16 April 2022


Author: Chad
What is it?

THORSwap is the first multichain DEX that uses the THORChain* network to provide cross-chain swaps.

*THORChain is a decentralized liquidity protocol that allows users to exchange tokens across chains, without the need for a third party, such as a centralized exchange.

What problem does it solve?

There’s a huge variety of layer-1 blockchains that have sprung up to support unique use cases (not to mention multiple layer-2 solutions built on top of them). However, there was never an easy way to swap assets between these ecosystems.

THORChain/Swap solves this by allowing cross-chain liquidity/trading without the need to wrap assets or rely on centralized exchanges.

How does THORChain work?

THORChain acts as a vault manager that monitors deposits and withdrawals. This helps create decentralized liquidity and removes the need to utilize centralized intermediaries or rely on derivative solutions like wrapped assets.

THORChain works like a cross-chain Uniswap, where the native token $RUNE acts as the liquidity pair for each pool (ETH/RUNE, BTC/RUNE etc).

RUNE is also used to pay for transaction fees, governance, bonding collateral and validation.

How does THORSwap fit into this?

THORChain does not have its own user-facing product. In effect, THORSwap is the main trading hub for THORChain, aggregating liquidity across 7+ major layer-1 blockchains and over 25 crypto assets.

How is it going?

Currently TVL is around $1.1B, with $458m locked in the pools.

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Trading volume has been increasing steadily on both THORChain and THORSwap.

In March, THORSwap processed $563M in volume, an all time high. A standard 0.3% swap fee would have generated $1.6m in revenue, with 75% of all THORSwap revenue accruing to vTHOR holders.
The TVL is not super high, but liquidity is still capped while on testnet. Liquidity picked up sharply from March this year, despite weakness in overall DeFi TVL. THORChain/Swap benefited from the integration of TERRA (LUNA & UST).

Moat / Competition

Although THORSwap is THE main exchange for THORChain right now, there are still several competitors. It’s hard for DEX / AMMs to build a strong moat as liquidity and trading tend to flow to whoever is offering the highest incentives.

Over the long-term though, bootstrapping liquidity is not sustainable. Eventually capital will flow to the most reputable, user friendly exchange. An exchange can become a nice cash cow as the trading flywheel kicks in: More trading volume -> higher revenues -> more value accrual to community -> higher cashback fee discounts -> more trading opportunities…

THORSwap accounts for around 25% of all volume on THORChain. We expect its dominance to grow over time.

Why we are bullish on THORSwap

1 Cross chain swaps are a structural growth market

As the universe of L1 & L2 blockchains expands, there will be a growing appetite for moving assets between chains. Users will gravitate towards the best solution.

As good as Uniswap is, you can’t swap between ETH and BTC. You have to rely on wrapped tokens, like wBTC. Wrapped tokens are not native - they are not secured by the underlying blockchain.

Of course, you can trade assets between chains using your Binance account or another centralized exchange. This is possible because users' assets are pooled and your wallet is just a database entry. Not your wallet, not your tokens.

THORSwap…your wallet, your assets

  • Decentralized - no account required
  • Non-custodial - trade directly with your own wallet
  • 20+ wallets, 7 chains supported
  • Seamlessly swap across multiple blockchains - no wrapping
  • Dedicated 24-7 customer support team

2 THORSwap can outgrow THORChain / DEX Aggregator

THORSwap DEX interface has already processed over $1B+ in transactions with over 75k monthly active users. However, this is just the beginning.

THORSwap wants to become a cross-chain DEX aggregation protocol, or in other words, a one stop DeFi exchange that can grow cross-chain volume to $1 Trillion. THORSwap will not only utilize THORChain, but will also integrate additional bridges to access liquidity across all chains.

Its aggregator aims to connect to $7 Trillion-plus of monthly trade volume across popular chains by aggregating:

  • Ethereum long-tail assets with native assets on THORChain
  • Terra integration
  • More EVM chains (Avalanche, Fantom, Polygon, Aribitrum, etc)
  • Solana long-tail assets
  • IBC (Cosmos) assets

The THORSwap aggregator will be incentivized by single-sided staking (vTHOR) that accrues value from 75% of trading fees.

3 A focus on innovation and community

The more THORChain builds, the more THORSwap can offer. As soon as THORChain’s Synths feature was activated, THORSwap users were able to mint, redeem and swap synthetic assets right on THORSwap.

THORSwap user experience and its community outreach is one of the best in DeFi. The team built the very useful THORYield app allowing users to see all of their THORChain yield. It also supports the THORChads DAO, which runs the community-owned THORChad rewards platform. THORSwap supports these community projects with funding, marketing, launchpads and access to the broader community.

We work hard every day to make our customers' lives better and happier
In order to estimate the value of THORSwap and the price of $THOR, we have to make a number of assumptions. We will need to estimate: the volume that is expected to accrue to THORChain and the market share of THORSwap (TS/TC ratio).

To estimate the total volume expected on the THORChain, we must first estimate the size of the market and then estimate THORChain’s share. We need to:

  1. Estimate the total volume of decentralized trading
  2. Make an assumption on the proportion of that volume that will be cross chain
  3. Make an assumption on THORChain’s / THORSwap’s market share

  1. Decentralized Trading Volume

We can see from the following chart how new and how quickly DEX volume has grown over the past two years. Decentralized exchanges have been taking market share from traditional centralized exchanges. The DEX/CEX ratio has steadily increased from 6% at the start of last year to 12% by the end of 2021. We expect this trend to continue.

In 2021, total DEX volume for the DEX sector came in at $1.25 trillion USD, or an average of $104 billion per month. Between January and December, DEX volume grew at a CMGR (compound monthly growth rate) of 6.1%.

If we assume a similar CMGR in 2022, we estimate that monthly DEX volume will amount to $146 billion in December, or an annualized $1.75 trillion.

2 Cross-chain volume

So how much of that $1.75 trillion of DEX trading volume will be due to cross-chain swaps?

A recent study by Fabian D. on the Economics of Thorchain found that around 43% of all trading over Binance (which accounts for around ⅔ of CEX volumes) occurs between two assets from different chains.

Hence if we use a ratio of 40% as the potential cross-chain volume, we arrive at a cross-chain TAM of $703B.

3 Estimate of THORChain and THORSwap

So the TAM for cross-chain swaps is $703B on an annualized basis. This volume will be split by traditional wrapping solutions and spot trading, of which THORChain is currently the only solution. Given the obvious advantages of spot trading versus wrapping, we assume that 80% of trading volume will be spot trading. Therefore the TAM of THORChain is $563B.

While there will inevitably be competition in the coming months or years, THORChain has the early leadership and hence potential to dominate the market. If we use Uniswap’s market share of DEX volume of 80%, then annualized volume across THORChain would be $450B.

THORSwap currently has around 23% of THORChain volume. I would expect this to grow as THORSwap becomes the key aggregator, but even keeping this ratio constant, implies $103B annualized volume. ($8.5B/month).

If we assume a standard 0.3% fee, THORSwap could generate an annualized $310m by year end.

Implied valuation

The current market cap of DEX sector is $25B, with $1,400B of annualised volume. Assuming a 0.3% fee, that would equate to annual DEX revenue of $4.2B. Hence, the sector trades at 5.9x protocol revenue.

At the fully diluted market cap of $445M, THOR is trading at a 1.4x protocol revenue.

Disclosure: 3Commas Capital members may hold The Open Network (TON) and/or hold advisory roles. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only, and you should not make decisions based solely on it. This is not investment advice.
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