Op-Ed: The Case for Repurposing THORChain’s Burn
by Boone Wheeler (https://x.com/boonew)
The only reason THORChain and $RUNE have value is because TC generates revenue (users are willing to pay fees to use the protocol). TC’s revenue = TC’s value. Herein I will argue that there are better uses of TC’s current revenue than the Burn to increase TC’s future revenue.
History of the Burn
TC mainnet was launched with Block Rewards (BRs) to bootstrap the protocol and encourage participation in it. These BRs made RUNE an inflationary token. BRs were a large drag on the price of RUNE and functionally transferred value from passive RUNE holders to the primary participants in the protocol — TC’s Liquidity Providers (LPs) and Bond Providers (BPs).
About a year ago some community members successfully advocated that a portion of TC’s revenue be Burnt. They claimed that this would support the RUNE price. This was sort of true, but in my view was largely confused. Yes, burning RUNE reduces the supply and thus is upwards pressure on the price, but the deflation of the Burn was a small fraction of the inflation of BRs. The Burn was like bailing water from a sinking boat with a teaspoon (reducing RUNE supply) while BRs were a gaping hole flooding the boat with water (inflation). The tiny bail helps, but the flood overwhelms it, causing the boat (RUNE price) to sink.
The amount of revenue that the Burn burns is variable, controlled by a mimir vote of the Node Operators (NOs). It was initially set quite low, but after a few months was raised to 5% of TC’s earnings.
I had long advocated for the reduction or removal of BRs, and supported the Burn (and increasing it to 5%) because anything that reduced RUNE inflation was a step in the right direction in my book. Without addressing the inflation of BRs, however, the Burn was just a meme.
This chart shows past revenue (fees collected by TC) vs. expenses (Block Rewards). The Burn was 5% of the green bar and we can see that it was completely overwhelmed by the amount of BRs. In terms of actually reducing the inflation of RUNE the Burn was a joke as long as there were BRs. The introduction of the Burn did not make RUNE deflationary.
The ThorFi Collapse
This past January ThorFi infamously collapsed. During that chaos with everything up in the air, I successfully argued that TC should suspend BRs. This ended the inflation of RUNE, and with the 5% Burn still in place RUNE actually became slightly deflationary — which is certainly a good thing!
But the elimination of BRs also completely changed the calculus of the Burn. BRs made up a huge portion of the income paid to LPs and BPs varying from 50–70% (depending on volume). Thus, the 5% Burn was only 1–2% of participant income. With BRs gone the Burn now consumes a full 5% of TC’s income, which is a significant amount!
Is the Burn the best use of this flow?
I am arguing that with BRs gone, TC should reconsider the usage of its revenue stream that is currently going towards the Burn. It is my position that there are far more productive uses of that capital flow.
What does the Burn actually accomplish?
Let’s first examine what the Burn actually does:
TC makes its money by charging its users (10bps for a double swap) whenever they swap between tokens on TC. This fee is collected as RUNE. This means that every swap generates a little bit of buy pressure on RUNE. If a user swaps from BTC to ETH, a small portion of that BTC is swapped to RUNE and collected by the protocol. This RUNE is then distributed as shown above.
The 5% that goes to the Burn gets burnt, meaning that instead of going to BPs and LPs it is forever removed from circulation. This ever-so-slightly reduces immediate sell pressure on RUNE insomuch as half of the RUNE that goes to LPs is immediately sold for the paired assets in the pools. We’re talking half of a quarter of 5% so a 0.625% reduction in the amount of revenue that is sold for paired assets. The Burn does not create any additional buy pressure — the RUNE that is Burned has already been bought off the market and collected as fees. The main benefit of the Burn on the RUNE price is that it reduces future selling. LPs and BPs will presumably sell their earnings at some point in the future and the Burn reduces this future selling by 5%. Reducing the circulating supply of RUNE is unambiguously good for the RUNE price. But the real question is how good for the RUNE price is the Burn?
Price Impact of the Burn
To make things simple let’s pretend that the Burn is a simple market buy (even though as we just saw it is not).
The Burn has averaged $2.65k/day over the past month. RUNE averages at least $100M in daily trading volume. A $2.65k buy into $100m volume is meaningless; less than noise.
So far the Burn has Burnt 800k RUNE, or 0.2% of the circulating supply. We can say that the Burn has increased the RUNE price by 0.2%. Incredible! And yes, of course this will increase over time, but I think we can find far better use of this capital. Over the last 30 days we Burned on average 2k RUNE a day. That’s 730k RUNE annualized, or another 0.2% of the circulating supply. Five years of the Burn equals 1% reduction in supply and a 1% increase in RUNE price. Wow! Doubling TC’s revenue means that instead of taking five years to increase the price of RUNE by 1%, it only takes two and a half…
It is further worth noting that less than half (48%, see above) of circulating RUNE is in the protocol (Bonded and Pooled). Since the Burn benefits RUNE holders on a pro rata basis this means the price impact of the Burn benefits simple holders more than it benefits participants who are actually contributing value to the protocol. Only 33% of the value of the Burn increases the Bond. Only 8% of the value of the Burn increases pool TVL. On net, the protocol is only benefitting from 41% of its spend on the Burn. Very Inefficient!! One might even be tempted to say stupid.
Repurposing This Flow
My argument is simple: we should do something less stupid with this 5% of revenue. There are of course infinite possibilities, but I think two primary ones make the most sense. Again, the metric that we’re interested in increasing is TC’s revenue. My recommendation is that we redirect this flow towards some combination of Marketing and Protocol Owned Liquidity (POL).
Marketing
Marketing should be pretty self-explanatory. More users = more revenue. Kenton Teows (@KentonC137) has been brainstorming on how to most efficiently market TC and I think should be trusted with spending what he thinks is appropriate to do so up to the 5%, at least on a trial basis.
This Marketing spend would be RUNE sell pressure. But well worth it imo.
Protocol Owned Liquidity
TC has always had a chicken and egg problem with liquidity. Low liquidity means low volume/revenue and low volume/revenue means low liquidity. ThorFi was an attempt to solve this problem, but clearly was not the right solution.
As I touch on here, LPing is currently broken on TC. Even in the unsynthed pools, LPs don’t get enough yield to make it worth their while to deposit. Essentially TC isn’t earning enough revenue to incentivize both BPs and LPs and has chosen to incentivize BPs at the expense of LPs.
This is actually okay for TC because of POL. In the ThorFi collapse TC “nationalized” all of the assets of Savers users and made this POL, and this trapped liquidity is what allows TC to remain functional. The only reason TC exists today is because of POL.
TC Should Lay Some Eggs
My proposal is simple. TC should take the portion of this flow that isn’t spent on marketing and lay some eggs — and by this I mean solve the chicken and egg problem by seeding pools with POL. There are many benefits to TC for doing so.
First, it’s simply more than twice as efficient for TC. Instead of the protocol benefitting only 41%, a full 100% of this flow would increase TVL (which makes swaps faster/more efficient and earns more revenue). It would also build a permanent warchest for TC to fall back on should it ever need it.
Second, while the price impact of the Burn on RUNE is negligible, growing a new pool by $79k in depth a month is not. If TC had funneled the last 30D of burn into the new $XRP pool it would be 42% deeper. This makes it significantly more efficient at swapping. Repurposing the Burn to POL transforms this flow from negligible to meaningful, a 0 -> 1 improvement.
Third, this would mean that TC is buying other protocols tokens and locking them away forever. This is a fantastic selling point for ingratiating ourselves with new chains’ communities. “We’re burning your token for you”
The implementation could be very simple. There could be a new mimir that would indicate which pool this flow deposits into. Nodes would still be able to adjust the amount of this flow via current mimir (i.e. turn it off if they want).
With TC adding a bunch of new chains and pools this year, I think this is a far better use of this flow than the Burn. Some people on X have suggested that this POL forgo its yield, but I don’t agree with this take. In my opinion, this POL needs the yield in order to hold its value against IL and remain productive for the protocol.
The Downside
The downside to my proposal is that it does reduce the price impact of the Burn by half. But as I’ve hopefully convinced you above, the price impact of the Burn is almost negligible so this doesn’t really matter. And even still, there is still net buy pressure on RUNE. Like the Burn, this POL would never be sold*.
*Other than the natural “buying” and “selling” of a CPAMM pool.
Conclusion
The Burn as it stands is like a stock buyback, which is great when you have nothing better to spend your money on. TC has a better thing to spend its money on — growth. I think that Marketing and re-investing its revenue into its own TVL are far more valuable uses of TC’s income at this juncture than is the Burn.
