Why Protocol-Owned Liquidity Matters for THORChain

Liquidity is essential to any decentralized exchange, but there are different ways to build it. Liquidity can come from users, professional market makers, or the protocol itself through Protocol-Owned Liquidity, better known as POL.

THORChain is now expanding the role POL can play within the network. In this article, we look at what POL is, why it matters for a DEX, and how it can be used to support THORChain’s liquidity over the long term.

Where Does DEX Liquidity Come From and Why Does POL Matter?

AMMs rely on liquidity pools, but protocols can source that liquidity in different ways.

The most common model relies on external liquidity providers. Users deposit assets into pools and retain ownership of their share, meaning the protocol doesn’t control the capital supporting its markets. Liquidity can be withdrawn at any time, so pool depth ultimately depends on whether providers choose to stay.

Protocols often use token emissions or other incentives to attract that capital. This can build liquidity quickly, but it can also be expensive and temporary. If rewards decline or better opportunities appear elsewhere, liquidity can move with them.

POL offers a different approach. Instead of relying entirely on external providers, the protocol owns part or all of the liquidity in its pools.

For an AMM, this matters because deeper liquidity generally means lower price impact and better execution for traders. POL also gives the protocol more control over where capital is deployed, allowing it to direct liquidity toward the markets where additional depth is most valuable.

Over time, this can create a more durable liquidity base. Rather than continually paying to attract capital it doesn’t own, the protocol can build liquidity positions that remain under its control and continue supporting its markets.

How Protocol-Owned Liquidity Works on THORChain

THORChain began laying the foundations for its current POL system with v3.18. The upgrade introduced a dedicated POL Reserve and made it possible for a configurable share of THORChain’s System Income to be redirected into that reserve and used to build protocol-owned liquidity.

v3.20 expanded this by making the system’s main controls operational. Node Operators can now determine what percentage of System Income is allocated to POL and which assets are eligible to receive it. These parameters are not hardcoded and can be adjusted over time through THORChain’s existing Mimir governance system.

RUNE held in the POL Reserve is gradually deployed into eligible liquidity pools, with allocations taking place every block. Every three days, THORChain reassesses those pools based on fee activity relative to liquidity depth, directing new capital toward the highest-scoring market until the next assessment.

Once deployed, that capital becomes part of THORChain’s liquidity base and begins supporting the pools it is allocated to.

More Control, Deeper Liquidity, Better Execution

POL gives THORChain another way to strengthen the liquidity behind its core product without relying entirely on outside capital.

By directing part of System Income into protocol-owned positions, THORChain can gradually deepen its pools, improve swap execution, and retain more of the liquidity supporting the network under its own control. In turn, stronger liquidity can make THORChain more competitive, help attract additional trading activity, and ultimately support higher protocol revenue.