RFC-000-037: Incentives for a decentralized network

Name: Incentives for a decentralized network
Authors: Ren Labs
Status: Draft
Scope: Outlining how a decentralized Ren ecosystem can fund and grow itself

Overview

In a recent technical proposal by Ren Labs (RFC-000-036), a design for supporting multichain applications on top of the Ren platform was outlined, with the ultimate goal of supporting more use-cases, users, and bringing more volume to the protocol. The Ren platform is also set to migrate to a fully decentralized network, governed by the currently growing Ren DAO. With these major developments potentially to take place in the near future, there is an opportunity to make sure these transitions are as successful as possible, by recalibrating the incentives of the network. With optimized economics, the Ren ecosystem and its development can grow faster, ensuring its position as the leading multichain and cross-chain infrastructure in the crypto space. Done correctly, this would bring more value to all the ecosystem participants.

Background

The current iteration of the Ren protocol has reached a mature state in terms of its utility and security:

  • The protocol supports 7+ host chains, 7+ source chains, and now an additional 20+ host chain assets through host to host support, with many more on the way.
  • The protocol has done over $11 billion worth of transaction volume since its inception.
  • The cross-chain support Ren offers can easily be integrated with RenJS, and the latest version (v3) makes it easier than ever to integrate, allowing seamless cross-chain bridging for any application on any of the host chains Ren supports.
  • Ren assets are integrated across the DeFi ecosystem, and tailored applications like VarenX, zeroBRIDGE, and Catalog, are powered by Ren.
  • The protocol has had zero hacks or exploits.
  • The Ren DAO is growing with more active participation every day.

In the near term, Ren Labs will be focusing on integrating more assets and chains into the Ren protocol, such as Optimism. In response to feedback in RFC-000-036, Ren Labs will also be exploring deploying an EVM chain on Ren, on which anyone could deploy cross-chain native applications, and only darknode operators could spin up validators for. Details on this will be provided outside this proposal as soon as the viability is determined, and then would only go ahead if there is community support and agreement on fee setting and incentives.

In addition to the potential Ren-EVM chain deployment, a new Ren network will be deployed in parallel to the current live RenVM network. This network will stand out in that it will be fully decentralized from the start, and have higher security thresholds than the current operating network. Darknode operators will be able to deploy nodes on this network, which will act as a ‘Chaosnet 2.0’, where the new Ren network design will be battle-tested in a public mainnet environment, and which the Ren ecosystem could fully migrate to in the future after sufficient security-related achievements have been met. More details on this Ren network deployment will be provided in a separate post.

While these large developments are taking place, there are discussions within the community regarding how to increase decentralized funding of the ecosystem. This highlights the need to take a look at the economic incentives of the Ren ecosystem, and possibly recalibrate them to ensure the community’s goals and the safeguarding of the Ren ecosystem are met. If decentralized funding can be increased, the community would be able to incentivize more developers to work on and integrate Ren, to bring more use-cases, users, and volume to the Ren ecosystem.

In this proposal, we outline how such a recalibration can take place, that would ensure long-term funding and growth of the Ren ecosystem, and make sure the incentives for darknode operators are aligned with the ultimate goals.

Details

The proposal comprises three components that would synergistically improve the economics of the Ren ecosystem. The first component is establishing a not-for-profit Ren Foundation, which would serve as a real-world conduit for the DAO and that would provide a stable environment for developers around the world to contribute to the Ren protocol, in a fully transparent fashion. The second component is introducing inflation to the protocol, inflation that would go to the Foundation to be used as incentives for protocol development and growth. The last component would be instituting REN as the native asset of chains and subnets deployed on Ren, used for payment for transactions and computational costs, which would increase the token utility.

Establishing a Ren Foundation

The Foundation’s scope would be simple:

  1. Create a not-for-profit public goods company that maximizes public value for all network participants.
  2. Provide a stable environment for developers around the world to contribute to the protocol.
  3. Create an organizational framework that is responsive to the DAO’s governance apparatus, providing transparency, autonomy, redundancy, and flexibility regardless of macroeconomic events.

To appreciate why a foundation structure makes sense for Ren, consider what is currently ensuring the protocol development of Ethereum to continue, regardless of market conditions, regulatory developments, and geopolitical events: it is their Swiss not-for-profit legal structure. In a fully regulatory compliant and transparent way, it provides funding to protocol development via grants, unfazed to macroeconomic changes (e.g. market sentiment, regulatory and legal considerations). For Ren to sustain itself over the next decade and adapt to the ever blockchain-changing landscape, it is paramount to adapt similar legal and governance structures.

Inflation

As innovation is expensive, the need to secure long-term decentralized funding for incentives to be used for ecosystem growth is crucial in the competitive crypto environment. While there currently is a source of protocol revenue going to the Ren DAO treasury, it is not enough at the moment to bootstrap a whole new ecosystem of applications. And while Ren Labs will be contributing to Ren core protocol development as well as application development on top of the protocol, it does not substitute an organic ecosystem filled with applications from partners and new teams and projects working or deploying on Ren.

The natural way to secure long-term decentralized funding for ecosystem growth is introducing inflation. It is particularly powerful as the incentives would be in the form of REN, which incentivizes the builders themselves to bring the most value to the protocol (in the form of use-cases, users, or volume), as that has a positive effect on the incentive they receive in the end. This form of incentive is the most efficient way to spend funding, which is why the inflation solution fits so well. Especially if the incentives/grants for developers and projects coming to Ren are set up with proper lock-up structures, this kind of decentralized funding will produce the best outcome for the ecosystem.

To make sure that darknode operators are fully aligned with this, who crucially have provided and will continue to provide the infrastructure powering Ren, any inflation mechanism can be designed to ensure that active nodes do not get exposed to the inflation. As an example, say there were 2000 darknodes in operation, and inflation was set at 7% per year. Then to maintain the same level of total supply for the active darknodes, 20% of the inflation would go to them, which would be 1.4% of the total amount (20% of 7% is 1.4%). The rest, 5.6%, would go to the Foundation for development and incentives. Designing the inflation this way, going towards darknodes and the Foundation, makes it so that slowly over time, a majority of the REN and voting power would aggregate with active darknode operators, who long-term have and are involved both on the infrastructure layer and in governance, the participants that enabled the Ren ecosystem to grow in the first place.

Token utility

To balance the new funding that would enter the ecosystem, and solve a design choice for how applications built on Ren would pay for transaction fees, REN can be instituted as the native gas assets for chains deployed on Ren, just like ETH is to Ethereum. REN would then not only be used for darknode bonds, but also to pay for transaction and computational costs. This would increase demand for REN, as it does for ETH in the Ethereum ecosystem.

Another reason for making REN the native gas asset for applications on Ren is that it makes the network more secure. More transactions on Ren would lead to more demand for REN, which increases the value of the darknode bonds, making the protocol more expensive for attacks, hence more secure. And this coupling makes sense from a security point of view as you want the network to be more secure as the platform has more volume and TVL, which it would with this change.


These three components could together make sure that the Ren protocol and ecosystem will continue to thrive and attract more developer talent, applications, users, and volume, while further strengthening the community and establishing full funding transparency. If the incentives of the system are not changed, there is a risk that competitors will be better positioned relative to Ren in providing cross-chain infrastructure to the crypto market.

Implementation

  • We will have a considerable period of open discussion regarding the proposal, to collect sentiment, feedback, ideas, and suggestions.
  • If the community is in favor of the proposal or a modified version of the proposal, we will publish a RIP with more worked out details which would be subject to a governance vote.
9 Likes

A bitcoin like inflation model could be very cool, where the inflation halves every x years, so that there is still a hard cap on the total amount of Ren

8 Likes

i like the model posted here. so it seems at some point the ren token may either need swapped for a new iteration of ren or 2 living versions bridgable, either way its approached however, my question regarding it would be at the time of this ren 2.0 inflationary contract launch will there also be an initial print? such as current token cap is 1b, does inflation go: 1b + x per block; or does inflation go: 1b + massive initial print at time of new contract deployment such as 40% to old token holders, some amount to the foundation, etc + x per block?
the same line of thinking it may be nice to see a burn mechanism, since the concept is to collect tx fees in ren, just throwing it out there. would love to see a balanced inflationary model that strongly respects current holders by trying to keep the # of dno’s at 10,000.
side note, it seems the dao and foundation serve the same purpose, but foundation clearly is the best path forward, great concept. should the dao be somewhat left to its own devices and finally restore dno income to 100% from 93%?

The idea would be that there would not be any initial print, and would just be a linear inflation, yep, it would be good to get the dnos income restored to 100% and adding deflationary tokenomics (similar to ETH on the RenEVM) so that it would counteract the inflation newly created and if we follow a decreasing inflationary model, eventually Ren will become deflationary in nature

4 Likes

@Susruth isn’t this automatically the same annoying, as with eth that users or builders always have to look that they have enough gas to pay.?

I like items 2 and 3 of the three core components. Inflation well executed, and introducing REN as a requirement to pay for transactions and computation will add additional utility and incentive to hold REN.

I do not see the merit in creating a new foundation when there is a fledgling DAO already in operation.

I like the idea of adding inflation as a way to further incentivize darknodes and the DAO. So all inflation should be split solely between darknodes and the DAO.

I also like the idea of setting inflation at a certain rate and having a progressive reduction schedule similar to what Synthetix implemented, a weekly or monthly reduction in inflation to smooth out the effect, as opposed to annual halving cycles which would be much more jarring.

More on the Synthetix approach can be reviewed here:

2 Likes

Am I correct in thinking that unless we can abstract ETH GAS away from all TXs within Ren, the user might be faced with paying ETH for GAS and then REN for TX fees for ERC20 transfers/swaps?

Just wondering about the impact on UX in this regard? Thanks for the RFC :+1:

We built a relayer system, that charges Dapp specific fees converts it to Ren and pays the miners (or can burn it). So that the end user does not have to think about gas fees. It is easier to think about fees in terms of a unified asset through out the protocol, and build abstractions on top that make UX better

3 Likes

Interesting proposition.

However, some OG Darknode operators already voiced concern about abandoning REN as a fixed supply non-inflationary asset.

Hence my question:

Could a dual token model (comparable to NEO) work, where we introduce “RenGAS” for payments and computational needs?

This way we wouldn’t compromise our original vision while separating governance/DNOs from network usage.

2 Likes

The main reason for a foundation to exist, is that without a legal real world entity everyone who is contributing to or governing Ren would be legally liable to things that are not under any one person’s control. Ideally we could create a legal entity that can legally be controlled by the DAO, and all the DAO participants have limited liability similar to the equity holders of a company. The idea of the foundation would be to get as close to this ideal as possible and protect everyone involved and eventually move to an ideal solution that would hopefully be created

10 Likes

This is something that could definitely be put to vote, personally I like a single token model where there is just one token that all the stake holders hold and everyone is trying to add value to it. Splitting them into two would complicate things, as there could be two sets of people with different incentives and creates more conflicts than it is worth

10 Likes

My concerns around spinning up a foundation will be quelled as long a darknode holders have ultimate control of the funds held in the foundation through a proposal and voting mechanism

As this RFC advances all of our community could collaborate on a representative model for different stakeholders in the project to take leadership of the foundation, would love to see DNOs hold majority and also have board seats for contributors, integrators, researchers and influencers. So that a wide variety of people can collaborate to make decisions on what is good for the future of the Ren ecosystem

3 Likes

I would like an inflation rate based on the initial supply and not based on the new supply every year.

So 7% of 1B = 70M Token per year, fixed.

Instead of

7% of 1B 1year
7% of 1,07B 2 year and so on.

Are the inflation calculated as compunding or not?

i.e

Supply*inflationRate^N°years

or

Supply * inflationRate * N°years

1 Like

Ren is entering a period of huge changes and extreme growth. Having DNOs fully controlling the foundation would be horribly inefficient. Having to post an RFC for every decision and wait for DNOs to discuss then vote is way too slow. Things would get done at a snails pace compared to other L1s.

DNOs should simply vote for all the foundation leaders we’d trust would make the best decisions for Ren’s future. These leaders should be re-evaluated semi-regularly by DNOs on their performance and can be voted out if DNOs deem they aren’t up to standard.

5 Likes

I think creating a foundation with a legal structure than protects the DNOs makes a lot of sense as long as it is governed by the DAO / DNOs.

I like the inflation model, but I would also be concerned about the dilution impact it could also have. Some of the comments I like in this regard are: 1) continuing to cap the max DNOs at 10,000; 2) always base the inflation on the 1B current tokens; 3) include a burning process based on activity. My suggestion regarding points 2 & 3 would be to link these together. For example, if, based on how the burning mechanism is set up, we expect to burn X% of REN each year (or week or month, annualized) then the inflation rate is set to 2X%. I think this would allow the ecosystem to provide the right incentives and help keep the REN value from decreasing due to inflation.

I like using REN for transaction fees and not creating a new Gas token. My question in this regard is how the transaction fees would be distributed? Would they just be allocated to DNOs or are we also implement a staking mechanism for people that don’t have enough for a DNO? Not sure staking is even feasible outside a DNO, but perhaps we could use a validation type model where DNOs could pledge more than 100k with the excess over 100k getting a share of the rewards too and then allocated to the stakers after a percentage going to the DNO. If we can do this it would have the added benefits of locking up more of the supply, decreasing circulating supply, and giving DNOs some additional revenue while they are funding the foundation.

1 Like

Yep, the current idea is to do inflation based on the initial supply and not do any kind of compounding

1 Like

I think it would be super cool, if (majority of the) proposals that ask for funds from the Foundation will also explain how they would use them and how they can repay the funds they recieved in the form of deflation.

For ex, a project that asks for let’s say 80M REN, comes with a clear plan on how it would eventually burn atleast let’s say 160M REN in the next 10 years, and will continue deflating the asset as the time goes. And the funding is given based on quantifiable metrics over let’s say 4 years. If the project or the team is not performing the foundation will stop funding the project.

I know that this is not possible for all proposals as there would be some that are just public goods like, SDKs etc which need to be funded. But all the major proposals can come with a deflationary proposal, which would accelerate the accrual of value for all Ren holders

The foundation could also decide to burn Ren that it cannot deploy into ventures (that give back more Ren they take) or public goods.

1 Like

Remove the need of having Ren in the wallet to pay any gas is the way to go.

6 Likes

I am all for inflation as long as it is a considered mechanism with reduction of inflation over time possibly even introducing a burn mechanism in the future if needed.

The scope of what was initially set out with Ren has completely changed and grown in to something much greater. To be able to compete in the layer 1 space for developers is going to be very difficult without being able to fund them to build properly and we have seen how big these dev communities can grow with the right funding and inflation mechanisms to bootstrap the ecosystem. Great proposal its time for us to move to the next phase where we can build something much bigger than we ever could have imagined.

@Susruth

Blockquote I think it would be super cool, if (majority of the) proposals that ask for funds from the Foundation will also explain how they would use them and how they can repay the funds they recieved in the form of deflation. For ex, a project that asks for let’s say 80M REN, comes with a clear plan on how it would eventually burn atleast let’s say 160M REN in the next 10 years, and will continue deflating the asset as the time goes. And the funding is given based on quantifiable metrics over let’s say 4 years. If the project or the team is not performing the foundation will stop funding the project.

I wonder whether this would just be making more complexity than is needed. We need it to be as frictionless as possible for devs to just be able to do what they do best, build an application that is going to generate revenue and bring more users of the Ren platform. We can always introduce a burn mechanism at a later date?

1 Like