RUNE is pumping, and it may be due to THORChain activating their on-chain Synthetics (synths) functionality. After the decentralized, cross-chain exchange made the announcement, RUNE went up nearly 34%.
Let’s take a look at what synths, like sBTC and sETH, are, why they may have caused this price action for RUNE, as well as determine how we can utilize them.
TL;DR
- What are synthetics?
- Why is the 50% RUNE backing important?
- What’s so good about synths?
- What this means for THORChain ecosystem
What are synthetics?
Synthetics are essentially derivative tokens of assets, which are backed by the value of other underlying collateralized assets. However, they are not to be confused with wrapped assets – there is a difference between the two.
A wrapped asset is an asset you have bridged across from one chain to another, by locking it in a smart contract. Hence the wrapped asset’s value is backed by the underlying value of the initial asset.
For example, when you are bridging ETH from Ethereum to Polygon, you end up with Wrapped ETH (WETH) on the Polygon network. In other words, WETH is collateralized by the ETH you initially locked up in the bridge’s smart contract.
This, unfortunately, means that more ETH could enter the Polygon ecosystem than is the underlying value of the Polygon network itself.
A synth, on the other hand, can be collateralized by more than one asset. In theory, this can be any digital token. In the case of synths on THORChain, they are partly backed by the liquidity pools of THORChain’s native token, RUNE, and partly by the asset itself. The ratio is 50% backed by RUNE, and 50% backed by the asset.
Synths on the THORChain network appear with an “s” in front of them. Expect to see your synthetic BTC appear as sBTC, and your synthetic ETH as sETH.
Why is the 50% RUNE backing important?
Since each synth is backed 50% by RUNE, it means that even if the synth were to grow parabolically, and go up 2000x in value, the economic security of the synth would remain intact. At the same time, the combined value of the synths on the chain is never greater than the value of the THORChain network itself.
What’s so good about synths?
Synths on THORChain have great utility as liquidity providers, as well as for people that need their transactions to be as fast as possible, like traders and arbitrageurs.
The synths can also be used to change the liquidity pool’s depth, and in turn, match the demands of the market. This could protect against supply shock.
At the same time, gas on THORChain is cheap, so trading with synths on the network is cheaper for traders. Combine that with the fact that the trades are near-instant, and it seems that it’s a no-brainer to utilize synths in this way.
What does this mean for the existing THORChain ecosystem?
If you decide to mint a synth on THORChain, you will effectively add liquidity to the RUNE liquidity pool. However, you don’t reap the yield benefits of providing liquidity to the pool yourself. Instead the rewards go to the existing liquidity providers.
In a very bullish tweet from THORChain, the team listed their roadmap while stating that they want to take the value of decentralized liquidity pools 10x higher than the value of centralized ones. It seems there is no stopping these devs, and we have said many times that you can’t have a good project without a great team.
Banter’s take
The future seems bright for THORChain and RUNE, and synths are one step forward in this project’s ambitious journey in the multi-chain future.
Synths could be a game-changer: the utility they offer is likely to bring a substantial inflow of users to the network.
We love the project, but as always, DYOR before investing!
