Republic Protocol (REN) Investment Research

by Wesley Pryor and Mazin Hamad

Ænigma’s investment thesis on Republic Protocol is presented below. A copy of our full report can be downloaded on our website via the following link: Full Report

Investment Thesis:

Ænigma has a bullish outlook on Republic Protocol for three reasons. First, the number of dark pools in the digital asset realm will accelerate as institutional investors enter the market and seek to buy and sell in large blocks. Second, Republic Protocol’s liquidity provider incentive program encourages OTC desks to use the protocol and build dark pools on top of its platform. Third, RenEx, Republic Protocol’s proprietary exchange, is the only dark pool exchange that is both decentralized and possesses the technology to ensure anonymous user identity and order detail at all layers of a transaction.

The use of Shamir’s Secret Sharing algorithm and zero-knowledge proofs creates an environment where only the transacting parties have access to their own identity, order size, and coin pairing. Traders will never have to trust their funds to an exchange, as all transactions are executed by atomic swap after darknodes privately match their orders. Compared to centralized alternatives such as Kraken’s dark pool, Republic Protocol will offer higher coin security with atomic swap architecture, lower fees, lower minimum order size, and more crypto pairings for its users.

Dark pools have played a crucial role in traditional equity markets since the 1980s by giving institutional players a private outlet to trade large blocks while avoiding significant slippage and market impact. In 2016, Cowen ATM estimated that dark pools account for approximately 15.0% of all volume in equity markets, with the average trade approximately 200 shares in size. Compared to equity markets, the nascent crypto market offers little liquidity on lit exchanges and could experience higher demand for OTC trading and dark pools. In fact, the TABB Group recently released a study claiming that the OTC crypto market receives 2–3 times as much bitcoin volume as traditional exchanges. With its decentralized dark pool protocol, Republic Protocol is the first player in the space with the technological infrastructure to address this highly profitable market need.

While Republic Protocol stands as a competitor to established OTC desks, it also has the unique ability to leverage these brokers as liquidity partners. Republic Protocol’s relationship with OTC brokers may comprise any combination of the following: 1) Republic Protocol competes directly with OTC brokers and captures a percentage of their market cap, 2) Republic Protocol partners with OTC brokers to pool liquidity on RenEx and open fiat-to-crypto pairings to new investors, or 3) OTC brokers create their own exchanges using Republic Protocol. Each option is a net positive for Republic Protocol, with options 2) and 3) presenting the largest potential upside. Per its recently announced partnership with Wyre, Republic Protocol has already begun executing strategic alliances with OTC trading desks. Wyre will migrate trading to Republic Protocol as available currency pairs permit. As an added benefit, Wyre will also implement its KYC compliance on RenEx. In return, Wyre will receive a share to be determined of the liquidity partners’ incentive (0.08% of RenEx’s total volume).

Republic Protocol is backed by a lineup of heavy-hitting investors that includes FGB Capital, Polychain Capital, and Kenetic Capital. But its headlining investor is crypto giant Huobi, which this past July launched its own Huobi Cloud platform for OTC desks. These investor partnerships with Republic Protocol could signal an intention to use large block or high frequency trading (HFT) as a source of corporate liquidity in the future. As exchanges on Republic Protocol grow in volume, new OTC brokers will have an incentive to pool liquidity and open additional crypto pairings for their customers.

Investment Catalysts:

  • Following an impressive testnet, RenEx’s Mainnet Beta launched at the end of September 2018. Republic Protocol’s 200 testnet darknodes earned an estimated $21,700 in fees in just over two months. Republic Protocol has also released an update which significantly lowers gas costs for matching orders.
  • REN, the Republic Protocol token, has just been listed to Huobi and The Ocean, enhancing its liquidity profile.
  • After the public mainnet is launched, Republic Protocol will work toward adding compatibility with additional chains such as LTC.

Investment Concerns:

  • For Republic Protocol to reach its full potential, exchanges beyond RenEx must build on the protocol. To date, no other exchanges have announced such intentions, but we would expect exchange growth after Republic Protocol proves itself as a legitimate player in the dark pool space. Fortunately, the market will be large enough to spread the wealth to multiple dark pools. Even if exchanges such as Binance, Huobi, and Coinbase were to develop their own independent dark pools, our valuation demonstrates that Republic Protocol could still yield a handsome market cap with only a small percentage of market capture.
  • Republic Protocol has stated that it will maintain sole responsibility for listing new coins on RenEx. This leaves Republic Protocol susceptible to government regulation of the listing of securities. If new third-party exchanges were built on the protocol, Republic Protocol would be able to a create decentralized listing process more resistant to regulation. Republic Protocol has hinted that its centralized oversight of the listing process may be only a short-term arrangement until the protocol is further developed.
  • It is unclear how many darknodes the Republic Protocol team will operate. The founders have sufficient REN to operate 3,000 darknodes, which constitute 30% of the maximum amount of nodes. In the early stages of mainnet, even 1,000 darknodes would likely give the team a majority of running nodes. Running nodes will provide the team with additional revenue for development, but too many would put the decentralized nature of Republic Protocol at risk. Republic Protocol plans to announce the number of nodes prior to the release of public mainnet, such that investors should have a better understanding of darknode distribution and overall node concentration as Mainnet Beta ends.

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Ænigma Capital: is a crypto hedge fund that combines venture capital and hedge fund investing approaches to address the unique and rapidly evolving nature of the crypto market. We establish investment relationships early and manage exposure based on fundamental valuation and quantitative market models.