Interpretation of MakerDAO’s multi-chain strategy: How to choose the Layer 2 route?


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

Original title: “Understanding MakerDAO’s multi-chain strategy and roadmap, which Layer 2 route will MakerDAO choose? 》
Written by: MakerDAO
Translation: Kyle

On May 28, Derek, the promoter of MakerDAO’s core unit, published an article ” Maker’s Multi-Chain Strategy and Roadmap. ” Introduced the opportunities and potential risks of MakerDAO in the fast-developing multi-chain ecosystem.

The purpose of this forum post is to outline the Layer 2 ecosystem and the various opportunities that exist. By introducing our insights on the multi-chain landscape, we hope to (1) guide and communicate with the wider community on this specific topic; (2) collect feedback on various development opportunities, and (3) adjust technology and development resources In order to reach a consensus on how MakerDAO should adapt to this new complex environment strategy.

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

Current multi-chain environment

We are currently at the intersection of two issues:

“How will DeFi develop?”

“Where will liquidity go?”

The rapid development of DeFi makes it difficult for us to answer these questions. Will one chain dominate? Will it be a Layer 2 to achieve the dominance? Will liquidity be concentrated in one or more places? It seems that in this new stage, it is impossible to concentrate in any specific place due to the innovation and development that occur in various ecosystems.

Ethereum is likely to become the global settlement layer (think of it as the Manhattan center of cryptocurrency). In this case, it is unreasonable to assume that everyone will adapt to a single “city” where real estate prices are skyrocketing. On the contrary, people with growing DeFi needs will build new, prosperous communities by creating their own islands. Haseeb Qureshi also put forward this idea in ETH2 cities, suburbs, and farms, where “blockchain city planning” and sharding will be used to meet demand.

Applications may gather in Rollup, chains or side chains based on their need to maintain close communication links, in the same way that the population tends to gather in regions and cities.

In terms of extension, there is no reason to think that people will not live in places where the cost of living is lower or work is better—similarly, in the case of DeFi, people will be attracted to the most profitable places. Therefore, we need to capture the value that 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.), so we have a competitive advantage and can seize where the value lies. The multi-chain environment is a constantly evolving and diverse ecosystem:

This is a constantly evolving environment. Not only is the ecosystem changing, but cross-chain bridges and technology implementation also determine the rules for their operation.

This movement of tokens introduces technical risks that must be evaluated for different Layer 2 solutions.

More in-depth discussion: scalability and scalability/security trade-offs

There is no need to go into the semantic discussion of what constitutes a “real” Layer 2 scalability solution. The scalability problem still applies to every chain that claims to provide “better scalability and cheaper transactions.” The reason why DAI is unique and powerful is that it is built on the most decentralized smart contract platform today (Ethereum). In the long run, it will strive to achieve scale (and follow-up) without compromising decentralization. Security). . Since DAI is not upgradable, it inherits many security and attributes (for example, censorship resistance) from the base layer of Ethereum. It can be said that each extension solution (including Rollup) adds additional security risks that MKR holders, DAI holders and Vault users should be aware of.

Similarly, each new type of collateral should be viewed from the perspective of financial and technical risks. To extend the MakerDAO protocol to new chains, a comprehensive analysis of the security assumptions and risks introduced by these new chains or Rollup is required. On Ethereum, we tend to ignore the very real technical risks associated with Ethereum itself (for example, if Ethereum collapses, the entire DeFi ecosystem including MakerDAO will collapse—so we can think of this as our only Acceptable systemic risk). When we consider transferring DAI or casting DAI on other chains, these risks become reality and MKR holders cannot ignore them.

Examples of these risks include:

  1. New encryption primitives used in zk Rollups that may be untested and difficult to audit
  2. The complexity of the new AVM virtual machine on Arbitrum and the complexity of the strategy for handling Optimism hard forks on the Optimistic Rollup platform
  3. MassExit problem based on Plasma
    4. Cartel group problem in DPoS system
  4. Upgradability on most platforms and reliance on MultiSigs
  5. Risks related to data availability
  6. The safety of cross-chain bridge operators and the related risks of freezing/detaining funds
  7. Risks associated with the L2 Rollup scheme that uses sidechains instead of inheriting the security of Ethereum

According to the risk assessment framework, Maker holders can choose any of the following:

By allowing the use of these collaterals to directly mint DAI to support the above chains, or support (underwrite) different bridges to smooth the transmission of DAI from Ethereum to these chains, so that end users can use these chains cheaper and safer DAI, or

It is completely avoided to directly support these chains at the protocol level, so that the community can decide how to use DAI on these chains (this is the case with most of the latest side chains such as BSC, Polygon, Klaytn, etc.).

Type of cross-chain bridge

Most end users tend to transfer DAI from one chain to another, just like transferring USD from one bank account to another. Perhaps a better analogy is to deposit DAI in a centralized encrypted exchange, where DAI disappears from the user’s wallet and 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 in the following figure:

Interpretation of MakerDAO's multi-chain strategy: How to choose the Layer 2 route?

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

You can see this example on (two versions of DAI on the Ethereum-Fantom bridge) or Polygon (depending on two different versions of non-substitutable DAI using PoS or Plasma).

Interpretation of MakerDAO's multi-chain strategy: How to choose the Layer 2 route?

In addition, and more importantly, compared to scams designed to lure users into a false sense of security through deposition, each cross-chain bridge may have a different function and security model, becoming a completely permissionless and non-upgradable bridge (its The behavior is formally defined and verified). Compared with a scam that aims to induce users to have a false sense of security by placing user tokens, the scam is only intended to steal users through an upgrade mechanism in the future.

On a permissionless chain that allows everyone to deploy any tokens and cross-chain bridges, the community will finally reach a consensus to determine what the “real” DAI is on the sub-chain. The MakerDAO community can create and support its own bridge (more on that below), or it can simply endorse an existing bridge. Similarly, at the UI level, we may see that centralized UI prefers a “version” of DAI instead of DAI, or UI developers use standardization work and a list of tokens with social consensus to revolve around which token is ” “Real” tokens-in all intents and purposes-can be substituted from “original” products and should be treated as an encapsulated/synthetic asset.

Maker’s opportunities and challenges

The evolving multi-chain ecosystem has brought opportunities and challenges to the Maker Agreement, which need to be understood and discussed.

MakerDAO has unique advantages and can take advantage of the evolving ecosystem in the following ways:

  • Provide cheap Rollup and sidechain DAI access for users who are currently unable to purchase due to high gas costs. In this way, retail users’ demand for DAI will increase.

  • It is allowed to use any collateral available on these chains to directly mint DAI on L2 and other chains. This will promote the growth of the overall supply of DAI.

  • Casting DAI can provide almost unlimited liquidity for fast withdrawal of cross-chain bridges, chain-to-chain communication channels (see Connext, Hop) and other protocols that may suffer from liquidity crunch

  • Use collateral inherent in other chains, including basic tokens such as FTM, SOL, AVAX, etc., without bridging and encapsulating them on Ethereum

The complexity of the multi-chain world brings new challenges and risks, including:

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

  • If the mint is damaged, the minting rights of DAI outside of L1 Ethereum will generate a serious attack vector (unlimited number of L2 DAI can be mined and withdrawn to L1)

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

  • The collateral currently used to mint DAI on L1 may be increasingly transferred to various L2 or other chains in order to seek better income opportunities from the current vault, thereby reducing the available use of L1 Ethereum Total amount of collateral to mint DAI

  • The complexity of mortgage clearing and global settlement will greatly increase

The Maker agreement requires collateral to mint DAI. If more and more collateral is transferred to other chains, Ethereum may eventually become the global settlement layer for these chains/Rollup, and most actual DeFi transactions will occur on L2.

The Maker protocol will need to chase the value of Ethereum outflow, while appropriately managing risk and maintaining the basic ledger of all DAI in the entire multi-chain field. Ultimately, when the multi-chain ecosystem matures, in the world after ETH 2.0, it may be worth considering transferring Maker’s ledger (VAT) to Rollup with the highest liquidity (combinability) or its own Rollup (with low execution speed and low execution speed The cost of the oracle update).

The Maker strategy of a multi-chain ecosystem

Various protocols have adopted different strategies for the multi-chain ecosystem. These are different from:

Build side chain/Rollup:

Choose a specific scalability solution/rollup. This strategy places a bet on a specific scalability solution and ultimately connects its users with it. Examples include:

Deployed on multiple chains (Polygon, BSC, Fantom, Avalanche, etc…):

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

There is no single strategy that can fit all situations. What makes sense for one project (for example, DEX that may want to be deployed on different chains) will not fit the needs of other projects (for example, you may want to choose a specific Rollup NFT publishing platform or game).

We recommend that the MakerDAO community focus on two main use cases:

  • Bridge DAI from L1 to other Rollup/chains so that end users can use DAI cheaply.

  • Evaluate the feasibility of using collateral available on other chains to directly mint DAI on other chains. To this end, an appropriate risk assessment and framework must be developed.

The ideal solution is to make the bridged DAI and the cast DAI completely interchangeable, so for the end user, this is the same DAI. This is ultimately only possible if MakerDAO controls the bridge used to transfer DAI to other chains/Rollup. DAI bridged to a third party should always be considered “encapsulated” DAI (see e.g. KDAI on Klaytn or bridged DAI on xDAI). This picture shows the concept of “Package DAI” created by the third-party “Uni Bridge” and DAI created by “Maker Bridge”. The latter can be interchanged with DAI cast directly on L2:

Interpretation of MakerDAO's multi-chain strategy: How to choose the Layer 2 route?

Proposed roadmap for community discussion

Note: Optimism DAI bridge has been approved by the community

  1. Create a risk framework to evaluate different scalability solutions.
  2. Design a blueprint for casting DAI on L2, while still tracking all the minted DAI in the “Vat” L1 base contract. This may include the implementation of a special similar type that allows a certain amount of DAI to be minted (depending on the security risk of a given L2). The DAI will be immediately locked in the bridge so that users who cast DAI directly on L2 and want to move it to L1 can use it.
  3. Optimism
  4. Deploy an upgradeable Maker bridge to make DAI available as soon as possible
  5. Implement a quick withdrawal plan
  6. Allow to cast DAI directly on Optimism
  7. Establish a PSM-like contract that allows users to exchange encapsulated DAI created by a third-party bridge with DAI minted through the Maker bridge (if it is safe to do so)
  8. Arbitrum-According to a recent announcement, Arbitrum plans to launch their mainnet on May 28. Since their architecture is very similar to Optimism, we propose the same steps as Optimism
  9. Continue to work with Starkware and zkSync to create a specific roadmap, aiming to make DAI available on these chains, and in the future will allow direct casting of DAI there
  10. Explore Non-Rollup scalability solutions (Polygon, Klaytn, Avalanche, BSC, etc…)-given that their security is much weaker (they do not inherit the basic layer security of Ethereum, such as L2 Rollups), mainly Work with integration and growth teams to appropriately and safely provide assistance to bridge DAI and track DAI liquidity

In addition, thanks to the protocol engineering team, especially @bartek, @hexonaut and @krzkaczor for recording our thoughts together. As a team, we welcome questions and feedback from the community, and will follow up the upcoming AMA/discussion to gain insight into the next steps and share our L2 progress. Thank you!

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