RFC-000-003: Adjustment of mint/burn fee %s

Name: Adjustment of mint/burn fee %s
Category: Protocol
Status: Draft
Scope: Begin the process of adjusting mint/burn fees to 1. collect data on the relationship between fees and volume to ultimately 2. identify the point of equilibrium where price does not materially impact volume.

Overview

This RFC aims to initiate formal discussions with the community to adjust mint/burn fees. Across Ren mediums (TG, Twitter, etc), there have been many valid arguments for and against the adjustment of fees. With the launch of Ren Forum and with 4 months since mainnet launch with $846m (77.6k BTC) in total volume, this RFC aims to bring the community together on this hot topic.

Background

RenBTC comes in at 2nd place for BTC on Ethereum (https://btconethereum.com/) making up roughly 18.6% of the supply (22k BTC), with wBTC at 73.9% (87k BTC). This is quite the accomplishment as wBTC launched in early 2019 and RenBTC launched May 27th this year.

To compare the two solutions:

RenVM

wBTC

  • wBTC fees are 0.25%
  • Requires KYC
  • BitGO is a centralized custodian

Just from a simple high-level comparison, it’s clear that RenVM offers a superior product for a lower price, which is fine as a method to increase early adoption. However, with 4 months of no issues, no lost funds, and no errors, RenVM has proven strong product-market fit, and it may now be a fitting time to begin discussions to adjust fees.

Details

As some in the greater DeFi community may see RenVM as relatively young, this RFC proposes that we increase the fees to only 0.2%. This will still be less than wBTC, but the Ren team and community will be able to begin gathering additional data points. (Please see Implementation for the steps we can take on this.) In addition, this gives RenVM a buffer to continue to increase fees >= wBTC’s fees as we progress to the next stages of mainnet. During these next stages, we will be able to prove RenVM’s robustness with less reliance on the Greycore ultimately providing greater security/value to our RenBTC Minters.

In addition, as the Ren team continues to 1) develop integrations with additional destination chains and 2) onboards additional tokens, RenVM will continue to prove to provide greater value to RenBTC Minters than wBTC will provide. One key piece of functionality we have yet to witness is the “Burn and Mint” transaction as described here (https://github.com/renproject/ren/wiki#cross-chain-transactions). This transaction will allow the transfer of RenTokens across multiple chains e.g. Burn RenBTC on Ethereum and Mint RenBTC on Polkadot. This key functionality offers utility of RenBTC in multiple chains outside of Ethereum which is something that may demand greater fees than wBTC’s current 0.25%.

Counterargument

Parts of the Ren community have expressed concerns that increasing fees 1) can decrease adoption/volume and 2) will increase friction with future chains/tokens/adopters. These are valid concerns that predict future behavior without data.

Without testing with fees, we will never know if or how much adoption/volume/friction changes. With any business providing unique products or services, price elasticity is something that must be measured and determined. Currently, our only data point involves fees at 0.1% and current volumes. For us to develop and fine-tune an automated algorithm for determining mint/burn prices, the Ren team and community must first collect sufficient data to build these economic models. (This is just based on my understanding, I do not have insights to Ren team’s view on this).

Conclusion

  1. For those against the RFC, please respond with why and please define what parameters or criteria must be met for you to be ready to increase fees.
  2. For those for the RFC, please share anything that may have been missed or any additional thoughts.

Implementation

  1. Increase fee to 0.2%, measure change in volume, and conduct impact analysis.
  2. 2a. If volume is materially impacted negatively in “X time”, decrease fee in small increments, measure change in volume, and conduct impact analysis.
    2b. If volume is not materially impacted in “X time”, increase fee again, measure change in volume, and conduct impact analysis.
  3. Repeat 2a. and 2b. until we reach a point of equilibrium of a fee that does not impact volume significantly.
  4. Once A) next stages of decentralization occur and/or B) multichain integrations launch and burn/mint functionality is launched, I believe the additional value RenVM provides at that point can command a fee >0.25%. However, just because Ren may potentially be able to command a greater % fee, it does not necessarily mean it should. We can discuss this when A) and/or B) occurs. In addition, See point 3. in “Other considerations”

Other considerations:

  1. “Material impact” above must be defined. I would propose that impact be quantitatively measured by 1) change in total revenue [Price * Volume] to measure impact to business and 2) an Y% change in volume velocity to measure impact to adoption. It would also be beneficial to measure this impact while attempting to remove outlier data (e.g. launch of Curve spiked RenBTC volume). Qualitatively, the team can measure if there is any change in tones of integration/alliance conversations.
  2. "X time" or the length of time we’d like to measure how fees impact volume must be determined.
  3. For enhanced security once the next stages of decentralization occur, TVB should be >= TVL/3. Depending on the timing of the next stage, fees are a lever we must consider to increase the value of TVB. I would caution against using fees to lower TVL as that would be a measure that would ultimately decrease the utilization of RenVM.
4 Likes

Just from a simple high-level comparison, it’s clear that RenVM offers a superior product for a lower price

I do not agree with this, not until Ren is more decentralized, it’s easier to trust Bitgo than Ren team right now. They are in the industry since 2013, in 2018 BitGo was approved by the South Dakota Division of Banking to act as a qualified custodian for digital assets etc.

Meanwhile Renbtc just launched, might have bugs etc. no offense I trust the Ren team but you know if you have the choice on where to keep large amounts of btc you would probably chose wbtc over Ren at this stage for various reasons, let’s think the other way, why would you chose Renbtc instead of wbtc ? I see no benefits as it’s as centralized as bitgo right now.

In that sense I think it’s better to try to stay competitive, stay cheap while we build trust and liquidity in the early days and try to get high volumes instead of low volumes for the same revenue. The problem is Wbtc is easily avaliable trough uniswap now and the liquidity is very deep already.

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@DeFiFrog, thank you for bringing up this important conversation for the network. Based on the current way that fees work I think it is important for us to be competitive with the marketplace, I would like to think that DEFI is in it’s early days and we are just learning about the value our DN network provides. Personally, I believe the industry as a whole tBTC, wBTC, and renBTC, are all charging an artificially low rate most likely to gain market share, however, we must look at the alternatives to really see how not only can we provide value but also provide better user experience, with a superior feature set.

How else can one get BTC value onto ETH, you can:

  1. Go to a DEX, trade BTC -> ETH or Stable ERC20, and proceed to use DEFI that way. (0.25% - 0.3% each way)
  2. Go to a CEX, trade BTC -> ETH, and proceed (0.1% each way)

All of these have fees that are charged, the prevailing rate seems to be .01% trading fees, but there is also a withdrawal fee, and also there is a whole set of fees to unwind the proceed .01%. So at the moment, by being priced similar to centralized exchange-traded fees for saving people exposure risk to an asset they may otherwise not want, being able to handle large MINTS and BURNS without price movement, a superior UI, and the ability to bridge multiple asset types puts us in an advantage in multiple categories.

Raise or Hold?
I am in favor of raising the fees to 0.25% and see if there is any demand response, so far in epoch 4, we have found that with DEFI yields lower since the market pulled back from the highs of Aug 30, 2020. The velocity of throughput has come down, our avg daily BTC minted/burned is near 500 BTC, where when the yields were good, we saw daily averages of 1500-2000 BTC. I believe we should match our fees for wBTC at 0.25%. Since I think when the yields from DEFI are so attractive customers are most interested in safety, speed, fees become marginal, our focuses should be on staying competitive in price during these booms, and making sure that our bridge operates faster than the wBTC bridge allowing the customer to capture the yields they are chasing.

Continuous Fee
If we introduce a continuous fee, we should consider having a lower Mint Fee than Burn Fee, we want people to come in to use the service, and we would want them to stay for a period of time, but not too long. 0.2% Mint vs 0.3% Burn. I currently believe we should keep the continuous fee at 0% until DEFI has stabilized to a level where we feel comfortable that people are making consistent yield providing liquidity and we can earn our piece of that since we have an established customer base.

Increasing the fee from 0.1% to 0.2% or even 0.25% will not make a big difference for DN owners.
The only pro I see is to gather data about user behavior.

If I compare fees with other big companies (Netflix, Amazon) you usually start very low and increase when everybody got used to your service and never has the urge to try something different. I think REN is not so far. We are just at the beginning. Also I never saw a company start with low fees, increase it and then go back to lower fees again.

I’m in favor to increase the market share before we try to make more money as DN owners.

2 Likes

Well, it potentially could increase the yield 100-150%, which could help increase demand for DNs, thus moving the price of REN higher, and potentially help us get closer to adequately bonding the network. Alternatively, we could see that demand goes down, but in order for it to actually lower so much that it negates the effect of the price raise would be in excess of a 50-75% decrease in BTC bridged.

Netflix and Amazon’s strategy is only viable when someone is subsidizing that growth, in this case, DN holders would be making the sacrifice of lower returns in exchange for future market share. I think at this time that all the fees in the space are set lower than the value we create, including our competition. It is still early days, but price discovery is important, and understanding the upper bounds is also important. We are creating a clear amount of value to customers who use our service to chase high performing yield, I believe the price ceiling is limited by the risk and ability to accomplish the same end DEFI goals through exchanges.

Exactly - I took the direct approach of comparing renBTC to wBTC, but I like that you also compared substitute / alternative routes of bringing in BTC value. The other thing to consider is that BTC -> ETH means the investor/trader loses exposure to BTC. renBTC -> Maker or Aave -> other coins keeps underlying Bitcoin exposure

I agree with this approach if continuous fees were ever to be switched on, but I would actually advocate to strongly avoid the use of continuous fees. As a renBTC minter/burner, I would be quite hesitant to continue using the service if I knew there was a switch someone could turn on that would start decreasing the value of my collateral. I think it is much more effective to adjust mint/burn prices to affect mint/burn volume. From the telegram chats, I believe many community members and team members have shared sentiments.

I actually don’t agree with this statement, and there are many multi-million dollar mints/burns that demonstrate whales believe in RenVM’s value proposition. But I do agree that it’s important for us to focus on how we best position ourselves in the market.

It seems you’re assuming that increasing fees to 0.2% would decrease volume by 50%, which I do not agree with. Also, what volume metrics would you like to see for you to be comfortable with raising fees?

@DeFiFrog

I think continuous fees play a super important role for our network, in a world where assets are being bridged effectively cross chains, there may be no reason people have to ever burn tokens, as they feel safe that their BTC is locked up with RenVM and redeemable while they take advantage of DEFI opportunity after DEFI opportunity for years on end. This could make our collateral super high and without DN operators charging “rent” = “continuous fees” we would be missing out on a huge stream of potential income. At this moment, that is not the case, as there is only one destination, however soon under a multi-chain scenario there could very well be a nice opportunity on Polkadot, then that slows down but because the flight of capital out of Eth created a new opportunity in ETH DEFI, and on and on it goes. So as a custodian of BTC and other assets we need to keep this tool in our toolkit, and even put it to work to make sure RenVM stays secure and continues to produce yield in low BURN environments.

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All for it. The grey core is temporary. The DNs do all the work. The project isn’t going anywhere w the partnerships coming and already on boarded. All this will of no surprise to any partnership. It’s been discussed with them. Any business needs to adjust to meet demand.

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Fair point - I agree we should keep the continuous fees in our toolkit but treat it as a last resort. I’m curious if maybe we can come up with more creative ways to generate income from locked BTC rather than creating a decay on renBTC value and ultimately risk de-coupling it from BTC price.

I don’t understand the concern for losing the peg. Ren has a very clear arbitrage pathway, direct burn for value. Id take it myself if the opportunity got large enough. The preceeding number before renbtc doesnt impact the value. Value of renbtc is always value of btc at mint minus fees over time. People dont even need to see the renbtc “quantity” as anything but random numbers as long as value remains, which it will through arbitrage i would think

Could we make the fees variable depending on the duration a token was concerted to RENtoken?

I imagine the continous fee is charged based on block times? Just guessing. So the fee increases continously. But maybe we could create an other time based fee.
For example:

  • Mint/burn within 24h --> no extra fee
  • Mint/burn >24h…<5days --> 0.1% extra fee
  • Mint/burn >5days…<30days --> 0.2% extra fee
  • Mint/burn >30days --> 0.3% extra fee

A solution like this could decrease the average age of renBTC and would price discriminate against oldest mints which would work if not for the following:

I think we run into the issue of when renBTC is transferred from one address to another. It would be unfair to charge somebody more when they received “older” renBTC. Also, if we choose to reset the age with each transfer, how would you determine if somebody didn’t just transfer it to reset the age and reduce the fee?

But how is the continous fee supposed to work then anyway?

If continous fees are activated:
User sends 1 BTC to RenVM and gets 1 renBTC

How will his renBTC decrease? I guess we can’t drain the wallet of the user. Also the market can not value old renBTC less than new renBTC. I was under assumption the final bill comes when renBTC is burnt for BTC. So this would be similar charged as my proposal.

Maybe someone can explain it to me how continous fee wil decrease the renBTC value.

No, the value is captured continuously by adjusting a multiplier, not at the burn. Since ren already holds the means to pay themself the adjustment of the multiplier is basically as easy as saying this part of your renbtc value is now the darknode renbtc reward, at an established rate.

Edit: understand when i say value i mean the underlying btc pool obviously

It is too early for these changes to mean anything. You will not be able to observe any statistically significant changes due to the low number of integrations.

If curve yields stay low then volume will be low, regardless of fee changes.

Prioritise adoption and offering the best possible experience for users and integrations.

Loong was on TG talking about ideas for dynamic fee changes based on volume.

3 Likes

Continuous fees is a dumb idea and a totally awful user experience.

As a node owner myself I agree with many of your points and would love to see fees increase. However…

As you pointed out, there are concerns about raising fees and you point out that these fears are not based on any real evidence. It is here that I have my concerns,

The project is still young and has very limited data to base any decision on. Making decisions based on limited data is problematic. I would rather see us develop a baseline of data which includes some additional integrations before basing decisions on that data. Raising fees at the same time as introducing new chains will also confuse the metrics and render them meaningless.

Sadly, I do not believe that we can do a true analysis of the communities concerns (quoted above) without first developing this baseline of data that includes upcoming integrations.

JMHO

If ever continuous fees were applied they would have to be invisible to the user… ie: maintain fungibility and 1:1 peg… otherwise I completely agree!

What happens is the amount of BTC one receives when burning renBTC slowly decreases over time, but at the same time the amount of renBTC one receives when minting BTC also increases.

For example, right now if you have 1 BTC and you want to mint renBTC, you will receive 1 renBTC minus the .1% fee. If you have 1 renBTC and you want to burn for BTC, you will receive 1 BTC minus fees. If a 5% continuous fee is activated, then every 24 hours the peg is reduced by 5%/365. So in Exactly one year, burning 1 renBTC would get you .95 BTC minus the fee. But, if you want to mint, 1 BTC would give you 1.05263 renBTC (so if you burned it within the current 24 hour period you would get back 1.05263 - 5% = 1 BTC, minus fees). Every day leading up to that one year mark, the % difference increases slightly so once you hit the 365th day you are at 5 %.

This is a smart way of doing it, but I agree with others who are against it as knowing 1 renBTC = 1 BTC is very psychologically comforting and I feel also lends a certain power and credibility to renBTC if only superficially. Having anything less than a 1:1 peg tarnishes the image of it being a perfect representation of BTC on other chains. I would only use continuous fees as a last resort. It is much too early to consider this path with so much more coming to affect the economics.

As far as raising fees now, I am for the most part against it echoing other sentiments that we do not have sufficient data to test their affects. I would rather wait for further integrations before adjusting the fees. We are not requiring a certain TVL/TVB ratio at the moment and we have enough darknodes for the amount of volume being processed. However, if fees must be raised or testing needs to happen now, I like Loong’s idea of an algorithmic model that adjusts to volume. Raising fees and then backtracking if it appears we are hurting volume or adoption isn’t a good idea.

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