Generating Randomness
Merlin provides a STROBEbased RNG for use in proof implementations, which aims to provide a general defenseindepth against badentropy attacks. It's intended to generalize from
 the deterministic nonce generation in Ed25519 & RFC 6979;
 Trevor Perrin's "synthetic" nonce generation for Generalised EdDSA;
 and Mike Hamburg's nonce generation mechanism sketched in the STROBE paper;
towards a design that's flexible enough for arbitrarily complex publiccoin arguments.
Deterministic and synthetic nonce generation
In Schnorr signatures (the context for the above designs), the "nonce" is really a blinding factor used for a single sigmaprotocol (a proof of knowledge of the secret key, with the message in the context); in a more complex protocol like Bulletproofs, the prover runs a bunch of sigma protocols in sequence and needs a bunch of blinding factors for each of them.
As noted in Trevor's mail, bad randomness in the blinding factor can screw up Schnorr signatures in lots of ways:
 guessing the blinding reveals the secret;
 using the same blinding for two proofs reveals the secret;
 leaking a few bits of each blinding factor over many signatures can allow recovery of the secret.
For more complex ZK arguments there's probably lots of even more horrible ways that everything can go wrong.
In (1), the blinding factor is generated as the hash of both the message data and a secret key unique to each signer, so that the blinding factors are generated in a deterministic but secret way, avoiding problems with bad randomness. However, the choice to make the blinding factors fully deterministic makes fault injection attacks much easier, which has been used with some success on Ed25519.
In (2), the blinding factor is generated as the hash of all of the message data, some secret key, and some randomness from an external RNG. This retains the benefits of (1), but without the disadvantages of being fully deterministic. Trevor terms this "synthetic nonce generation".
The STROBE paper (3) describes a variant of (1) for performing
STROBEbased Schnorr signatures, where the blinding factor is
generated in the following way: first, the STROBE context is
copied; then, the signer uses a private key k
to perform the
STROBE operations
KEY[symkey](k);
r < PRF[sigdeterm]()
The STROBE design is nice because forking the transcript exactly when randomness is required ensures that, if the transcripts are different, the blinding factor will be different  no matter how much extra data was fed into the transcript. This means that even though it's deterministic, it's automatically protected against an issue Trevor mentioned:
Without randomization, the algorithm is fragile to modifications and misuse. In particular, modifying it to add an extra input to h=... without also adding the input to r=... would leak the private scalar if the same message is signed with a different extra input. So would signing a message twice, once passing in an incorrect public key K (though the syntheticnonce algorithm fixes this separately by hashing K into r).
Transcriptbased synthetic randomness
Merlin provides a transcriptbased RNG that combines the ideas from (2) and (3) above. To generate randomness, a prover:

creates a secret clone of the public transcript state up to that point, so that the RNG output is bound to the entire public transcript;

rekeys their clone with their secret witness data, so that the RNG output is bound to their secrets;

rekeys their clone with 32 bytes of entropy from an external RNG, avoiding fully deterministic proofs.
Binding the output to the transcript state ensures that two different proof contexts always generate different outputs. This prevents repeating blinding factors between proofs. Binding the output to the prover's witness data ensures that the PRF output has at least as much entropy as the witness does. Finally, binding the output to the output of an external RNG provides a backstop and avoids the downsides of fully deterministic generation.
In Merlin's setting, the only secrets available to the prover are the witness variables for the proof statement, so in the presence of a weak or failing RNG, the RNG's entropy is limited to the entropy of the witness variables.
A verifier can also use the transcript RNG to perform randomized verification checks, although defenseindepth is less essential there. They can skip step 2, and perform only steps 1 and 3.
Constructing an RNG
To rekey with secret witness bytes witness
labeled by label
, the
prover performs the STROBE operations
KEY[label  LE32(witness.len())](witness);
To finalize the transcript RNG constructor into an RNG, the prover
obtains rng
, 32 bytes of output from an external rng, then performs
KEY[b"rng"](rng);
Ideally, the transcript, transcript RNG constructor, and transcript RNG should all have different types, so that it is impossible to accidentally rekey the public transcript, or use an RNG before it has been finalized.