Radar - Ren

Inter-blockchain liquidity for open finance

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Having inter-blockchain liquidity like having BTC representation on Ethereum has been a growing area of interest lately. Users are able to put their assets to work on expressive chains, capitalising on the rich composable dApp ecosystem that is open finance. But inter-blockchain liquidity doesn’t simply stop at Bitcoin and Ethereum. There are multiple chains that can benefit by sharing liquidity with each other. One of the projects pushing the boundaries in this area is Ren who have just announced the release of their mainnet today.

Just hours after the launch, we have ~$400k bonded value in REN tokens from Darknodes securing ~$254k of assets. This was largely driven by the Ren team which locked 23 BTC in order to bootstrap initial liquidity. RenVM will initially support the minting of BTC, BCH, and ZEC assets on Ethereum.

While Ren will no doubt be discussed at length in the coming days, let’s concisely breakdown 3 aspects of the network that deserve attention on your radar:

  • The RenVM release schedule

  • RenVM fee model

  • Burn-and-mint transactions

The RenVM release schedule

The mainnet release today is “Mainnet SubZero” - phase two of a longer rollout of RenVM. The general idea here is to release each phase gradually where, over time, RenVM requires greater active participation from the community. For example, having a greater responsibility in transaction execution for non-centralised Darknodes in the network. The end goal for Mainnet One is to have a fully sharded and decentralised RenVM network.

Right now, Mainnet SubZero still has elements of centralised control while it attempts to reach certain economic stability and test out its incentive design in the open. A semi-decentralised core of Darknodes (made up of Ren team and selected projects) will be solely responsible for consensus and execution. Darknodes that participate will still receive fees that RenVM facilitates. It is also important to note that there is also an invite-only community known as Greycode that will provide second signatures on all minting and releasing activities to further improve the safety of the system. Down the line, Greycode members will likely be voted in and out by REN token holders themselves but a formal governance model has not been set out yet.

RenVM Fee Model

Fees from transaction that RenVM facilitates is what incentivises Darknodes to support and secure the network. Specifically, they are rewarded with fees from users who transfer from one chain to another. What makes Ren unique is its dynamic fee model - it does not rely on oracle price feeds. Fees algorithmically change when demand for locking assets increases and decreases to ensure that the total value of Darknodes is always greater than the value of assets locked in RenVM (fee is currently set at 0.1% for mint and burn).

This is where it gets rather experimental. By not having any reliance on oracle price feeds, RenVM is not exposed to any oracle price feed attacks. Additionally, fast attacks (like we saw with bZx) on RenVM is simply not possible - registering as a Darknode can take up to a month to register as a Darknode and de-registering can take 2-3 months. While this all seems like a big positive, there are some potential drawbacks. Namely, Ren has to instead hardcode a valuation formula (a DCF model) to adjust fees to ensure that the total value of REN bonds is always greater than the locked value (currently 3x). The network knows what fees it is earning and calculates what a “stable” value of REN should be accordingly.

The problem here is valuation is going to be subjective - some Darknodes may have differing P/E, overheads, income expectations etc where reaching a consensus on a blanket valuation formula for REN is hard to achieve. Therefore, it will be interesting to see whether this pricing model continues come Mainnet One launch. If the fee model proves to be unviable, then a price oracle might be voted in by REN holders in the end.

Burn-and-mint transactions

When we think about the locking and redemption of assets on interconnected chains, we typically think of lock-mint and burn-release type transactions - a user locking the underlying assets to be issued with a peg which can then be burned with RenVM releasing the underlying assets back on the origin chain. However, the 3rd of type of transaction that RenVM can perform (“burn-and-mint”) is talked about somewhat less. These are the transactions that ultimately bring fluidity as well as flexibility to cross-chain exchanging.

Instead of requiring several lock-mint and burn-release actions when users want to move their peg assets to another supported chain, RenVM simply uses burn-mint transactions to achieve the same goal. Burn-mint transactions allow users and smart contracts to burn pegged assets on one host chain and mint the same amount of pegged assets on another host chain while never touching the origin chain (e.g. Bitcoin).

Considering confirmation times and transaction fees for the underlying chains, this greatly improves the overall experience for the end users while also having interesting implications for cross-chain composability. Having such a simple but dynamic transaction type will no doubt play a significant part of DeFi’s evolution in the coming months.

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