sDAI Ethena Reserve Fund Allocation Application

General
1

Applicant information

Name

Phoenix Labs

Key Information

  • Asset name: sDAI (Savings Dai) - Etherscan link.
  • sDAI token code: GitHub - makerdao/sdai: A tokenized wrapper around the DSR.
  • sDAI is a token that represents DAI deposited into the MakerDAO Dai Savings Rate (DSR).
  • sDAI accrues value according to the DSR, as it over time can be redeemed for increasing amounts of Dai. sDAI is therefore not a rebasing token, but an accumulating token that increases in value against Dai over time.
  • sDAI has been live since March 2023 with no security incidents.
  • At the time of writing the total supply of sDAI is 1.120 billion reflecting a deposit of 1.233 billion Dai in the DSR.
  • sDAI does not introduce additional risk to simply holding Dai, besides the smart contract risk of the sDAI token code.

Expected APY

  • Currently the DSR is 7% APY.
  • You can always find the current DSR here: Makerburn DSR dashboard.
  • You can find a chart of the historical DSR values here: Dune chart.
  • The Dai Savings Rate is set by Maker Governance based on the rate market dynamics. Since the DSR yield comes from both DeFi loans, and RWA investments, MakerDAO can react to changes in the rate markets by moving allocations into TradFi or DeFi, to always give the best risk adjusted rate. The expected base rate for DSR should therefore always beat the yield of short term U.S. treasury bonds.

Underlying asset(s)

  • The Makerburn collateral dashboard shows in real time the collateral backing for Dai and thus sDAI. It also shows the yield produced by the collaterals, which is used to fund the DSR.

Minimum/Maximum transaction size

  • There is no minimum or maximum transaction size.

Current AUM for asset

  • At the time of writing the AUM of the Maker Protocol is $5.215 billion. Real time data can be found on the Makerburn dashboard.

Volume metrics

  • Since sDAI can always be instantly redeemed for DAI, we consider the DAI metrics most relevant
  • MakerDAO targets a cash reserves balance of 25% of Dai supply (currently about 1.3 billion) as USDC liquidity in the Lite Peg Stability Module. This ensures that users can swap DAI for USDC with little to no slippage even for swaps in that magnitude.
  • Daily trading volume of DAI is usually in the 100s of millions.

Proposal Summary

Brief outline of the requested allocation of Ethena’s Reserve Fund to your asset/product and benefit to Ethena.

  • We believe that any stablecoin holdings that are not earning yield should be allocated to sDAI. Since sDAI is very liquid, Ethena can always instantly (even for sizes in the 100s of millions) move in and out of sDAI. We believe that any dormant stablecoin holdings, not earning yield should be allocated to sDAI.
  • Furthermore, because DAI is backed by both TradFi and DeFi assets, MakerDAO can always give the best risk adjusted yield across both markets. When DeFi rates are high, MakerDAO allocates into DeFi markets. When TradFi yields are high, MakerDAO allocates into traditional investments such as short duration U.S. treasury bills. MakerDAO should therefore always be able to outperform the yield of short duration U.S. treasury bills.
  • DAI and thus sDAI is already backed by a diversified set of assets and has a long track record of stability. Using sDAI, Ethena can effectively outsource portfolio management, while getting a good risk adjusted return.
  • To sum up, we believe that sDAI offers the best solution in terms of risk adjusted yield, liquidity, diversification, low maintenance, ease of integration and security.

Basics and background

How will this allocation improve the diversification or capital efficiency of Ethena’s Reserve Fund and/or backing assets?

  • Diversification: sDAI is already backed by a diversified portfolio of TradFi and DeFi assets. MakerDAO aims to always give the best risk adjusted yield across TradFi and DeFi, as the DAO manages the diversification on behalf of users.
  • Capital efficiency: sDAI can always be instantly redeemed for DAI which is very liquid against USDC. The investment can be sold off immediately with little to no slippage. Additionally, a portion of DAI backing is allocated to USDe and sUSDe via Morpho, so allocating funds to sDAI may help indirectly drive more demand to USDe.

Please describe any experience your firm has in working with decentralized organizational structures

  • Phoenix Labs has a long track record of working with decentralized organizations, being a long time contributor to Spark and MakerDAO. Our expertise is specifically offering services to decentralized organizations.

What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

Legal design

Do holders of your product have any shareholder, investor, creditor or similar rights?

  • No

Describe the legal and contractual structuring for your product, specifically naming any regulatory bodies overseeing the product, if applicable.

  • DAI and sDAI are decentralized, without any particular regulatory body overseeing the product directly.
  • RWAs backing DAI are held in trust for the benefit of DAI holders, and custodied with leading financial institutions.

How would the proposed allocation be treated in a bankruptcy or insolvency situation?

  • If the Maker protocol faces losses, in the first case this would be offset against the surplus buffer of excess DAI capital (currently 55 million DAI).
  • If losses exceed the surplus buffer, MKR tokens are minted and auctioned to buy back additional DAI to cover the loss.
  • In the worst case scenario where losses are too large to be recapitalized, MakerDAO governance or MKR holders can trigger global settlement, which shuts down the protocol, closes outstanding loans, and makes each DAI redeemable for a pro-rata share of all remaining collateral held in the protocol.

Smart Contract/Architecture

How many smart contract audits have been completed with respect to your tokenized product? Please name the auditors and provide a copy of reports.

  • The relevant audits for sDAI relate to the Pot.sol contract of the Maker Protocol (Multi-Collateral DAI (MCD)), and the sDAI token code.
  • MCD Security Audits by Runtime Verification, Trail of Bits and Peckshield can be found here: Audit Reports | Security
  • sDAI token security audit can be found here: Security and Audits | Spark Dev Docs
  • MakerDAO works closely with ChainSecurity as a security audit partner on a retainer basis.
  • MakerDAO has a bug bounty program on Immunefi that pays up to $10 million in rewards for critical vulnerabilities: MakerDAO Bug Bounties | Immunefi | Immunefi
  • The Dai Savings Rate smart contracts have been in production since November 2019, with no security incident and billions in TVL and volume.
  • The sDAI token has been live since March 29, 2023 with no security incidents, currently with 1.120 billion supply.

Is the asset/product permissioned? If so, how are you managing user identities? Any blacklisting/whitelisting features?

  • No, sDAI and DAI are completely permissionless. There are no blacklisting/whitelisting, KYC or other identity related features.

Is the asset/product present on several chains? Are there any cross chain interactions?

  • Canonical sDAI is available on Ethereum mainnet and Optimism, Arbitrum and Base through canonical layer 2 bridges.

Are the applicable tokens being used in any other protocols? Please describe the various components of the ecosystem.

  • sDAI is widely integrated in the DeFi ecosystem. For example, sDAI is used as a source of yield for users or treasuries, or as collateral type in lending markets. Furthermore sDAI is widely and freely traded on various AMMs. Integrations include:
    • SparkLend as a collateral type
    • Aave v3 as a collateral type
    • Uniswap v3 liquidity pools
    • Gnosis Chain xDAI bridge to offer Gnosis Chain users the DSR yield through sxDAI.
    • Balancer liquidity pools
    • Used in many DeFi project treasuries
  • sDAI is always instantly redeemable for DAI which is widely integrated across all of DeFi and CeFi, offering an easy path to use other services for yield.
  • An overview of sDAI holders can be found here: $1.10 | SavingsDaisDAITokenTracker|Etherscan

How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?

  • The Maker Protocol and therefore Dai and the Dai Savings Rate is managed by MKR token holders through the decentralized Maker Governance process. There are no centralized admins, who can arbitrarily change parameters in the protocol. All changes must go through a transparent Maker Governance vote.
  • Maker Governance votes always impose a timelock, which enables users to react, should they disagree with the management of the DAO.

Is there any custom logic required for your token/product? If so please give any details.

  • sDAI follows the ERC20 and ERC4626 token standards. This should make the token very easy to integrate and manage, and require no custom logic. The ERC4626 interface enables holders to instantly redeem sDAI for DAI.
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