The brilliance of REN tokenomics primarily relies on the fact that the token serves one, and only one, purpose: Bonding for the right to operate a Darknode.

For most of us, passive income is the holy grail of wealth accumulation. Imagine going to the mailbox once a month, opening it, and a pile of cash comes pouring out. Now imagine you had two mailboxes like that. Or five. Or ten. That’s the promise of the Ren protocol, and the fulfillment of that promise falls largely at the feet of its elegant token economics.

What is RenVM

Today, all the interesting programmable money applications are happening on Ethereum. However, most of the liquidity (money) is stranded on the Bitcoin blockchain. Bitcoin is just sitting there, doing no work, for thousands of hodlers. How might we bring that value into the DeFi ecosystem?

RenVM offers a solution in the form of a trustless, decentralized, distributed network of “Darknodes” that enables interoperability between chains. You can learn more about how it works, and I highly recommend that you do. But the focus in this article is specifically around the tokenomics of REN, not the fine details of the technology. All you need to know for now is that 100k REN tokens are required to bond in a smart contract for the right to operate a RenVM Darknode, and begin earning passive income.

Note: I reference BTC since that is where the liquidity is currently, but Renvm is agnostic about the chain. Any chain that makes use of the ECDSA standard (which is almost all) can integrate the protocol.

First, Some Level Setting

Based on the particulars of Darknodes and how they function, we will take a few principles as given:

A high token price makes the network harder to attack

Attacking the network requires control of at least ⅓ of Darknodes. Therefore, as the price of the REN token increases, so does the cost to attack. Thieves may be shady, but you can count on them to act rationally where money is concerned. No one will steal less money than the cost to steal it.

A secure network inspires adoption by developers and users

If you take for granted that there is demand for blockchain interoperability to begin with (and I believe it is safe to do so), then developers and users will naturally gravitate to the fastest, most reliable, and — crucially — the most secure solution.

Running a Darknode becomes more attractive as the fees increase.

This should be obvious to anyone. Who doesn’t like money! Darknodes earn fees for the work they perform. The higher the fees generated, the more demand there is for people to operate their own Darknode.

The elegant simplicity of REN’s tokenomics

The incentives in the system are aligned in perfect harmony for all participants, creating a flywheel effect where each orbit of the loop grows the network.

Traffic Increases

We can all go home now if the solution doesn’t solve a real problem. At this stage we can speculate that it does, and that developers will adopt it, but time will tell. In order to jumpstart adoption, the Ren team plans to bootstrap the network, and reportedly has some unannounced partnerships with teams ready to integrate RenVM at the launch of Mainnet SubZero in Q1 of this year.

Fee Generation Increases

Assuming some amount of adoption, RenVM will begin generating fees for Darknodes. The higher the volume, the higher the fees.

Token Demand Rises

As fees increase, so, too, does demand for the token by hopeful new Darknode operators (who will compete with existing operators rolling fees into more REN for additional nodes). Since the supply of REN is fixed, the price naturally rises with demand.

Network Security Enhanced

As the price of REN increases, the cost to attack the network likewise will increase, since accumulating enough REN to control ⅓ of Darknodes will be costly. A high price, therefore, enables the network to secure more funds.

Developer Demand Increases

All of this enhances RenVM’s capabilities, and will in turn drive demand from more developers to integrate the most secure protocol into their applications.

…Creating more volume, generating more fees, a higher price, and so on.

So how much will a Darknode earn?

No one can say. Predicting the future price of REN is tricky, given there are three unknown variables that work together to determine its value: The price of 100k REN, the amount of fees generated, and how many Darknodes are sharing in those fees.

To further complicate matters, the fees schedule is yet to be fully baked and announced by the Ren Protocol team. For now we know that .1% of the value that passes through RenVM will be taken in fees and shared equally among active Darknodes. In that case a very basic calculation can be made in these terms:

Volume x .001 / # of Darknodes

As an example, if we have 100M USD volume passing through RenVM, and 1000 Darknodes active, the payout would be:

100M x .001 / 1000 = $100 per Darknode

Is $100M unrealistic? Maybe not. If you take one DEX as an example, last year Kyber had spikes of up to $7M per day. And that’s just one platform. There are numerous DEX’s, as well as lending platforms like Maker, Compound, and dYdX that could benefit from RenVM.

And if you believe as I do that DEX’s will eventually overtake centralized exchanges, then the potential earnings could be truly massive. Last year, Binance alone did an average of $2.8 BILLION dollars per day in trading volume. Could the global Forex market eventually be run on RenVM? Now you’re looking at $27 TRILLION per day. The mind boggles.

The brilliance of REN tokenomics primarily relies on the fact that the token serves one, and only one, purpose: Bonding for the right to operate a Darknode. In many other systems the token tries to do too many things, and thus creates reverse or perverse incentives. In the case of the REN ecosystem all components are aligned to accelerate growth of the system, up to the point where RenVM may inevitably become a core protocol in the foundation of the Internet of Money. Should that future arrive, operating even one darknode will generate significant passive income.

Follow me on Twitter: @nateirish

Resources:

renproject.io

Ren | All-in-one FAQ

Ren Project Telegram

Join the Ren Alliance

RenVM Fees In Depth