Op-Ed: The Case for THORChain Suspending Block Rewards
by Boone Wheeler (https://x.com/boonew)
Recent events involving THORChain’s THORFi products provide a unique chance to firmly restore TC to core principles and sound economic theory.
In particular, I will argue for TC suspending Block Rewards (BRs) for at least six months.
The only value TC has or ever had is its ability to generate cash flow via charging for cross-chain swaps and its projected future ability to do the same. RUNE’s value is based on TC’s value.
Background
BRs 100% had their place in bootstrapping the network, and served very well in doing so. It is my belief that the network is out of its bootstrapping phase, and is fully capable of standing on its own merits.
If you’re not intimately familiar with TC tokenomics, I invite you to read my attempt at explaining them here. I will assume you have done so here on out.
A key point that I make in that editorial that is worth repeating is that BRs do not create any value whatsoever. They only redistribute wealth; they do not create it.
Personally, I think this fact alone is an open and shut case for their removal. Since they do not create value, they are extraneous and only distort the market.
The first piece of my argument is understanding market reflexivity.
Market Reflexivity
Markets are forward looking, which creates a phenomenon known as reflexivity.
Let’s say the US Government is going to start buying 100 BTC every day. The first order effect of this is the straightforward buy pressure from their buys. However! The market knows the USG controls the money printer and is price insensitive. Being forward looking, everyone and their mother will start buying BTC, knowing that the USG will come in behind them and bid it even higher. Thus, the actual price impact of the USG buys are far greater than just the buys themselves.
It works the same to the downside with known future selling. People sell ahead of the known selling. (Side note: this is why I’m against any of the THORFi proposals that have deterministic selling incorporated)
TC Swap Fees Create Deterministic Buying
(Fees collected here should be understood to mean LFs)
Using the definitions of buy and sell pressure from my previous post, we can precisely determine how much RUNE buy pressure is created by Liquidity Fees (LFs) as the protocol stands now. IP is the Incentive Pendulum, currently giving the pools 62% of income.
Buy pressure:
Liquidity Fees: LF
Burn: LF x .05
Sell pressure:
LFs sold in pools: LF x .9 x IP(.62) x .5
LFs given to devs: LF x .05
Buy pressure less sell pressure:
1.05LF — .05LF — .28LF = 72% of LFs buy RUNE (under current conditions)
A TC has recently been averaging about $190k a day in LFs, which translates into $137k of daily RUNE buy pressure. Not shabby.
Now this bought RUNE goes to LPs and BPs, who presumably will take profit at some point. But LPs and BPs are sticky liquidity, and don’t withdraw super regularly. Many are happy to keep compounding.
In general in this article, since I can’t model taking profits, we’ll ignore it.
The most beautiful thing about this buy pressure is that it is RUNE price insensitive. Swappers pay their fee regardless of the price of RUNE. Constant, price indiscriminate buy pressure. The necessary ingredient for upwards price reflexivity.
Block Rewards Create Deterministic Selling
Using the same definitions, we can determine sell pressure from BRs.
Sell pressure:
BRs sold in pools: BR × .62 × 0.5
BR supply expansion: BR
131% of BR in RUNE sell pressure (under current conditions)
Putting a dollar value on that is actually a little tricky because BRs are paid out in RUNE (~25k/day), so the dollar value depends on the price of RUNE at each given block. If you wanted to determine it you could just figure out the average price of RUNE and multiply them together.
Where Buy and Sell Pressure Meet
Things are a little simpler if we denominate in RUNE. We can find a curve over the range of the IP where buy pressure and sell pressure cancel out.
So LFs (in RUNE) have to be 1.76x of BRs for the two to have no net buy or sell pressure on RUNE (under current conditions). Above the curve is net buy pressure, below it net sell pressure. Let’s call this line the Break Even Curve (BEC)
We can see here that this past Nov. was TC’s most profitable month ever, but only hit 1.13x Revenue to Expenses (roughly the same as SFs to BRs)
This shows that TC volume has yet to cross the BEC into deterministic buy pressure. Swaps currently aren’t placing a consistent RUNE bid.
Block Rewards and RUNE Price
There’s a more sinister consequence of Block Rewards being denominated in RUNE, which is that the dollar value of sell pressure increases linearly with RUNE price.
25k RUNE @ $3.50 RUNE = $114,625 sell pressure per day
25k RUNE @ $7 RUNE = $229,250 sell pressure per day
25k RUNE @ $14 RUNE = $458,500 sell pressure per day
What doesn’t necessarily scale with RUNE price is LFs, because volume has only a small direct relationship to RUNE price, if any. This increasing sell pressure is like a wet blanket to RUNE price. When RUNE goes up, the BR sell pressure gets greater and pushes it back down.
RUNE Price and TC Debt
Due to the designs of both Savers and Lending, the price of RUNE is heavily correlated to the debt TC owes. The higher the RUNE price, the lower the debt obligation and the quicker users can be paid back.
Thus, it is in every TC stakeholders’ interest to want a higher RUNE price. Aligned incentives.
However, this won’t be the case if the debt is dollarized.
Putting the Pieces Together
Because LFs are variable day to day, but BRs aren’t, the market can’t predict if there’s going to be buy pressure or sell pressure on a given day. The reflexivity effect never kicks in.
With Lending and Savers frozen, BRs are the only source of systemic RUNE sell pressure. Take BRs away, and it’s only buy pressure. Predictable buy pressure. Reflexivity inducing buy pressure. Furthermore, no more wet blanket as RUNE price rises. The sky’s the limit.
Higher RUNE price means it’s easier for TC to meet its debt obligations. Everyone wins.
The Time is Now
Because BRs dollar value scales with RUNE price, now is the perfect time to suspend them as the low RUNE price means they aren’t that valuable anyway. I’m suggesting we suspend them for six months. If for some reason this turns out to be a horrible idea, we can always turn them back on.
What Might Happen
Suspending BRs would obviously entail a reduction in yield for BPs and LPs.
For LPs, their positions likely have a ton of IL from underperforming RUNE. RUNE price going up and undoing IL will help them far more than a little extra yield.
BPs too will take a yield hit, but the idea is that price appreciation should more than compensate for it.
This said though, lower yields could cause some LPs and BPs to withdraw. I don’t think this is too likely though. Anyone who’s still here after all the recent chaos is probably in for the long haul. I am firmly convinced that removing BRs is fantastic for the long term performance of RUNE and TC.
And if some do withdraw, then they do. The market will find the proper balance between LFs and capital divvying up those LFs. Thankfully, with streaming swaps, pool depth is a lot less important for swap rates than it used to be. There’s also now $96m in liquidity locked in the pools due to Savers being frozen.
New Distribution
If we do suspend BRs, I would also want us to suspend the Burn. The suspension in BRs more than compensates for the loss of the Burn.
The 10% debt repayment would come out first, then 5% dev fund. Rewards would be split between BPs and LPs based on the IP.
Buy pressure:
Liquidity Fees: LF
Sell pressure:
LFs given to debt payment: LF x .1
LFs given to devs: LF x .9 x .05
LFs sold in pools: LF x .9 x .95 x IP(.62) x .5
Buy pressure less sell pressure:
LF — .1LF — .045LF — .265LF = 59% of LFs buy RUNE (at current IP)
$190k liq. fee x .59 = $112k daily avg. RUNE buy pressure, opposed by NO systemic sell pressure.
Conclusion
I give you TC’s bulletproof new left curve narrative: infinite price indiscriminate bid. Who wouldn’t want to own that?
