MakerDAO’s Paradigm-Bending Bridging Solution Begins on StarkNet
Re-Imagining Multi-Chain Bridges in an L2 World with Fast Withdrawals, Teleportation, and Wormholes
Intro to Maker
The Maker Protocol is a set of smart contracts on Ethereum that enable decentralized, permissionless borrowing. Users can put collateral, like Ether, in Maker Vaults and mint the decentralized stablecoin DAI.
Maker lends this DAI to users that have collateral in a Maker Vault. Users can then trade DAI, provide liquidity with it, or do any number of things in the DeFi ecosystem, but if the value of collateral provided falls below a certain threshold, the Maker Protocol will liquidate the position to repay your loan.
This system is dependent upon users depositing collateral into Maker’s vaults and minting DAI. This has led to the creation of over 10 billion DAI in circulation and over $16 billion in TVL. Maker is considered the blue-chip of blue-chip DeFi protocols as the DAI stablecoin has been around since 2017, with Rune Christensen founding MakerDAO in 2014.
If you want a safe place to put your assets and not get rugged, Maker is your best bet. Maker’s philosophy has been to prioritize security, decentralization, and permissionlessness.
The Maker Multi-Chain Strategy
If you’ve spent any time in the crypto/Web3 world, you’ve probably heard about Ethereum, its scaling challenges, and its solutions. The rollup centric roadmap is that solution. Ethereum will scale up transaction throughput, reduce transaction costs, and increase decentralization and security through the use of rollups.
This means there will be many different chains with different levels of activity, liquidity, and security assumptions. The world will consist of sidechains, optimistic rollups, and ZK rollups. The world will be multi-chain.
But what does the multi-chain world look like? A multi-chain world will likely have a few large blockchains operating as city-states, each with its own set of scaling solutions and sidechains. These could be considered “blockchain suburbs”.
In this environment, users will leave Ethereum to use these cheap, fast, high-throughput solutions and Ethereum will become a security layer for these L2s. Optimistic rollups (like Optimism and Arbitrum) and ZK solutions (like zkSync, and StarkNet) will settle transactions on Ethereum.
This poses a problem for Maker. In order for users to actually do things on these chains, they need to migrate their assets over. They’ll have to use bridges.
So what does Maker do as liquidity and user activity leave Ethereum?
- Deploy Maker products to these new chains?
- Create/support bridges that move DAI to these different chains?
- Refrain from acting there entirely?
The space of opportunity on L2s is too large not to capitalize on. As user activity and collateral move to L2s, Maker should follow.
As these users go to other scaling solutions, they’ll want to use stablecoins. Particularly DAI for its decentralized values and history of stability.
But which DAI do you use?
This might seem like an odd question. There’s only one protocol that mints DAI, after all. But DAI bridged from Ethereum to an L2 is not truly DAI minted by Maker. Not all of the DAI flowing throughout Optimism and Arbitrum are “canonical DAI” issued by Maker, but wrapped derivatives. These derivatives are created by 3rd party bridges, and users have many bridges to choose from.
This creates confusion for DAI holders on L2s.
- Why are there multiple versions of DAI in my wallet?
- Is my DAI controlled by a multi-sig or a mutable (ruggable) smart contract or a permissionless, immutable smart contract?
In general, the security model of DAI changes depending on how it’s bridged. Furthermore, if it’s not bridged by Maker, Maker can’t ensure L2 DAI’s security.
There’s another problem: Maker prints DAI based on the amount of collateral held in Maker vaults. As assets flow to these L2s, Maker’s collateral growth will begin to stall.
As Ethereum block space demand increases, block space prices go up, and users are pushed to migrate to L2s. Again, this will lead to an outflow of user assets and DeFi activity out of Ethereum. If Maker is not there to serve L2 users, Maker controlled collateral assets could decline, hurting Maker’s ability to mint more DAI.
Thus, it’s in Maker’s best interest to deploy products to these new chains.
Given that Maker cannot afford to stand on the sidelines, two problem spaces arise in this multi-chain world:
- How should users bridge assets between L1 and L2 so it stays cheap to use?
- How does Maker natively mint tokens on other chains and maintain a unified ledger of assets across all of them?
What is the Maker Wormhole? (Maker’s Bridging Solution)
As a part of this multi-chain strategy, this is Maker’s initiative to bridge across the Ethereum ecosystem. This means bridging between L2 solutions and from L2 to L1.
Imagine L2 to L1 withdrawals as the base case. Bridging from L1 to L2 is cumbersome and costly. Users have to move assets out of L2 by interacting with the L2 Bridge and the corresponding L1 Bridge, all the while waiting for transaction finality. Transaction finality for ZK rollups can take a few hours to finalize while Optimistic rollups can take 1–2 weeks.
The Maker Wormhole utilizes off-chain Maker Oracle Feeds to communicate between L1 and L2. The solution doesn’t need to move assets between L2 and L1 at all! Instead, Maker leans into the burn and mint mechanisms.
For example, when a user initiates a withdrawal, DAI is sent to the L2 bridge, where it is burned. Meanwhile, the Maker-controlled L2 node operators (the Maker Oracle Feeds) listen for these kinds of transactions and create a signed attestation as proof of the transaction. This serves as a proof of the withdrawal. Users can then query the oracle network for an attestation and provide it to the Oracle Fast Withdrawal contract, initiating the minting of L1 DAI.
The general case of L2 to L2 bridging, or “teleporting”, is similar. If a DAI minting contract is deployed on two L2s, the Maker Oracle Network’s wormhole adapters can facilitate the burning of DAI on one L2 and the minting of DAI on the other.
One thing to note here is that the debt collected and issued by the wormhole adapter is fully fungible. This means that there is no need to match each user transfer with a corresponding settlement transaction and the attestation is functioning as collateral.
What is StarkNet?
Rollups are scaling solutions that bundle and compress transactions such that very little data needs to be stored on the L1 (Ethereum).
Imagine each transaction as a driver on the freeway where each driver pays for their own gas. Rollup transactions are like buses. Instead of passengers paying for their own gas, they can pay a small fare to get on the bus with others. In rollups, user transactions are bundled together and settled on Ethereum.
StarkNet is a Validity rollup (often referred to as a ZK rollup) built upon Ethereum security, created by StarkWare. ZK rollups bundle tens of thousands of transactions off-chain, and generate a cryptographic proof (validity proof) that is posted to Ethereum.
One benefit of using ZK technology is the speed of finality. Validity proofs are posted on-chain and can be verified by anyone. There is no waiting period and it is secured by L1 Ethereum. The drawback here is the difficulty of executing the computation and creating the validity proof for it, but once the proof is generated, it’s easy to validate. Improvements are always being made by teams like StarkWare.
StarkNet is a permissionless validity rollup that allows any dApp to scale up computation, makes transactions cheaper, all while benefiting from security of Ethereum.
“The StarkNet ecosystem is growing fast and dozens of teams are already developing for it. In 2021 we focused on adding the required features for a public rollup. In 2022 we will improve StarkNet to make it the most scalable and performant rollup, backed by Ethereum’s security. This year will also be the year StarkNet is decentralized, starting with community discussions, and culminating with a permissionless network.”
- Ohad Barta, Product Manager & Blockchain Researcher at StarkWare
StarkNet has been developed by the StarkWare team, and StarkNet Alpha is now live on Mainnet. What makes StarkNet special is that it’s the first Validity-Rollup to feature fully-composable, general, smart contracts.
Maker and StarkWare have joined forces to usher the multi-chain strategy to life. Maker is a well respected player in crypto with DAI being a fundamental building block of DeFi, and StarkWare is one of the most advanced ZK rollup teams in the world.
Louis of Maker’s StarkNet Engineering team puts it:
“Maker is a flagship protocol with high TVL, and a trusted stablecoin, DAI. At Maker, our ambition is to expand the use of DAI and make it the easiest stablecoin to move around the ecosystem.
We start with Ethereum rollups to rollout canonical DAI. StarkNet stands out with its ZK technology as it is enabling faster withdrawals than other rollups, and it is formulating a fast and ambitious decentralization roadmap.”
The Role of StarkNet in the Multi-Chain Strategy
Maker intends to utilize the speed of L2 transaction throughput to their advantage by making minting, trading, and liquidating faster. L2s are already attracting DeFi projects and user activity, so not building bridges to L2s would put Maker at a competitive disadvantage to those who are building these bridges.
Maker has already built bridges to Arbitrum and Optimism, but they are trying this new ambitious project on StarkNet. StarkNet is one of the first places they want to start implementing the wormhole product because the settlement times are much faster than optimistic rollups.
The move to StarkNet will allow Maker to benefit from improved capital efficiency and StarkNet’s security posture. ZK rollups afford fewer security assumptions than other technologies because validity proofs ensure the transition from state to state is correct.
In addition, many projects have already migrated to StarkWare products. These projects have since seen incredible improvements in cost and transaction volume, and Maker is looking to capitalize on this as well.
Why bridge to StarkNet?
Bridging between StarkNet and other solutions will improve velocity of capital because of the shorter times to finality offered by ZK technology. StarkWare is in the process of implementing a bridging solution between StarkEx applications and Ethereum side chains. Again from Louis:
“Maker has a very ambitious strategy for DAI deployment, and this includes being on as many rollups and as many sidechains as possible. We are formulating a strategy to expand the use of both canonical DAI and wrapped DAI, currently most of the focus is still on canonical DAI. StarkNet has been chosen by Maker as the first ZK-based Ethereum rollup.”
Why mint on StarkNet?
- Reduced transaction costs. Maker users will save on gas by minting DAI natively on StarkNet. An example of users benefiting from StarkWare’s cost reduction is their StarkEx product. On StarkEx a complex perpetual trading transaction costs 1100 gas in ZK rollup mode. This is 200x cheaper than an L1 implementation of the same logic.
- Increased number of users. The reduction of fees and the improved transaction throughput speeds will also likely increase the number of users. Uniswap and Aave have already tripled their number of users by moving to L2s. When Maker moves to L2, it will have access to a new category of short-term, transaction-cost averse traders that would not exist on Ethereum L1.
- Enhanced ability for new collateral types. Maker will also benefit from this reduced transaction cost through the ability to use new collateral types. Previously, Maker had to off board the use of certain collateral types due to the lack of profitability. The lowered transaction costs will likely improve the profitability of using these collateral types.
- Improved transaction throughput speed. Maker will benefit from improving the DAI Savings Rate (DSR), reducing the collateral ratio, improving the liquidation experience, reducing minting time, all while allowing fast withdrawals.
- Smoother bridging to other platforms. There will likely be activity on other scaling solutions and sidechains. Using StarkNet, Maker Protocol can cheaply mint DAI and use Maker’s inexpensive and trustless bridges to move DAI to sidechains.
Maker has dedicated a new engineering team to build out the move to StarkNet. This team is funded by both Maker and StarkWare.
Fast Withdrawals with StarkNet
StarkNet is working with Maker to create a fast withdrawal bridge from L2 to L1 and between other L2 solutions.
It will have the same “Wormhole” structure from before, but in this case there’s a system for resolving the imbalance between each L2 bridge.
Periodically, a “keeper” will call a transfer function from an L2. Let’s call this L2A and call the bridge contract the L2-A bridge. The L2-A bridge will call upon the L1-A bridge to move funds from the L1-A to the L1-B bridge. Subsequently, the L2-B contract will mint DAI on L2B which is used to pay back the debt created by the Wormhole contract.
This specification enables users to exit an L2 through the bridge back to Ethereum. Imagine a scenario where a user moves DAI from Ethereum to L2A, then to L2B, and decides to withdraw back to Ethereum. If assets are not moved from the L1-A bridge to the L1-B bridge, the user will be unable to retrieve their funds on L1. This flushing mechanism maintains a record of how much DAI is on each bridge and maintains Ethereum as the protocol’s settlement layer.
As a side note, users can still withdraw by directly calling the L1 bridge in the case of Oracle failure. This path is slower, but always available.
Louis says that the team has broken out the roadmap into several phases:
Phase 1: Build a simple bridge with a wallet interface. The team has already built the simple bridge and expect to release it and the wallet interface on April 28th, 2022.
Phase 2: Fast Withdrawals. The team is targeting the release of Fast Withdrawals to happen by the end of Q2.
Phase 3: Teleportation. Minting directly on the target L2 is necessary to implement this. The team is looking to complete this by the end of July.
Phase 4: Implement the entirety of Maker on StarkWare. This means multi collateral DAI (MCD) contracts, some flavor of emergency shutdown, and an interface to migrate bad debt to L1 Ethereum.
Traversing the Road Ahead
As the multi-chain world develops, there are going to be security challenges that come with bridging, and projects must move to L2s to continue to serve users. Maker is partnering with StarkNet to do just that. Not only has Maker developed a novel solution to increase coverage of DAI throughout different L2s, they are also capitalizing on the speed and cost advantages that they afford. It’s clear that the roads are paved for Maker to steam into the multi-chain world.
Maker’s wormhole solution is akin to a terminal where different buses can drop off or pick up passengers. This is a novel solution that improves cross-L2 liquidity and positions DAI as the most decentralized, secure, and widely available stablecoin, allowing Maker to increase its product offerings and grow alongside Ethereum.
Author Bio
Jake and Stake is a writer and editor at BanklessDAO. He is the Writers Guild’s Governance Coordinator and runs the State of the DAOs newsletter, with a background in software engineering and cybersecurity.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
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