A look at the early stages of Thorchain's launch of "chaosnet" with my thoughts and experiences. At the end is some lesons for the WLEO launch. If you are not interested in Thorchain, but want to know what we can learn from it, skip to the end of this post for some key take-outs.
Thorchain slowly ramping up.
The Thorchain project is different. In these crazy DeFi times, where projects can launch, and in a couple of weeks ramp up via "vampire mining" and capture huge market share - along with "Rug-pulls" and crazy yield farming returns, Thorchain is different. Projects like Sushiswap (the most famous Vampire mining set up) are simply forking the code from a project that has been developed over time (Uniswap) changing the branding and offering a crazy yield to attract Liquidity Providers, effectively stealing market share. Codes are being launched and gaining huge capital flows in days, with zero audits and oversight. Founders are selling out on the community that springs up, lured by huge yields and greed, "pulling the rug" out from investors with a crazy risk appetite. It certainly is crazy times in the wild west of DeFi.
Thorchain is different.
There are projects out there that have been built differently to this. Over 2 years ago, the Thorchain team started work on this new protocol. It has been built from the ground up, based on extensive research, and extensively tested and audited. The team have patiently built their product, and progressed through to the current stage of development, known as "Chaosnet".
Chaosnet is open for business.
After a number of test-net environments where developments have been rolled out, bugs found, feedback received and community built, the launch a bit over a week ago of Chaosnet has seen the Thorchain project take a leap forward. This is the first practical implementation of what the team have spent two years building, using real funds, real risks and real returns.
So how is it going?
It's been fascinating to watch, and participate in the Chaosnet launch. Just prior to launch, the team published a risk assessment report, which covered in great detail all the ways investors could lose money. The technology and economics of the project is experimental, and they were very clear that the Chaosnet phase of development was high risk - funds could be attacked, lost, stolen, locked in vaults and no longer accessible, or otherwise lost. They urged people to only put in what they were willing to lose, and then they launched.
Despite all these dire warnings and possible risks, holders of RU?NE have been queuing up to add their funds to the liquidity pools. The team have a cap in place, as the system requires a balance between the amount of RUNE staked by Liquidity Providers, and Rune bonded by the anonymous nodes that run the system. This cap, despite being a very necessary safety measure to protect investor funds, has caused some community displeasure, as many people have been unable to add their assets to the liquidity pools. Eventually there won't be any caps, but for now they are required to maintain system balance.
Some early LP providers have lost money. As the caps were raised, the pools actually took funds out (from the pools) and gave them to the nodes. This is a design feature that is unique to Thorchain I think, as its economic design relies on an "incentive Pendulum" that tries to ensure system income is split 2/3rds to nodes, 1/3rd to LP's. Because the nodes were not earning their share, funds actively moved out of the pools to node operators, causing some early LP's to lose money. The team have addressed this issue by pausing the raising of caps, as new nodes with higher bonds cycle in to the system. The incentive pendulum has swung back in favour of LP's over the last day or two, and everyone seems to be happier and making a profit. The other cause of loses seems to have been Asynchronous staking and Impermanent Lose.
What is BEPSwap?
Bepswap is the first live swapping and staking front end active on the Thorchain. Here you can see how much Rune and other tokens have been staked, the volume and capital metrics at a glance, pool information and recent network transactions. In its present form, it only has certain Binance chain native assets available, and the ETH pool is a ETH Bep2 wrapped token, not native ETH at this stage. This phase is the Liquidity Bootstrapping, single chain Bepswap. Support for multi-chain is coming, with bridges being built to Ethereum and Bitcoin, to allow true cross chain swapping and LP staking.
My thoughts.
I love the measured approach that the Thorchain team have taken. In the early days, as feedback started coming in that LP's were losing money, they were initially a little defensive in tone, pointing out that they spelled out the risks and that maybe Liquidity Providers were not fully aware of what they were getting into. As people started to learn the downsides of Impermanent lose and the risks of asynchronous staking, the team were gathering data and the real world test was underway. As feedback continued to come in, the tone changed and the team investigated the causes of loses. They have responded by suspending asynchronous staking, and slowing down the cap raising, limiting in the short term growth in funds staked and deliberately skewing the "incentive pendulum" in favor of LP's. They have also rolled out a trading contest, offering a bounty to active traders to drive transaction volume and fee income for the pools. These responses are working, with most Liquidity providers reporting a significant improvement in returns and profits, and generally much happier with the situation.
I staked into the pools in the early days, with a small amount of RUNE and BNB. As with most, I experienced early loses, but with only a small amount of funds being risked, I was comfortable being part of the early experimentation. I removed we stake, did a little swap trading and made back most of my lost funds. I have since put liquidity back in to the pools and am enjoying nice returns now, which are combining with rising prices for BNB and Rune to make the investment look quite healthy.
The future.
I personally think the Thorchain project has a very bright future. The project has been extensively researched and built to be as permission-less and decentralized as possible. The incentive set up will attract capital, both from Liquidity providers looking for a nice ROI, and from potential Node operators looking to run the network and gain the node rewards. As the pools grow, the low fee nature of the network, will attract traders, swappers and arbitragers, boosting system income and sustainability.
Long term I am extremely bullish on RUNE, and hope to add to my holdings as much as possible. This is not financial advice - just my perspective, based on my experience so far and my personal risk preference. Do your own research.
Lessons for @leofinance.
As we all know, LeoFinance is heading down the Liquidity pool path, initially via wrapped Leo and Uniswap. I think there are some useful take-outs from the launch phase of Thorchain that can be applied to WLEO:
Managing stakeholder expectations is hard - everyone is looking for their moonshot, their 10x, 50x, 100x investment that makes them rich. Hopes and dreams can become unrealistic, and investors can become blinded to the risks involved - managing those expectations can be tough, but is an important part of the process.
There is a big risk of lose of value in the opening phase of the WLEO experiment. The way I see it, the early days for the Uniswap pool will mainly be Leo people getting involved. The risk here is that many may not have the matching ETH holdings to stake their LEO with. What many will do is swap some of their WLEO into ETH, via the pool, in order to add to it. The problem here is that if lots of people do this, the pool becomes unbalanced, with too much WLEO in it and not enough ETH. This would cause the price discovery that is going on in Uniswap to push the value of WLEO down significantly, as it is seeking to balance the USD value between ETH and WLEO.
IF you don't have the ETH to match your LEO holdings, be patient. If you want to, stake what you can into the pool, but don't rush to swap WLEO to ETH to get in. If lots of people do that before the pool gains depth, it will push the price down. The price discovery mechanisms of Uniswap are so elegant and simple, but if you don't understand how they work, they could crash the value of WLEO. Consider other ways to get the ETH you need, if you do have to swap using the pool, take your time. Just my 2c, but I think this is an important message.
Have fun and learn from this process, the more we analyse this launch, provide @khaleelkazi and the @leofinance team with constructive feedback, the better of we will all be in the long run.
Be prepared for loses - Impermanent Lose is a thing - Gas is a thing on ETH. Accept that, and give it time. The LEO token has gone up significantly in value over the last 2 weeks, there is a possibility that could reverse. It may moon, but it could crash. Know your own risk appetite, and adjust your involvement accordingly.
The new Leofinance landing page is a fantastic addition to create a professional site that we can direct new people to. I'd encourage Leo people to share it widely, link to it any excuse you can, and get it out there and in-front of potential users as much as possible.
Thanks for reading. Enjoy the ride everyone.
JK.