What is REN and RenVM?
Ren is a decentralized Ethereum protocol that mints tokens which track the value of non-Ethereum assets such as Bitcoin or Zcash, and provides liquidity to projects on different blockchains.
All Ren tokens are backed 1:1 by the underlying asset and the tokens can be redeemed, in a permissionless manner, at any time.
In this article we’ll explain how Ren works, why it’s so important to the world of DeFi, the latest updates to Ren in 2021, and why Ren tokens are better than the competition.
The Ren Network and RenVM
Put simply, Ren is a protocol for minting and redeeming asset-backed tokens on the Ethereum network. Here’s how it works:
- A user sends an asset, like BTC, to an address controlled by the Ren protocol
- Ren mints a new token that represents the value of the asset locked. For example, if Bob locks up 1 BTC, the Ren protocol issues him 1 renBTC. renBTC is an ERC20 token and can be used throughout the DeFi ecosystem on Ethereum
- At anytime Bob can redeem renBTC for “regular” BTC on the Bitcoin network
Ren is not confined to Ethereum however. Other assets that the RenVM network supports include Bitcoin, Bitcoin Cash and Zcash.
Tokens minted by Ren hold their value because they are 100% backed by real assets. Any deviation from the “true price” creates an arbitrage opportunity. For example:
- If 1 BTC = $40,000 and 1 renBTC is trading $42,000, a user can lock up Bitcoin, sell renBTC and make $2,000 in profit. This drives the price of renBTC down
- If 1 BTC = $40,000 and 1 renBTC is trading for $38,000, a user can buy renBTC and redeem it for BTC. This drives the price of renBTC up
An arbitrage opportunity is the same mechanism that keeps the DAI peg at $1. When DAI is undervalued, MakerDAO vault holders can buy DAI and pay off their loans at a discount. This buying pressure forces the price up. If DAI is trading above $1, vault holders can mint DAI and sell it for another asset. This drives the price of DAI down.
The RenVM (Virtual Machine) is the software that enables Ren to work. When users want to create or destroy a token they need to pay a fee, and that fee is dispersed to Ren’s darknodes. The darknodes are responsible for verifying that a user has deposited the asset. Once the asset deposit is confirmed, the darknodes mint a token representing ownership of that asset. Darknodes also provide computing power and storage space on the Ren network. Darknodes are decentralized and permissionless: they cannot block a user from minting or redeeming a token.
RenVM is a trustless protocol which means that anyone can run a darknode, however, there are certain requirements. Darknodes need to run the RenVM software on a VPS (Virtual Private Server) and they must deposit 100,000 REN tokens into the darknode registry contract.
To prevent darknodes from stealing assets from the deposit address, darknodes are arranged into new shards once a day. This makes it nearly impossible for them to collude and exploit the network.
For those interested, Gemini has a great guide that goes into even more detail about the inner workings of the Ren protocol.
Ren Token use Case
Ren’s native token, REN, has a limited use case. Its primary function is to act as a security bond for darknodes. As mentioned, darknodes must lock 100,000 REN in a contract before they can begin minting and redeeming coins. There is a maximum supply of 1 billion REN.
Unlike other Ethereum protocols, users don’t pay fees with the native token. Rather, all fees are denominated in the asset that the user is depositing. For example, if Bob wants to mint renBTC he pays the minting fee in BTC.
Ren is not its own blockchain, but more like a ‘plugin’ that can enhance features of other blockchains. Rather than competing with other smart contract platforms, Ren simply uses it’s virtual machine to improve them, and help them to link up to other chains.
Anyone who has REN tokens and wants to store them safely can use the Exodus wallet. Exodus supports REN and a growing number of other ERC20 tokens like LINK, DAI and AAVE, just to name a few.
Ren 2021 Updates
The story of Ethereum in 2021 is the story of growth. Scaling solutions like Polygon and Arbitrum are finally coming online, after years of development, and many of the largest protocols, including Ren, are linking up with these layer two networks.
Moving quickly, Ren has already created a bridge to Polygon for seven of the most popular Ren tokens. The Ren-Polygon bridge supports the following assets:
- Bitcoin Cash
The advantage of a Ren-Polygon bridge is that it allows users who are holding Ren-minted tokens to quickly move them onto the Polygon chain. Once a user has their Ren crypto tokens on Polygon they can use them with any of the dApps that are there.
Ren and Polkadot
Ren is building out this capability in conjunction with one of Polkadot’s own DeFi powerhouses, Acala. Currently the two projects are collaborating on a testnet, however, the teams expect that the bridge will go live before the end of 2021.
Ren vs the Competition
WBTC is the most popular version of tokenized Bitcoin on the Ethereum blockchain. WBTC’s main advantage is its long track record of security. Hacks and exploits are frustratingly common in crypto but WBTC has been running strong for years. That being said, even though lots of people trust WBTC it’s definitely not perfect.
WBTC’s primary disadvantage is that it’s controlled by BitGo, a centralized company. BitGo custodies all BTC deposits and they control the minting and redemption of tokens.
Similar to any other centralized company, BitGo can freeze accounts and block traders from the platform. In a worst-case scenario (there is zero evidence that this will happen, this is purely hypothetical), BitGo could even take the BTC they are holding in custody and do an exit scam.
These inherent problems of a centralized token illustrate why Ren is so important. Although Ren isn’t the first decentralized project to create a tokenized version of Bitcoin, RenVM has the potential to become the most reliable and secure DeFi protocol to do so.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.