1/ One easily overlooked quality about Thorchain’s network of LPs is that they themselves are agents in the market place (as facilitated by swappers and arb bots). The way that agency expresses itself during a market sell-off is rather interesting.
2/ Perhaps we just saw a great example in the past 48 hours.
A generic scenario: BTC sells off, and alts, because they are less liquid sell off worse. Imagine on the initial downward impulse, RUNE sell off the worst of all the significant Thorchain LP tokens.
A generic scenario: BTC sells off, and alts, because they are less liquid sell off worse. Imagine on the initial downward impulse, RUNE sell off the worst of all the significant Thorchain LP tokens.
3/ Not an unreasonable assumption because it has the smallest market cap.
The LP balances are an expression of relative price and don’t change until swaps take place.
The LP balances are an expression of relative price and don’t change until swaps take place.
4/ If RUNE sells off more, to an arb bot, it’s a great chance to buy cheap spot RUNE, swap it for LP tokens, then sell those tokens for more RUNE.
More generally, if RUNE drops faster than the LP tokens, all of a sudden it’s as if the nonRUNE TVL bids for spot RUNE.
More generally, if RUNE drops faster than the LP tokens, all of a sudden it’s as if the nonRUNE TVL bids for spot RUNE.
5/ The effect more granular than that and potentially quite significant.
For the sake of discussion, let’s imagine Thorchain has 20 well capitalized LPs, the market corrects and RUNE drops the most. LPs exist to sell winners and buy losers.
For the sake of discussion, let’s imagine Thorchain has 20 well capitalized LPs, the market corrects and RUNE drops the most. LPs exist to sell winners and buy losers.
6/ So all 20 pools are selling our their tokens to buy RUNE. Technical, bots are doing this, but easier to imagine it’s the pools themselves.
So at first, all 20 LPs effectively have a spot bid for RUNE.
So at first, all 20 LPs effectively have a spot bid for RUNE.
7/ That idea makes it easy to imagine that pretty quickly, there is a limit to RUNEs underperformance.
In fact, it’s almost a mathematical inevitability that one of the LP tokens will be underperforming RUNE. What does that means?
In fact, it’s almost a mathematical inevitability that one of the LP tokens will be underperforming RUNE. What does that means?
8/ Instead of have 20 LPs buying RUNE, there are 19 LPs buying and 1 selling, a net 18 LPs buying RUNE. The net bid for RUNE is lower, but still RUNE is bid, and it’s underperformance likely lesses still.
9/ This process of cycling LPs between buying and selling RUNE will dampen RUNE’s underperformance. And noteworthy is the fact that several pools are stable-coin pools. The biggest and most sustainable bids will come from those pools during sell-offs.
10/ If RUNE drops 20% relative to cash and if the stable coin pools are large, those will be significant and persistent bids. And as I noted earlier, LPs exist to sell winners and buy losers so they would sell lots of cash to buy lots of RUNE.
11/ Does this idea track with how RUNE trades during selloffs? The price action during the past 48 hours suggests as much.
One of the emergent properties of RUNE is that it may be a low beta token relative to BTC / ETH.
One of the emergent properties of RUNE is that it may be a low beta token relative to BTC / ETH.
12/ Certainly, as Thorchain amasses capital - particularly stable coin capital - it’s reasonable to expect this phenomenon to become more noteworthy.
Won’t it the limit the upside of RUNE? In a very hot market when every other token is surging - very likely.
Won’t it the limit the upside of RUNE? In a very hot market when every other token is surging - very likely.
13/ But over time, the value of RUNE will be a function of the nonRUNE TVL in the Thorchain network. That growth should be massive.
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