The aim of this forum post is to present a bird’s eye view of the Layer 2 ecosystem and the various opportunities that exist. By presenting our interpretation of the multichain landscape we hope to be able to (1) Guide and engage with the broader community on this specific topic, (2) Gather feedback regarding the various opportunities, and (3) Align technical and development resources to agree on a strategy for how MakerDAO should embrace this new and complex landscape.
This approach will help to define our collective focus on the Layer2 priorities that exist - specifically, which ones offer the right balance of growth, exposure and security to protect the integrity of DAI as a stablecoin across multiple chains. We welcome community feedback and plan to host a series of AMA / discussions in the coming weeks as we solidify the strategy and roadmap for the coming months.
We currently stand at the cross-roads of two questions:
“How will DeFi grow?” and “Where will the liquidity go?”
The rapid and evolving growth of DeFi makes these difficult questions to answer; Will it be one chain? One Layer2 implementation? Will liquidity concentrate in one or multiple places? It appears that at this nascent stage, concentration in any one particular place is unlikely due to the innovation and development happening in various ecosystems.
Ethereum is likely to become a global settlement layer (think of it as the Manhattan of crypto), in this context it is unreasonable to assume that everybody will fit into a single “city” where property prices skyrocket. Instead, people with growing DeFi needs will establish new, thriving communities by creating their own islands. Haseeb Qureshi also draws out this line of thinking in ETH2 Cities, Suburbs, Farms where “blockchain urban planning” and sharding will be used to meet demand.
(above) Apps may cluster into rollup, chains or sidechains based on their need to maintain close communication ties - the same way populations tend to cluster in regions and cities.
Expanding upon this, there is no reason to assume that people would not go to places where it is cheaper to live or have a better job - similarly, in the case of DeFi, people will be drawn towards the highest yield. Therefore, we need to capture the value as it exists in these different blockchain environments and allow the value - denominated in DAI, to flow safely between them. In some cases, value is unlikely to flow out of cities (Solana, BSC etc) and so there is a competitive advantage for us to capture this value where it lies. The multichain environment is a diverse and growing universe of ecosystems:
This is an evolving environment where it is not only the ecosystems that change, but also the bridges and technical implementations that determine the rules within which they operate. This movement of tokens introduces technical risk that must be assessed for different Layer2 solutions.
Without going into the weeds of the semantic discussion of what constitutes a “true” Layer2 scalability solution, the scaling trilemma still applies to every chain that claims to provide “better scalability and cheaper transactions”. What makes DAI unique and powerful is that it is built on the most decentralized smart contract platform today, i.e. Ethereum, that, in its long-term vision, will try to achieve scale without compromising on decentralization (and - as a corollary - security). Given that DAI is non-upgradable, it inherits much of its security and properties from base-layer Ethereum (e.g. censorship resistance). Suffice to say that every scaling solution, including Rollups, adds an additional security risk that MKR holders, DAI holders and Vault users should be aware of.
Similarly, each new collateral type should be looked at from financial and technical risk perspectives. Extending the MakerDAO protocol to new chains necessitates a thorough analysis of security assumptions and risks that these new chains or Rollups introduce. While on Ethereum we tend to ignore the very real technical risks associated with Ethereum itself (e.g. if Ethereum breaks down, the whole DeFi ecosystem including MakerDAO will break - we can therefore consider this to be a systemic risk that we simply accept). When we consider moving DAI or minting DAI on other chains, these risks become real and cannot be ignored by MKR holders.
Examples of such risks are:
- New, possibly untested and hard-to-audit cryptographic primitives used in zkRollups
- Complexity of the new AVM on Arbitrum or the strategy for handling Ethereum hard forks on Optimism on Optimistic Rollup Platforms
- MassExit problem on Plasma-based chains
- Cartel formation in DPoS systems
- Upgradability and reliance on MultiSigs on most platforms
- Risks related to data availability
- Security assumptions underlying bridge operators and the risks related to funds being frozen / seized there
- Risks associated with using sidechains as opposed to L2 Rollups that inherit their security from base-layer Ethereum
Based on the risk evaluation framework, Maker holders can choose to either;
- Support the above chains by allowing direct minting of DAI using collateral from these, or
- Support (underwrite) different bridges smoothing transfer of DAI from Ethereum to these chains so that it is cheaper and safer for end-users to use DAI there or,
- Entirely refrain from directly supporting these chains at a protocol level, thereby leaving it up to the community to decide how DAI should be used on these chains (as is the case for most current sidechains like BSC, Polygon, Klaytn, etc…).
Most end users tend to think of moving DAI from one chain to another as similar to moving USD from one bank account to another bank. Perhaps an even better analogy would be depositing DAI to a centralised crypto exchange, where DAI disappears from a user’s wallet and credit appears in the user’s exchange account. A similar user experience can be provided on platforms such as Loopring and dYdX (both being ZkRollups), where there is only a single way to deposit and withdraw tokens.
On a permissionless blockchain, however, where everybody can deploy their own bridge, it is far more likely that users will have more than one bridge to choose from, like in the diagram below:
In this example, each bridge (Bridge A and Bridge B) will create its own “version” of DAI on a child chain - these different versions of DAI won’t be fungible (similarly to, say, wBTC vs renBTC). Moreover, if the MakerDAO community does not control the narrative around the DAI brand, end users may end up having many different non-fungible versions of DAI in their wallet creating potential confusion.
An example of this can be seen on multichain.xyz (two versions of DAI on Ethereum-Fantom bridge) or Polygon (two different versions of non-fungible DAI depending on whether the PoS or Plasma bridge was used)
Furthermore and more importantly, each bridge may have different functionality and security models ranging from being fully permissionless, non-upgradable bridge, where its behaviour is formally defined and verified, compared to a scam designed to lure users into a false sense of security by depositing their tokens, only to rugpull them later e.g. through an upgrade mechanism.
On permissionless chains, where everybody is allowed to deploy any token and bridge, it will be ultimately up to the community to reach social consensus on what is the “true” DAI on a child chain. MakerDAO community can either create and support their own bridge (more on that below) or simply endorse one of the existing bridges. Likewise, at the UI level, we may see centralised UIs favoring one “version” of DAI over another, or where UI developers adopt standardization efforts and token lists with social consensus around which token is the “real” token that is - for all intents and purposes - fungible from the “original”, and which should be considered a wrapper / synthetic asset.
The evolving multichain ecosystem provides both opportunities and challenges for the Maker protocol that need to be recognised and discussed.
MakerDAO is uniquely positioned to take advantage of the growing ecosystem by:
- Providing cheap access to DAI on Rollups and Sidechains for users currently priced out of Ethereum due to high gas prices. By doing so, the demand for DAI amongst retail users will increase.
- Allowing minting of DAI directly on L2s and other chains using whatever collateral is available on those chains. That will promote growth in the overall supply of DAI.
- Minting DAI to provide virtually unlimited liquidity for fast withdrawal bridges, chain-to-chain communication channels (see Connext, Hop) and other protocols potentially suffering from a liquidity crunch
- Using collateral that is native to other chains including base tokens such as FTM, SOL, AVAX, etc… without needing to bridge and wrap them on Ethereum
The complexity of the multichain world brings new challenges and risks, including:
- Many versions of DAI create confusion in the community, especially amongst retail users
- Minting rights for DAI outside of L1 Ethereum creates a serious attack vector if the minter is compromised (unlimited amount of L2 DAI could be minted and withdrawn to L1)
- DAI can get stolen/stuck in the L1 part of the bridge (either through user error sending DAI to the bridge or a bug in the bridge)
- Collateral on L1 that is currently used to mint DAI may be increasingly moved to various L2s or other chains in pursuit of better yield opportunities flowing out of current Vaults, thereby reducing the overall amount of collateral that is available to mint DAI on L1 Ethereum
- Complexity regarding collateral liquidations and global settlement will greatly increase
Maker protocol needs collateral to mint DAI. If more and more collateral is moved to other chains, Ethereum may eventually become a global settlement layer for these chains / rollups while most of the actual DeFi transactions will happen on L2s. The Maker protocol will need to chase the value flowing out of Ethereum while properly managing risks and maintaining the base ledger of all DAI minted in the entire multichain universe. Ultimately, when the multichain ecosystem matures, in the post ETH 2.0 world, it may be worth considering moving Maker’s ledger (VAT) onto a rollup with most liquidity (for composability) or its own Rollup (for speed of execution and the low cost of Oracle updates)
Various protocols employed different strategies towards a multichain ecosystem. These vary from:
- Building a Sidechain / Rollup:
- Selecting a specific scalability solution / rollup. This strategy places a bet on a specific scalability solution ultimately tying it’s users to it. Examples include:
- Deploying on multiple chains (Polygon, BSC, Fantom, Avalanche, etc…)
- Aave, Curve, 1inch, SushiSwap, mStable, PoolTogether, Frax Finance, bzX, Augur on Polygon
There is no one strategy that fits all. What makes sense for one project (e.g. a DEX that may want to get deployed on different chains) will not fit the needs for other projects (e.g. an NFT issuance platforms or Games that may want to choose one particular Rollup).
We recommend that the The MakerDAO community focuses on two primary use cases:
- Bridging DAI that originated on L1 to other rollups / chains so that DAI is cheap for end users to use.
- Assessing the feasibility of minting DAI directly on other chains using collateral that is available there. For this to be achieved, an appropriate risk assessment and framework must be developed.
The ideal solution would aim at making bridged DAI and minted DAI fully fungible so for the end user this is the same DAI. This is ultimately possible only if MakerDAO controls the bridge used to transfer DAI to other chains / rollups. DAI bridged with third party bridges should be always considered “wrapped” DAI (see e.g. KDAI on Klaytn or bridged DAI on xDAI). This diagram shows the concept of “wrapped DAI” created by a third-party “Uni Bridge” vs DAI created by a “Maker Bridge” that can be fungible with DAI minted directly on L2:
Note: the Optimism DAI bridge was already approved by the community
Create a Risk Framework to assess different scalability solutions.
Design a blueprint for minting DAI on L2 while still tracking all minted DAI in the “Vat” L1 base contract. This could include implementing a special ilk-type that would allow minting a capped amount of DAI (depending on the security risk of a given L2). This DAI would be immediately locked in a bridge so that it is available for users minting DAI directly on L2 and wanting to move it to L1.
Optimism (see announced roadmap)
Deploy the upgradable Maker bridge to make DAI available as soon as possible
Implement a fast withdrawal scheme
Allow minting of DAI directly on Optimism
Set up a PSM-like contract that allows users to swap wrapped DAI that will be created by third party bridges with DAI minted through Maker bridge (if it is safe to do so)
Continue working with Starkware and zkSync to create specific roadmaps aimed at making DAI available on these chains in a manner that will allow direct minting of DAI there in the future
Explore Non-Rollup Scalability Solutions (Polygon, Klaytn, Avalanche, BSC, etc…) - given their much weaker security (they do not inherit Ethereum’s base layer security like L2 Rollups) work primarily with the Integration and Growth Teams to help properly and safely bridge DAI and track DAI liquidity
Additional thanks to the Protocol Engineering Team, in particular @bartek , @hexonaut and @krzkaczor for coming together to document our thoughts. As a team we welcome community questions and feedback and will be following up with an upcoming AMA / Discussion to dive into the next steps and share our L2 progress. Thank you!