the chart, we can see that for all but six weeks of the last six months, System expenses were greater than System income. However we can also see a clear trend that SI is increasing while expenses stay roughly flat, and that TC has been net profitable each of the past three weeks. This is incredibly bullish imo.

This bears repeating: System Expenses are more or less a fixed cost — they don’t respond much to outside variables. System Income however is a direct function of swap volume. More swap volume, more income, less swap volume, less income. TC has basically become net profitable since the US election. This is a huge watershed moment for TC. If volume continues to grow, and there’s every reason to think it will, TC will surge past breaking even into big time profitability. Very few people seem to be aware that TC is sitting at a huge inflection point in its history.

If I mathed correctly, I calculate that net RUNE buy pressure exceeds net sell pressure when Revenue is twice Expenses under current conditions. This is because the Incentive Pendulum is leaning so heavy towards LPs at the moment, and half of the RUNE that goes to them and enters the pools is sold for the paired asset. To put this another way, when Income is twice Expenses there is net RUNE buy pressure even accounting for the sell pressure of RUNE entering the swap pools.

There are two more capital flows in TC that need to be understood.

Lending

TC pioneered an innovative new lending design that it ultimately decided wasn’t in the protocol’s best interest to continue. There are no new loans to be issued, but extant loans can still be closed at their owners’ whim.

Whenever a TC loan is closed RUNE is net minted and then sold for either BTC or ETH. This is bad for RUNE price (MC down, supply up).

Of note, RUNE being minted is new RUNE being created. This increases both Circulating Supply AND Current Supply. However there is a hard limit to how much RUNE could possibly be minted, which is Max Supply that we discussed earlier.

Lending is now simply a liability of the TC protocol that will be paid off over time. However if RUNE appreciates significantly against BTC and ETH, there is a good possibility that Lending will be a net benefit for the RUNE price. Furthermore, it’s a good bet that some amount of the open loans will never be closed due to lost keys or other such events.

Protocol Owned Liquidity

The last big flow of capital in TC is Protocol Owned Liquidity (POL). It’s theoretically dynamic, but in practice is static.

In short, 6M RUNE was transferred from the Reserve into a number of TC pools (MC flat, supply up). As with all RUNE that enters TC pools, half of it was then sold for the paired assets (MC down, supply flat).

POL is thus strictly bad for RUNE price. I am campaigning for POL to be ended and returned to the Reserve (MC up, supply flat) and (MC flat, supply down).

Ending POL would be equivalent to a $21.35M market buy of RUNE (RUNE @ $7.30), and then would reduce the circulating supply by ~6M RUNE. This RUNE would return to the Reserve, and would increase block rewards by ~8%. This would have a significant positive impact on RUNE price.

This can’t be done immediately though, we’ll need to wait for Synth Utilization to wind down in the pools. Furthermore, RUNEPool depends on the existence of POL. Unfortunately it seems we’ll be stuck with POL for a while.

Network Fees

TC charges a fee of .02 RUNE to process any transaction on the TC blockchain. Think of this as the TC version of gas. This RUNE is sent to the Reserve. This is a very minor flow, but is good for price (MC flat, supply down).

Game Theory of THORChain

RUNE is what we in crypto call a utility token, which is both a blessing and a curse. TC is more properly thought of as a business, rather than an asset like Bitcoin.

Hopefully by now you understand that swap volume is the key metric, the prime mover, of the THORChain protocol. It is the same business model as say Binance or Coinbase. Users pay TC fees to swap between assets.

As you should also understand now, those fees are given to BPs and LPs. In order to provide bond or pool liquidity, users must buy RUNE and loan it to the protocol. This is the secondary source of demand for RUNE.

Pool Depth

Behold, the virtuous cycle of TC liquidity!

The more volume, the more fees, the more fees, the more LPs chasing yield, the more LPs, the deeper the pools, the deeper the pools, the better the swaps, the better the swaps, the more volume. And around it goes! This has been called the TC Flywheel.

Deeper pools enable the protocol to execute swaps faster and at better rates.The better TC can execute swaps, the more people will use the protocol.

Additionally, the pools generate swap volume simply by existing whenever there is volatility in the crypto markets. TC is what’s known as an AMM, which means its asset prices only change when users make swaps through its pools. So whenever the, say, BTC price moves in the broader market, there is now an arbitrage opportunity to capture the difference in BTC price between the TC price and the external market. The deeper the pool, the more volume it takes to align the price. And crypto is the most volatile asset class in the world.

As discussed, to capture fees LPs must buy RUNE. This raises the price of RUNE. And since the pools are composed half of RUNE, the increase in price raises pool TVL. Furthermore, RUNE in the pools is RUNE not in circulation. LPs are likely to be long-term holders.

We once again see how volume is the prime mover of TC, driving both the primary and secondary sources of demand for RUNE.

The Broken Flywheel

Or at least that’s how it should work.

TC pools haven’t been classic constant product AMM pools since Nov. 12, 2022 when the Savers product was introduced. Savers changed the nature of TC LPs as I have detailed in this post. As I explain there, it is my belief that Savers broke the TC Flywheel by making LPing on TC a demonstrably poor prospect.

Thankfully, there is now consensus that this is the case, and Savers will be eventually sunset. As Savers wind down and TC pools return to classic k=xy pools, I expect the flywheel to be repaired and to kick off in earnest, fueled by massive yield from massive TC volume in 2025.

Bond Wars

TC Node Operators are the validators of the TC blockchain. They are also Bond Providers, which provide the economic security of the network. The only way to get single-sided yield on RUNE is to bond it to a node. People that understand the value proposition of TC are eager to do so. Thus there are many node operators that secure the TC network.

The design of TC forces the NOs into competition with each other. Every three days there is a node churn, where three nodes are forced to leave the network, and pending nodes may “churn in”. Every churn the oldest node, the worst performing node, and the lowest bonding (least amount of RUNE bonded) node are forced to exit the network.

There’s currently a cap of 120 nodes, which recently got hit. Thus, nodes are forced into competition to stay active and earn yield. The lowest bonding nodes must compete with each other to not have the lowest bond if they want to stay active. This competition, and bonding in general, are another large source of RUNE demand.

Like LPers, Bonders are likely long term holders of RUNE.

Speculation

The last source of demand we have is speculation. People buy an asset because they hope they can sell it later for a greater price. So why might one expect the price of RUNE to appreciate?

As I said earlier, RUNE is a utility token and TC is best thought of as a business. TC is in the cross-chain swapping business, same as Binance or Coinbase.

As I write this, TC processed .0735% of BTC spot volume compared to CEXs in the past 24 hours.

Without taking the time to lay out my entire bull thesis for TC, I’ll ask some questions and leave the rest as an exercise for the reader.

• Why has BTC become valuable?
• Do you have the keys of the coins you hold on a CEX?
• Have people lost money by trusting CEXs?
• Is the future of money centralized or decentralized?
• Is BTC likely to appreciate or depreciate in value in the future?
• How many DEXs can trade actual L1, native, BTC?
• Which is more trustworthy: code, or institutions that are subject to government control?
• Is the future of money on-chain or off-chain?
• Did you know that TC has better prices (swap rates) than any CEX?

Closing Thought

Given the explanation of RUNE tokenomics I’ve outlined, what do you think would happen to the price of RUNE if TC volume 10x’s from here? 100x?

Not financial advice, but could be worth speculating upon.