Explaining MakerDAO’s multi-chain strategy: How to choose a Layer 2 route?

Which Layer 2s balance growth, exposure and security to protect the integrity of DAI as a cross-chain stablecoin?

On May 28th, Derek, a core unit enabler of MakerDAO, posted an article “Maker’s Multi-Chain Strategy and Roadmap”. It describes the opportunities for MakerDAO in the rapidly evolving multi-chain ecosystem and the potential risks involved.

The purpose of this forum post is to provide an overview of the Layer 2 ecosystem and the various opportunities that exist. By presenting our insights into the multi-chain landscape, we hope to (1) guide and engage with the broader community on this particular topic, (2) gather feedback on the various development opportunities, and (3) align technical and development resources to reach consensus on strategies for how MakerDAO should adapt to this new and complex environment.

This approach will help us focus on existing Layer 2 priorities – specifically, which Layer 2s can strike the right balance between growth, exposure, and security to protect the integrity of DAI as a stablecoin across multiple chains. We welcome feedback from the community and plan to host a series of AMAs / discussions over the next few weeks to solidify the strategy and roadmap for the coming months.

The Current Multi-Chain Environment
We are currently at the intersection of two questions.

“How will DeFi evolve?

Where will the liquidity flow?

The rapid growth of DeFi makes it difficult to answer these questions. Will it be one chain alone? Will there be one Layer 2 implementation? Will liquidity be concentrated in one or more places? It seems unlikely that it will be concentrated in any one particular place at this nascent stage due to the innovations and developments happening in the various ecosystems.

Ether will likely become the global settlement layer (think of it as the Manhattan hub of cryptocurrencies), in which case it is unreasonable to assume that everyone will fit into a single ‘city’ where real estate prices are skyrocketing. Instead, people with a growing demand for DeFi will build new, thriving communities by creating their own islands. haseeb Qureshi also proposes this idea in ETH2 cities, suburbs, farms, where ‘blockchain city planning’ and slicing will be used to meet demand.

Applications may cluster into Rollup, chains or sidechains based on their need to keep close communication links, in the same way that populations tend to cluster in regions and cities.

By extension, there is no reason to think that people will not go to live in places where the cost of living is lower or jobs are better – similarly, in the case of DeFi, people will be drawn to the places with the highest returns. Therefore, we need to capture the value that exists in these different blockchain environments and allow DAI-denominated value to flow safely between them. In some cases, value is unlikely to flow out of cities (Solana, BSC, etc.), so we have a competitive advantage in capturing value where it resides. The multi-chain environment is an evolving and diverse ecosystem of.

Explaining MakerDAO's multi-chain strategy: How to choose a Layer 2 route?

This is an evolving environment where not only the ecosystem is changing, but also the way cross-chain bridges and technologies are implemented dictate the rules under which they operate.

This movement of tokens introduces technical risks that must be evaluated for different Layer2 solutions.

A deeper dive: Scaling and scalability/security tradeoffs
Without going into the semantic discussion of what constitutes a “true” Layer2 scalability solution, the scalability conundrum still applies to every chain that claims to offer “better scalability and cheaper transactions”. The DAI is unique and powerful because it is built on the most decentralized smart contract platform available today (i.e., ethereum), and in the long run it will strive to achieve scale (and with it, security) without compromising decentralization. Given that DAI is not scalable, it will inherit many security and properties (e.g., censorship resistance) from the base layer, Ether. Arguably, each scaling solution (including Rollup) adds additional security risks that MKR holders, DAI holders and Vault users should be aware of.

Again, each new collateral type should be viewed in terms of financial and technical risk. Extending the MakerDAO protocol to new chains requires a thorough analysis of the security assumptions and risks introduced by these new chains or Rollup. On Ether, we tend to ignore the very real technical risks associated with Ether itself (e.g., if Ether crashes, the entire DeFi ecosystem, including MakerDAO, will crash – so we can consider this to be the only systemic risk we can accept). These risks become a reality when we consider transferring DAI or casting DAI on other chains, and MKR holders cannot ignore them.

Examples of these risks include

New, potentially untested and difficult to vet cryptographic primitives used in zk Rollups

Complexity of new AVM VMs on Arbitrum, and policy complexity in handling Optimism hard forks on the Optimistic Rollup platform

Plasma-based MassExit issues

  1. Cartel Group issues in DPoS systems

Scalability and reliance on MultiSigs on most platforms

Risks related to data availability

Security of cross-chain bridge operators and risks associated with freezing/seizing funds

Risks associated with L2 Rollup solutions that use sidechains rather than inherited ethereum security

Under the risk assessment framework, Maker holders can choose any of the following.

Support the above chains by allowing direct casting of DAI using these collaterals, or support (underwrite) a different bridge to smooth the transfer of DAI from Ether to these chains, thus making it cheaper and safer for end users to use DAI on these chains, or

Avoid supporting these chains directly at the protocol level altogether, thus leaving it up to the community to decide how to use DAI on these chains (this is the case with most of the latest sidechains such as BSC, Polygon, Klaytn, etc.).

Cross-chain bridge types
Most end users tend to move DAI from one chain to another, much like moving USD from one bank account to another. Perhaps a better analogy is to deposit DAI into a centralized crypto exchange where the DAI disappears from the user’s wallet and the credit appears in the user’s trading account. A similar user experience can be provided on platforms such as Loopring and dYdX (both ZkRollups) where there is only one way to store and withdraw tokens.

However, on a permissionless blockchain where everyone can deploy their own cross-chain bridge, users are more likely to have multiple bridges to choose from, as shown below.

Explaining MakerDAO's multi-chain strategy: How to choose a Layer 2 route?

In this example, each cross-chain bridge (Bridge A and Bridge B) would create its own “version” of the DAI on the child chain, and the different versions of these DAIs would be irreplaceable (similar to wBTC vs. renBTC). Furthermore, if the MakerDAO community does not control the narrative of the DAI brand, end users may have many different irreplaceable versions of the DAI in their own wallets, creating potential confusion.

Examples can be seen on multichain.xyz (two versions of the DAI on the Ether-Fantom bridge) or Polygon (two different versions of the irreplaceable DAI depending on whether PoS or Plasma is used).

Explaining MakerDAO's multi-chain strategy: How to choose a Layer 2 route?

Moreover, and more importantly, each cross-chain bridge may have a different functionality and security model, becoming a completely unlicensed and non-scalable bridge (whose behavior is formally defined and validated), as opposed to a scam designed to lure users into a false sense of security through the placement of user tokens, which is only intended to be used later through an upgrade mechanism to steal from users.

On unlicensed chains that allow everyone to deploy any token and cross-chain bridges, the community will ultimately reach consensus on what the ‘real’ DAI on a sub-chain is. the MakerDAO community can create and support its own bridges (more on this below), or simply endorse one of the existing ones. Similarly, at the UI level, we may see centralized UI favoring a ‘version’ of the DAI over the DAI, or UI developers working through standardization and a list of tokens with social consensus around which tokens are ‘real’ tokens – for all intents and purposes — can be substituted from the “original” product and should be considered an encapsulated/synthetic asset.

Opportunities and Challenges for Maker
The evolving multi-chain ecosystem presents opportunities and challenges for the Maker protocol that need to be recognized and discussed.

MakerDAO is uniquely positioned to take advantage of the evolving ecosystem by

Providing inexpensive Rollup and sidechain DAI access to users who are currently unable to purchase due to high gas costs. This will increase the demand for DAI from retail users.

Allowing the direct casting of DAI on L2 and other chains using any collateral available on those chains will facilitate the growth of the overall supply of DAI.

Casting DAI provides virtually unlimited liquidity for fast withdrawals across chain bridges, chain-to-chain communication channels (see Connext, Hop) and other protocols that may suffer from liquidity crunches

Use the collateral inherent in other chains, including FTM, SOL, AVAX and other base tokens, without bridging and encapsulating them in ethereum

The complexity of a multi-chain world presents new challenges and risks, including

Many versions of DAI create confusion in the community, especially among retail users

Minting rights for DAI’s outside of L1 Ether can create a serious attack vector if the mint is compromised (an unlimited number of L2 DAI’s can be mined and withdrawn to L1)

DAI may be stolen / stuck in the L1 part of the bridge (either through user error in sending DAI to the cross-chain bridge or error in the cross-chain bridge itself)

Collateral currently used for minting DAI on L1 may increasingly move to various L2 or other chains seeking better revenue opportunities out of the current vault, reducing the total amount of collateral available for minting DAI on L1 ethernet

The complexity of collateral clearing and global settlement will increase significantly

Maker protocols require collateral to mint DAI. if more and more collateral moves to other chains, Ether may end up being the global settlement layer for these chains/Rollup, and most of the actual DeFi transactions will happen on L2.

Maker protocols will need to chase the value of Ether outflows while properly managing risk and maintaining the underlying ledger for all DAIs across the multi-chain space. Eventually, as the multi-chain ecosystem matures, in a post-ETH 2.0 world, it may be worth considering moving Maker’s ledger (VAT) to the most liquid (combinable) Rollup or its own Rollup (performing speed and low cost prophecy machine updates).

Maker strategies for multi-chain ecosystems
Various protocols have adopted different strategies for multi-chain ecosystems. These differ from.

Build Sidechain /Rollup.

Compound Cash

Roadmark Exchange

dYdX (zkRollup on StarkDEX)

ImmutableX (Validium on StarkDEX)

Select a specific scalability solution /rollup. this strategy bets on a specific scalability solution that will eventually connect its users to it. Examples include

Synthetix based on Optimism

Uniswap based on Optimism (now Uniswap may also run on Arbitrum)

Deployed on multiple chains (Polygon, BSC, Fantom, Avalanche, etc. …) : Aave, Curve, 1

Aave, Curve, 1inch, SushiSwap, mStable, PoolTogether, Franx Finance, bzX, Augur on Polygon

There is no single strategy that fits all situations. What makes sense for one project (e.g., a DEX that may want to deploy on a different chain) will not fit the needs of other projects (e.g., an NFT distribution platform or game that may want to choose a specific Rollup).

We recommend that the MakerDAO community focus on two primary use cases.

Bridging DAIs originating from L1 to other Rollup/ chains so that end users can use DAIs cheaply.

Assess the feasibility of using collateral available on other chains to directly cast DAIs on other chains. To do so, an appropriate risk assessment and framework must be developed.

The ideal solution aims to make the bridged DAI and the minted DAI fully interchangeable, so that it is the same DAI for the end user. this is ultimately only possible if MakerDAO controls the bridge used to transfer the DAI to other chains/Rollup. DAIs bridged to third parties should always be considered as “wrapped” DAIs (see e.g. KDAI on Klaytn or bridged DAI on xDAI). This diagram shows the concept of a “wrapped DAI” created by a third party “Uni Bridge” versus a DAI created by a “Maker Bridge” which is interchangeable with a DAI cast directly on L2.

Explaining MakerDAO's multi-chain strategy: How to choose a Layer 2 route?

Proposed roadmap for community discussion
Note: Optimism DAI Bridge has been approved by the community

Create a risk framework to evaluate different scalability solutions.

Design a blueprint for casting DAIs on L2 while still tracking all cast DAIs in the “Vat” L1 base contract. this may include implementing a special analog type that allows a certain number of DAIs to be cast (depending on the security risk of a given L2). This DAI would be immediately locked in the bridge so that it could be used by users who cast DAIs directly on L2 and wish to move them to L1.


Deploy a scalable Maker bridge to make DAIs available as soon as possible

Implement a fast withdrawal plan

Allow direct DAI minting on Optimism

Create a PSM-like contract that allows users to exchange encapsulated DAIs created by a third-party bridge with DAIs minted via the Maker bridge (if it is safe to do so)

Arbitrum – According to a recent announcement, Arbitrum is planning to launch their mainnet on May 28th. Since their architecture is very similar to Optimism, we propose the same steps as Optimism

Continue working with Starkware and zkSync to create a specific roadmap aimed at making DAI available on these chains, which will allow direct casting of DAI there in the future

Explore Non-Rollup scalability solutions (Polygon, Klaytn, Avalanche, BSC, etc. ……) – given their much weaker security (they don’t inherit Ether’s base layer security such as L2 Rollups), work primarily with integration and growth teams to properly and securely provide help bridging DAIs and tracking DAI mobility

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/explaining-makerdaos-multi-chain-strategy-how-to-choose-a-layer-2-route/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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