Abstract

wDAI is our first foray to bridging Ethereum's yield bearing tokens between layers. It introduces less trust-ful integrations to enable more permanent building blocks into DeFi as we know it. Through MakerDAO's DAI Savings Rate, users are able to access yield directly from any Layer 2 (and beyond) without requiring extra participants to custody their funds. 1 wDAI is equal to 1 DAI in all cases.

Background

In 2019 MakerDAO introduced the Dai Savings Rate to help balance the Maker Protocol. Its funded via the Stability Fees paid by Maker Vault holders and acts as another mechanism to maintain its peg. There's Currently 5.3 billion DAI in circulation in Jan 2024.

Over the past 12 months there's been a myriad of Layer 2s launching on top of Ethereum, reminiscent of the L1s launched in 2020. Since the L2s derive their consensus from Ethereum, it offers a lot more flexibility for builders. Although this remains to be seen as most applications opt for cheaper/centralized solutions to ferry information from Ethereum to L2s.

Introducing Wrapped DAI

We propose wDAI as a yield-able stablecoin that is backed 1:1 with L1 DAI deposited on the DSR. This earns yield which can be streamed to a specific staking contract on the L2 (aka L2DSR). Users or protocols who decide to stake the L2DSR will earn yield from the entire pool of assets deposited on the L1.

wDAI harmonizes with the MakerDAO protocol to create a stable solution that increases yield on Layer2s while maintaining decentralization and organic yield.

Fundamentals

wDAI is designed to be trustless. DAI is deposited into the L1 DSR by the end user when bridging. It is withdrawn when a user bridges back from the L2. At no point there's wDAI on Ethereum as it only resides on the L2 it was bridged on. The core bridging contracts rely solely on the official L2 bridges. No third-party bridge can control user's funds when denominated in wDAI.

Third party bridges could however be used to facilitate the bridging from the L2 to the L1 for either fast withdrawals or for wrapping naked DAI from an L2.

The DSR is controlled via MakerDAO and may change based on supply and demand. If too much wDAI is bridged, it may cause the DSR to go down to a reasonable amount.

The L1TokenBridge manages the locking, depositing, unlocking and withdrawing of DAI. It also accounting of the surplus DAI earned by itself. It uses the Messenger contracts provided by each L2.

There is a unique L1TokenBridge per L2 or chain that the protocol is deployed on to reduce the effects of issues on a specific chain.

The L2TokenBridge is deployed together with ERC20TokenBridge to enable the bridging process.

The L2DSR is a 4626-enabled vault which users can deposit wDAI into to earn any of the surplus DAI. When deposited into the L2DSR, the user holds swDAI or savings wrapped dai.

Tokenomics

Acquiring wDAI

The underlying asset for wDAI is DAI. To acquire DAI one can either open a borrow position on MakerDAO, Swap using the Peg Stability Module (PSM), or buy on the open market.

Depositing to an enabled bridge is as simple as approving and bridging.

Important Notes:

• DAI deposited is not rehypothecated or loaned to third parties.

• wDAI is a 1:1 representation to DAI

• There is no maximum number of wDAI that may be minted by a user

Yield Accrual

Wrapped DAI yield is derived from the DSR revenue generated by borrowers on MakerDAO.

• User deposits DAI into DSR

• Variable Savings Rate is determined by MKR Governance

• DAI accumulated can be withdrawn at any point in time

The yield of wDAI accumulates continually by the rate determined by MakerDAO. This rate can be up to 8% or as low as 4% based on utilization percentages:

Revenue can be calculated by using the DSR values:

$DaiSavingsRate * Deposited WDAI = YearlySurplus DAI$

Auto-compounding

A unique aspect of wDAI is that assets sitting idle in a Layer 2 bridge can now be put to work safely within the confines of the same protocol its managed by. This enables secure yield without introducing new participants to a trusted activity. Yield is compounded without requiring trusted parties to bridge or custody funds.

To earn the yield, users just need to hold the L2DSR vault token.

Yield Distribution

Not all wDAI receives yield. A user must deposit the wDAI into the L2DSR to earn. There is an incentive to deposit given that the total amount bridged will be used to provide yield to the stakers.

If there's 1 million wDAI on Base but only $100k in the L2DSR, and the DSR remains at a 5%. Then L2DSR would provide an effective yield of 50%.

Withdrawal

Users may unwrap their wDAI at any time through the official bridges. Depending on the L2 this may take from 30 minutes to up to 7 days (such as in optimistic L2s). There is no waiting period introduced by wDAI.

Governance

Beyond the management of the deployments and potential bridge upgrades there will be a gamified process to choose which chains wDAI is deployed on. Governance will also be able to vote on a fee toggle which can take 30% of the yield generated on the DAI in the DSR.

Use Cases

While there are a good number of stablecoins within the L2 space and L1 space. None have taken the steps to foster a good process of yield generation that doesn't require an oracle provider or another third party to custody funds.

• Stable Store of Value:

  • Compared to conventional RWA solutions on L2s. wDAI protects from insecure systems by directly using MakerDAO

• Yield Bearing:

  • Users and protocols don't have to settle on the yield available on the L2. Yield can now come from Ethereum further strengthening the bond of the upper levels of chain computation.

• Single-sided alternative to stablecoin liquidity pools:

  • swDAI offers a solution for gaining yield without taking on risk of a swap or lending protocol.

• Non-rebasing token:

  • Since wDAI is non-rebasing and does not require oracles to track the rate, protocols can easily integrate wDAI into lending markets and Automatic Market Makers with little-to-no changes

Conclusion

Wrapped DAI offers a sleek solution for any L2 to launch safer yield-bearing opportunities. This is a DeFi primitive that should be supported day 1 on any L2.