Key Insights
- Ren Protocol only has $160,000 in its treasury and will not be able to compensate the Ren Labs team beyond Q4 2022. There is a time crunch for Ren Labs to figure out a solution.
- MakerDAO and Ren asset holders must burn and bridge back their native assets before Ren 1.0 is officially sunset.
- The lack of legal transparency by Ren Labs regarding Ren Protocol’s intellectual property has the Ren community concerned. Restructuring Ren DAO’s governance framework could bring new legal challenges.
Context
Ren Protocol (formerly known as Republic Protocol) was founded in 2017 by Taiyang Zhang and Loong Wang. They sought to build an open-source protocol providing inter-blockchain liquidity and privacy via zero-knowledge, trustless swaps. After four years of building Ren, Alameda Research acquired the Ren Protocol and the Ren Development Team (later named Ren Labs).
Alameda Research funded Ren Labs’ development efforts with a quarterly budget of $700,000, which has been halted in light of the recent bankruptcy filings of Alameda and FTX. Given that Ren Protocol only has around $160,000 in treasury assets, the protocol was dependent on Alameda’s budgetary contributions to continue development. Ren Labs will require a new funding source to continue development or continue development unpaid.
Ren 1.0 refers to the RenVM, which is a decentralized cryptoasset custodian that enables universal interoperability between blockchains. Anyone can use RenVM to bridge any quantity of an asset to any protocol on any blockchain. Ren Labs will sunset Ren 1.0 in favor of Ren 2.0’s new protocol architecture.
(Source: Ren Protocol Blog)
The timeline to sunset Ren 1.0 and launch Ren 2.0 has been expedited due to Alameda claiming the rights to the Ren 1.0 Intellectual Property (IP) when it acquired Ren Protocol. To avoid crossing any legal lines, Ren Labs decided on the “safest” course of action for the Ren ecosystem, as quoted below:
- Disable minting through Ren 1.0 while keeping burns enabled (bridged assets are always backed 1:1).
- After 30 days (approximately Dec. 18, 2022, but no official date has been announced yet), shut down Ren 1.0 and disabling Ren assets to be burned and bridged back to their native asset.
In parallel with the above:
- Deploy Ren 2.0 on testnet.
- Test and harden the Ren 2.0 testnet together with the community.
- Deploy Ren 2.0 on mainnet.
- Transition away from the renproject.io domain, which was owned by Alameda. All current sites will be hosted on IPFS, and control will be transferred over to the RenDAO moving forward.
Assuming funding for Ren 2.0 is secured, the Ren Community has indicated that it would like to see a portion of the funding earmarked to further build out the Ren DAO and its governance framework.
Expand Ren DAO
Compared to more mature and active DAOs like Synthetix or Balancer, Ren DAO doesn’t rely heavily on DAO governance to enact changes to the protocol. In the past year, the DAO has only processed 18 Snapshot votes.
Currently, the Ren Protocol depends on Ren Labs to make most of its decisions. However, the Ren Protocol has a DAO limited to Darknode Operators (REN-DN tokenholders). The REN token is only used as a bond to run a Darknode, requiring 100,000 REN to be bonded to register and run a Darknode. In turn, Darknode operators run and power Ren’s decentralized virtual machine.
The Ren community believes there is value in expanding the DAO. A proper governance framework might encourage REN tokenholders’ involvement and keep the Ren Labs team accountable for the Ren Protocol. This vision aligns well with the Ren 2.0 announcement of decentralizing and open sourcing the Ren Protocol, enabling a bipartisan governance model composed of the Ren DAO and Darknode operators.
While the community has pushed for the expansion of the DAO, this request may not be as attractive to the Ren Labs team. If the Ren protocol can procure funding and continue development, the expansion of the Ren DAO would likely cut into this funding and, as a result, a percentage of Ren Labs members’ compensation. Additionally, Ren Labs would also be required to hand over control of protocol decision-making. This scenario assumes that no equity will be exchanged during the funding process, which could further dilute the team’s control over the protocol.
renBTC FUD
As of Nov. 18, 2022, Ren 1.0 has processed approximately $13 billion in cross-chain volume since its launch.
Due to the expedited development timeline of Ren 2.0, Ren Labs could not test and confirm that the Ren 1.0 contracts could be reused for Ren 2.0. This was the safest course of action instead of delaying the launch of Ren 2.0.
Since MakerDAO’s proposal to offboard renBTC, there has been fear, uncertainty, and doubt (FUD) surrounding a potential depegging of renBTC due to the recent sell/burn pressure. This proposal is not a result of the MakerDAO losing faith in the Ren Protocol; it’s that Ren assets (specifically renBTC in this proposal) can only be burned and bridged back to their native assets until approximately Dec. 18, 2022, as mentioned earlier. Hence, MakerDAO must burn the renBTC collateral as quickly as possible to ensure the underlying BTC isn’t locked in the Ren 1.0 contracts once Ren 1.0 is officially sunset.
Based on Ren 2.0’s roadmap released in August 2022, if the Ren 2.0 transition had gone as planned, Ren would not have needed its users to burn the Ren 1.0 assets and would have been able to provide a better user experience for Ren asset holders. In addition, Ren users would have avoided the need to burn Ren 1.0 assets.
Analysis
Legal
The lack of legal clarity around the Ren Protocol and Alameda Research contracts has created a lot of uncertainty, confusion, and frustration within the Ren community. The Ren community is currently trusting the Ren Labs assessment of the Ren Protocol and Alameda Research contracts. The Ren Labs team has yet to cite whether legal counsel was consulted or not regarding the IP of the Ren Protocol post-Alameda Research’s insolvency. However, a Ren Labs member has confirmed that Alameda Research was happy to open source the Ren 1.0 code.
While there is a need to expedite both Ren 1.0 sunsetting and the launch timeline for Ren 2.0, rushing to expand the DAO and set up an entirely new governance framework seems impulsive. Given the regulatory pressures DAOs currently face, the first step forward for Ren should be to have a law firm assess the Ren Protocol and Alameda Research contract agreement to confirm Alameda Research is allowed to open source the underlying IP ownership. Following a legal interpretation, a new roadmap can be set for the Ren DAO. Ideally, this roadmap would help increase transparency from Ren Labs, which would ease the tension within the Ren community.
Currently, the Ren Protocol has not set up a foundation as a legal entity, and the Ren DAO currently operating as a general partnership. This is surprising as many DAOs have created a foundation and a proper legal structure to protect the DAO from legal liabilities. However, the Ren Labs team posted a proposal on Dec. 2, 2022, to set up a Swiss not-for-profit foundation called the “Ren Foundation” and seeks to mint an additional 125 million REN (a 12.5% increase from the initially planned total supply of 1 billion REN) during the upgrade to the Ren 2.0 contracts. This proposal currently has a negative sentiment from the community as the inflationary nature of tokens could hurt Darknode operators by diluting the value of their Darknode rewards. If the legal audit provides greater clarity on the IP ownership and the Ren community wants to move forward with restructuring Ren DAO’s governance framework, then creating the proposed Swiss not-for-profit foundation would be a proper step towards ensuring the Darknode operators (DAO voting tokenholders) have some personal liability protection. As discussed in the Governor Note: Ooki Protocol vs. CFTC, it is important for DAOs to have a proper legal entity to protect the DAO and the voting tokenholders from personal liability issues.
Revenue-Based Fundraising Mechanism RFC
An alternative approach to fundraising was mentioned by one Ren community member, who proposed a revenue-based fundraising mechanism RFC. Put simply, this would entail open crowdfunding as an alternative to a private funding round (e.g., venture capitalists).
Crowdfunding participants would then be paid back using Ren’s future revenues, including a predetermined rate of return on their investment. This would provide cash flow to the Ren Protocol and allow Ren Labs to continue the development of Ren 2.0 into 2023 without inflating the REN token supply. However, if crowdfund participants earn a portion of the protocol revenue, the Darknode operators would see a decrease in earnings. Additionally, this alternative method would increase legal risk and make the implementation.
Akin Sawyerr provided another alternative solution in response to the revenue-based fundraising mechanism RFC. Sawyerr’s alternative would divert a portion of all Darknode operators’ earnings to a multisig managed by Ren Labs. However, this solution wouldn’t solve Ren Protocol’s short-term cashflow issue, especially since Ren 2.0 isn’t guaranteed to generate revenues for Darknode operators.
At the time of writing, no Ren Labs members have responded to either RFC forum post.
Lack of Time
With around one month of runway, time is certainly not on the Ren Protocol’s side.
In terms of Ren DAO’s governance restructuring, a month does not seem like enough time for the community to iterate on a new governance framework, get feedback from Ren Labs and Darknode operators, and then help determine a new budget if the Ren Protocol secures funding. As it stands, Ren Labs has yet to comment on this RFC.
One possible short-term solution for Ren’s cashflow crunch is to access a portion of Binance’s $2 billion FTX recovery funds. This possibility has led to rumors that Binance is looking to acquire Ren Protocol.
FTX Contagion
Ren Protocol’s sister company, Catalog, depends on Ren Protocol’s survival because Catalog can only be run on the RenVM. Catalog has been in development by Ren Labs since October 2021, as mentioned in its fundraising announcement, which consisted of $7.5 million in February 2022. Because Ren’s dependencies are facing collateral damage due to FTX, the need to secure funding has become even more prudent.
Conclusion: I’m Not Mad, Just Disappointed
Although the Ren community has expressed much confusion and frustration about the Ren Protocol post-Alameda Research, the community has submitted positive RFCs to save the Ren Protocol from the FTX contagion. The lack of clarity from Ren Labs is a cause for concern, but the protocol’s future matters most for both Ren Labs and the Ren DAO. Now that Ren Labs has delivered on the promised proposal regarding how they would like to proceed with the transition from Ren 1.0 to Ren 2.0, the Darknode operators will likely get to vote on this proposal and decide on Ren Protocol’s short-term future.
Additionally, the recent information of Alameda Research being happy to open-source the Ren 1.0 code could mean that Ren Labs would be able to return to Ren’s 2.0 Roadmap before the FTX and Alameda Research Collapse. Thus, Ren asset holders could potentially be able to retain their Ren assets and wait for the Ren 2.0 merge as originally intended.
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