Under the Hood: Liquidity Pool Creation, Staging and Churning
2022-09-22 — 3 min read
Most liquidity pools on THORChain consist of RUNE and the gas assets of the integrated external blockchains (BTC, LTC, BCH, DOGE, ETH, BNB Smart Chain, ATOM and AVAX C-chain).
Additionally, blockchains like Ethereum, BNB Smart Chain (BSC) and Avalanche C-chain, have tokens (ERC-20, BEP-20 and AVAX C-chain tokens) which can have their own liquidity pools on THORChain. Anyone can create/start a liquidity pool on THORChain for any of these tokens, with the following restrictions:
- Ethereum - Besides the ERC-20 RUNE* token which is blocked, there is an additional whitelist for approved ERC-20 tokens: https://gitlab.com/thorchain/thornode/-/tree/develop/common/tokenlist/ethtokens
- BNB Smart Chain (BSC) - Current BEP-20 token whitelist: https://gitlab.com/thorchain/thornode/-/blob/develop/config/default.yaml?ref_type=heads#L198
- Avalanche C-chain - Current AVAX C-chain token whitelisted: https://gitlab.com/thorchain/thornode/-/blob/develop/config/default.yaml?ref_type=heads#L172
- LPs with tokens with taxed transactions or rebasing tokens will not be handled properly by THORChain
*ERC-20 RUNE have been fully deprecated since Jul-2023.
Requests to waitlist specific tokens can be proposed on the THORChain Developer Discord.
Pool Churning Methodology
- First, newly created pools are “Staged”, not “Active”. Every three days, there is a “Pool Churn” where the deepest Staged pool with >10k RUNE depth (total >20k RUNE depth equivalent) will be promoted to Active.
- If none of the Staged pools meet this >10k RUNE depth, then none will be promoted.
- If any of the Active pools fall below the 10k RUNE depth, these pools will be demoted to Staged.
- There is a limit of maximum 100 Active pools. Thereafter, the promotion/demotion will be a purely economic competition between the lowest Active pool vs the highest Staged pool.
- Starting v1.96 (Sept 2022), there is a Mimir setting that devs/nodes can enable; such that pools which earn less than Mimir-specified liquidity fees per pool churn cycle will also be demoted for at least one pool churn cycle.
Note: Gas asset pools are never Staged, they are always Active regardless of their pool depth.
Limitations of a Staged Pool
- One can deposit and withdraw liquidity from Staged pools, but there is no trading/arbing, thus no trading fees earned.
- There are no block rewards.
- There is a 10 RUNE tax per churn if the pool remains Staged. If this causes the RUNE value of the pool to be depleted, then the pool would be completely abandoned.
In summary, creating a new pool (or depositing into a shallow pool) is not a set-and-forget strategy. Rather, it is a part of the wider flexible design of THORChain where the Dex Aggregation path for accessing long tail assets may be more practical than maintaining small pools on THORChain itself.
Feel free to hop into the TC University Discord to chat about this, or any other THORChain questions that you may have.
Explore THORChain: Website, X, Telegram, Developer Discord.
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