sDAI is a tokenized wrapper for DAI held in the Dai savings rate (DSR) contract, which provides a continuous increase in value of holdings over time at a rate set by Maker governance. Inter Protocol already integrates with DAI, via the parity stability modules for DAI bridged through Axelar and Gravity Bridge. Adding support for sDAI would provide additional benefits without a material change in risk from current state.
sDAI is a tokenized wrapper for DAI deposited in the DSR. It implements the ERC20 token standard and ERC4626 standard for tokenized yield bearing assets. It can be found at the following Ethereum contract address: Savings Dai (sDAI) Token Tracker | Etherscan
Currently, sDAI to DAI ratio increases at a rate of 1% per year via DSR accruals. However, it is expected that this DSR rate will be increased to 3.49% in the near future. This rate can be changed by MakerDAO governance, and is shift with prevailing market rate conditions.
The risk of holding sDAI is essentially equivalent to holding regular DAI, and there are no limits on withdrawals or other liquidity constraints. The only additional risk is smart contract risk of the DSR contract (live since 2019 with no exploits) and sDAI wrapper contract (audited and fairly simple).
IST currently is entirely backed by PSMs (eg IST has a 100% liquidity ratio), and although this ratio will surely drop as crypto collateralized vaults are introduced, we can still expect a sizable share of IST collateral to be held in stablecoins to maintain deep liquidity and keep price close to the $1 target. Currently, these PSM reserves earn zero revenue for Inter Protocol, which represents a drag on capital efficiency. Integrating with sDAI, which is exchangeable for DAI on Ethereum and highly liquid, allows for earning significant revenues on liquidity reserves. This can improve Inter Protocol’s financial sustainability and allow for greater incentivization of IST holders or BLD stakers.
sDAI could be integrated either as a PSM or as a vault collateral for minting IST.
- Allows for minting/redeemong IST at 1:1 ratio of DAI per IST, which provides liquidity support to IST
- Protocol retains 100% of sDAI revenue generated
- Potentially more complicated from technical or governance perspective, as sDAI/DAI ratio must be continuously updated to provide accurate pricing for PSM and this information can only be queried directly on Ethereum L1; Inter Protocol governance may be able to mirror sDAI/DAI exchange rates and DSR accrual rates manually via governance proposals but this would increase governance workloads
- Simpler integration, as sDAI/DAI exchange rate could be updated only infrequently (eg monthly or quarterly) without significant negative impacts, and without the need for a continuous accrual rate to be taken into account
- Requires overcollateralization, and vault borrow rate must be less than 100% of DSR to attract users in normal conditions, which means Inter Protocol would not earn quite as much as with sDAI PSM
- Only provides indirect liquidity support; eg if IST is below peg, sDAI vault borrow rate can be increased to incentivize repayments, but IST can’t be directly redeemed or minted for corresponding value of sDAI
To support integration of sDAI within the Inter Protocol and broader Agoric defi ecosystems, the following steps can be taken as a jumping off point:
- Adding sDAI support to Agoric wallet (ensuring sDAI tokens transferred via Gravity and/or Axelar show up in user balances)
- Add instructions to bridge sDAI to Agoric in the docs
- Begin technical planning and integration work to support sDAI within Inter Protocol PSMs and/or vaults