Caution: The valuation models are for educational purposes only, they offer very limited actionable information. As of writing, I do not own REN but this could change in the future.
Introduction
The Ren project is 3 ½ years old and launched in the early bear market of 2018. Ren conducted an ICO and raised $28.9m for 56.5% of the maximum REN tokens. The project is backed by Polychain and FBG capital. The project has gained a significant user base and has remained relevant even through pivotal changes in the project scope.
The project was initially focused on the development of a decentralized protocol for cross-chain trading. A technical approach was to develop a dark pool orientated solution to cross-chain asset exchange, the team pivoted their development roadmap by eventually focusing their distributed system to allow for detailed interoperability beyond moving assets through tokenization.
Through the lifecycle of the tokenized BTC market, the Ren core team has been extensively involved from the beginning. Having been a partner in the launch of wBTC and also Ren’s native renBTC, a more decentralized solution in comparison.
Tokenized BTC has experienced growth and user adoption over the last two years largely attributed to the developments in DeFi, by allowing users to leverage BTC in the decentralized markets. Fundamentally enabling investors to earn a yield on BTC investments.
In this report, we would explore the current standing of the project and also determine potential opportunities for the project and those that have invested in the REN token.
What is RenVM?
The Ren virtual machine (RenVM) is a decentralized custodian that can custody private keys. By being operationally able to custody multiple keys from multiple blockchains RenVM is able to move value across networks, this is essentially done by locking assets (BTC) on one side (Bitcoin) and concurrently issuing tokens (renBTC) on the target blockchain (Ethereum).
Minted Ren tokens hold a claim on the locked assets, where the price is largely maintained by arbitrageurs. The current product offering and utility are to offer bridges for cryptocurrencies (BTC, BCH, ZEC, DOGE, DBG, FIL, LUNA) to move to DeFi enabled smart contract chains such as Ethereum, Binance Smart Chain and Solana, to name a few. To date tokenized BTC (renBTC) on Ethereum is by far the most used bridge and is primarily used to allow for capital utility.
RenVM uses an internal ledger to allow for the permissionless cross-chain transfer of assets that can be used by any application.
Types of tokenized Assets
Several approaches have been taken in the past to create tokenized assets. Each offers different user experiences and risks. In this report, BTC will be used as the reference asset.
Centralised
A centralised entity custodies BTC and offer tokenized representation to a 1:1 claim of the underlying. Clients to the custodian have to KYC and create accounts to be able to mint and redeem tokens. Tokens are accessible on secondary markets without KYC.
wBTC is a centralised solution that is the market leader with 76% dominance. The token is issued by BitGo through regulated merchants, BitGo is a renowned crypto custodian.
This approach incorporates counterparty risk in the form of a centralized entity’s ability to safeguard and willingness to honour the redemption of assets under custody.
Decentralised
Several decentralized solutions exist with varying approaches. The most common approach historically has been to exchange control of assets between different parties and is known as atomic swaps, atomic swaps have proven a poor user experience. In comparison, RenVM takes a custody focused approach. The approach is similar to that of centralised solutions in the sense that a claim on the custodied asset is issued natively to the target blockchain. The process of custody on the other hand differs as the method is decentralised.
renBTC is the market leader in terms of decentralized solutions and third in all types. As of writing the network is in control of 17.4k BTC, which is roughly 6% of the total tokenized BTC market size.
In comparison with counterparty risk, decentralized solutions introduce higher degrees of technological risk.
Synthetic
The third type is synthetic assets, they are technically not tokenized BTC but rather tradeable derivatives that track the monetary value of BTC. sBTC is the most relevant example.
Synthetic assets are minted natively on the target blockchain. The infrastructure is not based on interoperability technology, but rather on reliable oracle data and overcollateralized positions that are could be liquidated on decentralized exchanges to ensure soundness.
Network Design
From a technical point of view, RenVM is an interoperability software solution that requires a trustless network of nodes that process transactions with zero knowledge of the transaction details. The protocol makes use of a Tendermint based Byzantine fault-tolerant network that is implemented to achieve consensus between nodes. Consensus is required to ensure the decentralized custody of digital assets.
The consensus mechanism is combined with secure multi-party computational algorithms to allow for a zero-knowledge processing layer on the network. A zero-knowledge based approach to computational work is necessary for network nodes to be able to jointly custody and process transactions without exposing any wallet balances, transaction amounts and most importantly access controls of the wallets to the node operators themselves. More specifically the RZL MPC algorithm is used, which can generate and manage ECDSA private keys without ever exposing them.
RenVM fundamentally combines a decentralized network of custodians with digital safety boxes that shield the custodians from the assets. A custody approach where users are able to interact with multiple applications, multiple assets, and multiple chains with only one transaction.
RenVM has taken a simplicity focused design consideration to interoperability by focusing on access control to several blockchains. In other words by means of ensuring safe custody of control rather than creating blockchain specific compatible infrastructure.
Darknodes
The network is maintained by staked nodes that are referred to as Darknodes in the RenVM ecosystem. Darknodes have to bond 100k of the network’s native token REN to participate in the network. Nodes are bonded to prevent malicious behaviour or any action that results in the loss of funds.
For their services, Darknodes are incentivized by toll fees billed to users that want to move assets cross-chain via Ren’s bridges. The fee portion is the critical part of RenVM’s revenue model and is paid in the transported asset.
Shards
To achieve a zero-knowledge processing layer, the Darknodes are organized daily into random shards. Shards are non-overlapping groups that work together for the duration. Shards use the combined computational power to generate private keys through the RZL MPC algorithm. This operational process allows the Darknodes to custody and create assets in a trustless manner.
Each shard consists of a relatively large set of more than 100 Darknodes and consensus is required between at least a third of them for the shard to transmit and execute transactions.
Sharding offers security benefits as well. Malicious actors require control of a larger portion of the network to execute Sybil attacks, the fragmented computation aspect means that >⅓ of the nodes would have to collude, which comes as a benefit thanks to the randomization attribute. Bribery is also difficult to achieve as collusion with anonymous actors is required in a short period before shards are reshuffled.
Road to decentralization
RenVM is still in the process of decentralizing its infrastructure. In terms of the roadmap, the project is in the sub-zero centralized phase with Darknodes operated by known community members and the inclusion of Greycore. Greycore is a shard that manages the RenVM operational process through oversight and second signage for actions initiated by the standard gateway shards, these included minting and burning tokenized assets. The purpose of the Greycore shard is twofold. Firstly, guaranteeing the safety of assets under custody and secondly, guaranteeing the uniform randomness of shard selection by generating secure random shard groups.
The decentralization of nodes is planned for the first quarter of 2022, where any actor could acquire a Darknode and contribute to the operation process of the network without oversight.
Host-to-host
In the current phase Ethereum, Solana, Avalanche, Fantom, and several other smart contract chains are only able to receive assets cross-chain. Host-to-host is the final upgrade to the core RenVM codebase and is expected to transition from the test environment to a live state very soon. The upgrade would allow users to send smart contract blockchain native cryptocurrencies (ETH, SOL, FTM etc.) and tokens (ERC20, SLP etc.). Essentially the upgrade allows users to send value from one DeFi ecosystem to another seamlessly.
From the August Development Update:
“Host-to-host transactions are the last major feature on the roadmap for the core RenVM protocol and will allow for some exciting new use cases in and of itself, but it also opens the way to something bigger. With the core protocol complete, and decentralisation well underway, the core team will begin on a new roadmap for RenVM that expands its capabilities even further.
The core team is now investigating and designing some new use cases that would massively benefit from decentralised and autonomous private keys. These new use cases will guide the design and implementation of a generic “application layer” on top of RenVM that can be used to build new and exotic applications that can make use of decentralised and autonomous private keys for more than the transfer of assets between chains.”
REN, the token
REN is the native token of the RenVM protocol. The token is used as a bonding asset which is necessary (100k) to run a Darknode.
A native asset is required
- To ensure that as the utilization of the network grows and the subsequent opportunity of maintaining a Darknode increases the bonded asset also appreciates. This is achieved by bonding an asset that is native and aligns with these mechanisms. If for example ETH is used as a bonded collateral a situation could occur where the opportunity-cost ratio drastically changes and thus increase attack profitability.
- To be able to deliver on a full interoperability solution. If RenVM becomes the centrepiece in a wheel of blockchains it is necessary for a native bonded asset.
The maximum supply of REN is 1,000,000,000, and all of these are currently unlocked and in circulation. This translates to a maximum of 10,000 Darknodes in the network. Only 18% of REN is currently bonded to Darknodes. At current prices, this translates to $194,700,000 of bonded capital.
REN follows a simple value accrual model where all fees captured by the system is paid out to Darknodes as a portion of the transferred asset. Price appreciation helps the security of the network since you have to accumulate REN to control a portion of the Darknodes to attack the network.
RenVM roadmap
Interoperability is a broad concept, and in the case of Ren interoperability to date has meant the ability to migrate assets cross-chain. This is an important aspect but forms only a part of true interoperability that edges to seamless unlimited cross-chain interaction.
The Ren team has made it clear that their focus would shift to becoming a full-service interoperability solution and see RenVM at the core of a network of blockchains.
The team has been hard at work setting up their simple, but flexible, interoperability infrastructure, but are actively working towards implementing a layer between the blockchains that they service. A layer that is an ecosystem in its own right, transforming the role that RenVM fulfils.
From the August Development Update:
“These new use cases will guide the design and implementation of a generic “application layer” on top of RenVM that can be used to build new and exotic applications that can make use of decentralized and autonomous private keys for more than the transfer of assets between chains.”
The project is gearing itself to be able to capture a significant portion of the market as operations and value become cross-chain enabled. We are already seeing a significant flow of capital from the Ethereum DeFi ecosystem to other L1’s and L2’s. If the broader DeFi market is to operate cross-chain, interoperability would become an increasingly attractive opportunity as value has to transfer over bridges.
Source: DeFiLlama
The Ren project was acquired in early 2021 by Alameda Research. An important company to the Solana ecosystem. The Solana blockchain has spent a significant amount of effort to drive assets and adoption over the last year. It is evident that Ren would play an important role in achieving this and confirms the change in direction by the Ren development team.
Competitive advantage
The Ren ecosystem has a significant advantage in terms of adaptability over most competitors because of the architectural design considerations. A custody based approach to interoperability allows minimal integration from external networks. Fundamentally RenVM is only a user of other blockchains that interacts with them in their language and process. This is in contrast to most true interoperability solutions such as Cosmos that require the adoption of their Inter Blockchain Communication tool that facilitates communication.
The simplistic design has limitations. To ensure adoption Ren has to capture less complex use cases. This should be approached by leveraging the current market-relevant position of renBTC.
The token mechanics the manage the REN token offers extremely clear value accrual in any interoperability based application, this is a strength in community development that Ren has over several competitors.
Valuation Approach
In an attempt to value REN we have two different approaches. This is because we have to take into account that the RenVM project scope has evolved considerably over the last two years while still gaining traction as a tokenized BTC solution.
The first approach considers the current position of a decentralized tokenized BTC protocol. The second framework offers an approach to modelling RenVM as a market-leading full interoperability solution.
Tokenized BTC
In determining the value of a BTC tokenization solution we could utilize a relative valuation approach or one that is based on protocol revenue.
For a relative approach to valuing RenVM the best approach is to determine if the market has any acquisitions.
In May 2021 BitGo was acquired by Galaxy Digital for $1.2b. We have to consider the fact that only a quarter of BTC that BitGo custodies is tokenized. If we consider the market capitalization of REN ($1.08b) and the amount of tokenized assets, one could easily conclude that REN is overvalued from a relative point of view. An investor should also consider that REN has appreciated 273% over the last year, but BTC tokenized has dropped by -34%.
An alternative approach is to determine a reasonable value of REN based on protocol revenue as earned by Darknodes.
Based on fees collected over the last couple of weeks we can calculate an estimate for annualized earnings by protocol. We also assume that revenue would flow directly as net income to token holders that have their REN bonded in Darknodes. Historically the amount of REN bonded has been relatively low, as of writing only 18% is bonded and thus earning protocol fees. This is likely to change in the future as the protocol becomes more decentralized.
By assuming a conservative PE ratio of 30, which is in line with high growth, mature, public companies, and a constant bonded ratio. A fair valuation for REN is $2.29
True Interoperability
It is extremely difficult to value true interoperability as the largest consideration is the unhindered flow of all things between isolated ecosystems, ecosystems that are currently only in development.
An approach to such a valuation would also involve modelling a transaction volume through the RenVM based on asset transfer fees. This however forms only a part of what is to be considered for interoperability and neglects the benefit of communication and direct interaction.
Conclusion
As a long-standing project, Ren has early on gained a respectable market share through the deployment of renBTC, leading decentralized solutions. One could easily assume that tokenized BTC would continue to play an important role as a DeFi capital asset. Ren has been unable to expand its market position and has consistently lost market share over the last year. The amount of minted renBTC has stayed relatively flat, with competitors constantly issuing more tokens.
The team has set their eyes on the broader market of interoperability, by hoping to facilitate more intricate cross-chain interaction. This also includes plans to implement a generic “application layer” on top of RenVM that can be used to build new and exotic applications that can make use of decentralised and autonomous private keys for more than the transfer of assets between chains.
Taking this approach the project has opened itself to far bigger opportunities but comes in competition with far larger competitors such as Cosmos, Polkadot and THORChain.
