Decentralised Finance (DeFi) is one of the most expansive sectors in the crypto space. These financial applications sometimes still struggle with communication across different blockchains though. That's what interoperability projects like the Ren Protocol aim to solve.
In my last article, I introduced Ethereum sidechains and the Polygon Network. Sidechains aim to reduce congestion on the Ethereum mainchain by completing transactions on a parallel blockchain. By their very nature, sidechains are intrinsically linked to the mainchain and support the development of projects.
However, interoperability of blockchains is a broad topic, encompassing bridges between mainchains. Interoperability is the “ability to see and access information across various blockchain systems”. And this leads us to today’s topic: The Ren Protocol, with the REN token, which aspires to lead the interoperability project.
Liquidity across different blockchains
The blockchain industry is growing rapidly, and is comprised of multiple blockchains, each claiming to be better than the next. While blockchains have been able to develop in parallel, they are still unable to communicate with each other due to their traditional architecture. Without communication between chains, each blockchain will be highly segregated and restricted, and ultimately mass adoption is likely to take substantially longer because of it.
RenVM, the Ren Virtual Machine, seeks to allow users to transfer any token between any blockchain. The project claims to have three main advantages: being 100x faster than atomic swaps (a smart contract technology that enables the exchange of one native cryptocurrency for another), being able to integrate into existing infrastructure, and being composable with decentralised finance (DeFi).
A network of decentralised machines called Darknodes power the Ren Virtual Machine. Thousands of machines communicate to contribute their computational power, network bandwidth, and storage capacity. The community runs Darknodes – anyone who has 100'000 REN tokens can bond their coins to be part of powering the virtual machine. In return, they receive fees from whoever uses the RenVM to bridge their crypto assets to a different blockchain.
Ultimately, Ren intends the RenVM to become a self-sustaining protocol governed by the community. Currently, $502 million dollars are locked up in the RenVM; this includes bonded REN tokens as well as deposited tokens from other blockchains, e.g. BTC and BCH.
How does the Ren Protocol work?
The most popular asset being moved between blockchains is Bitcoin (BTC). At present, there are 11'025 renBTC, which gives renBTC the third largest market share of Bitcoin on Ethereum after hBTC (huobi BTC) and wBTC (wrapped BTC).
RenVM aims to be a trustless, decentralised, and permissionless custodian. The RenVM allows users to mint renBTC by supplying BTC that is held until later redemption of the renBTC against BTC. As such, renBTC is backed 1:1 by BTC.
It is important to note that renBTC is not a synthetic, meaning that it does not rely on a liquidation mechanism and it does not only represent the price of Bitcoin on Ethereum. It is a one-to-one representation of Bitcoin on Ethereum that can be redeemed for BTC at any time.