RUNE Deterministic Value and How We Can Use it to Predict Price Action in the Future

over 3 years ago (Edited)

RUNE Deterministic Value and How We Can Use it to Predict Price Action in the Future.png

In the crypto space, we often look at various assets and speculate on their future price. RUNE is different. With RUNE, there is a level of fundamental value that exists beyond simple speculation.

As assets flow into the Thorchain ecosystem and get pooled by liquidity providers, RUNE's deterministic value increases. In my last post, I gave an introduction to Thorchain (RUNE) and discussed a few of the key ideas that make it an interesting project to dig deeper on.

In this post, I'll explore exactly what deterministic value is and how we can utilize it to predict the future price and value of RUNE both as a speculative investment for the future and as a tool for dynamic, cross-chain liquidity.

Asset Price Fluctuations: Bull Markets = Exponential RUNE Value

The fundamental or "fair" value of RUNE as a crypto could be seen as 3x the value of non-native assets in the pools (non-native referring to assets that aren't RUNE). Many refer to this as "deterministic value".

Due to the security design of the Thorchain network, RUNE's total market cap will always be at least 3x the total value locked (TVL) in liquidity pools. This design relies heavily on the amount of RUNE bonded by node operators which must be higher than the value of non-native assets in pools.

The simple calculation is:

RUNE Price = (3 * Sum of Assets Locked) / RUNE Circulating Supply on Date

So how does this lead to exponential bull runs for RUNE?

Liquidity provders are pooling assets like BTC, ETH, BNB and others in Thorchain liquidity pools. During a bull run, the USD value of these assets rises.

As the value of these assets rise, so too does the value of RUNE (remember: RUNE's market cap is always at least 3x as valuable as the total non-native asset value).

During a bull market, the value of RUNE also rises due to speculation. The way I see it, this risk on environment leads to greater and greater speculation.

What happens as new investors buy RUNE because of the broader market speculation? They pool it.

What do they pool it with? Other non-native assets like BTC, ETH or BNB.

The pools increase in value and so does RUNE.

What I'm getting at here is that RUNE is designed with very specific mechanisms in place. You can only imagine the level of analysis that went into creating the various attributes of this system.

When I first learned about these different attributes, I found the algorithm-based approach to liquidity providing to be on par with something like Bitcoin's algorithm-based approach to value storage and supply & demand economics.

Price Simulations

Similar to Bitcoin, providing simple input to the algorithm-based approach can allow you to simulate the future value of RUNE.

Thorchain thrives on community-created tools like this one.

Various community tools provide different angles of analysis on the Thorchain ecosystem. The above allows you to simulate the price of RUNE under various conditions (i.e. fluctuating market outcomes and total value locked in the network).

Incentive Pendulum

The Incentive Pendulum is something that you'll hear about often when looking at the Thorchain ecosystem. It refers to a simple economic mechanism which - again - uses an algorithm-based design to change the distribution of incentives for Node Operators and Liquidity Providers.

The pendulum keeps the network balanced and safe. Thorchain can be in 1 of 5 main states:

Unsafe
Under-Bonded
Optimal
Over-Bonded
Inefficient

"These different states can be seen in the relationship between bonded Rune and pooled Rune. The amount of Rune which has been bonded by node operators, and the amount which has been added to liquidity pools by liquidity providers." - How it Works: Incentive Pendulum

Just 3 days ago, there was an adjustment to the Pendulum. You can read more about that in @jk6276's weekly Thorchain report.