[ACX] Arrakis PALM - Market Making Proposal

Proposals Active Proposals
1

Summary

Deploy Arrakis PALM to conduct market making for ACX on Mainnet UniV3, with POL allocated from Across DAO.

Introduction to Arrakis Finance and Arrakis PALM

Arrakis Finance Web3’s trustless market making protocol that enables running sophisticated algorithmic strategies on Uniswap V3.

Since launch, Arrakis has achieved

  • $1.7b in TVL at its peak (currently around $460m), across Ethereum, Optimism and Polygon

  • 25% Uniswap V3 total TVL

  • 80 projects have their liquidity managed via Arrakis vaults

Arrakis PALM

  • Protocol Automated Liquidity Management, is a novel on-chain market making mechanism that taps into the organic trading volume on UniV3. PALM autonomously and trustlessly makes markets for protocols to create deep and sustainable liquidity with high capital efficiency and customizability.

In essence, PALM helps protocols bootstrap their base asset inventory (ETH, DAI, etc.) as well as attain deep and sustainable liquidity. The major advantages of using PALM include:

  • Zero incentive: no LM incentive needed, liquidity bootstrapping is done solely via market making.
  • No biased price impact: PALM conducts market making by setting up ranges / limit orders, no swaps involved.
  • Trustless: Across DAO retains the ownership of the liquidity and can withdraw at all times. PALM only autonomously manages the liquidity but can never remove it.
  • Highly customizable: PALM can be adjusted for various asset types and purposes beyond just liquidity bootstrapping.

PALM has been deployed for over 30 protocols and counting. Protocols such as Stargate, Kwenta, Redacted Cartel, Premia, etc. are benefiting from the high capital efficiency and cost effectiveness enabled by PALM.

Background & Motivation

Currently, there are two major challenges in terms of ACX liquidity:

  1. High liquidity rental cost: 2.9m ACX has been given away as LM incentives in the form of bribes via Aura Finance. Based on the current price of ACX, this bribe allocation represents roughly $183k, and has bootstrapped around $1m liquidity.

    As elaborated in this recent proposal 1, the efficiency of the bribe campaign has depreciated by about 50% over time. In addition, most probably the liquidity will leave once the reward runs low. This is particularly true when the LM is conducted through bribes, because rather than directly rewarding community LPs that believe in the value of ACX, it is the vlAura holders that receive the token and they tend to sell the bribes for AURA to increase their bribe earning power, or other assets.

  2. Low capital efficiency: A 50/50 Balancer pool or any x*y=k type DEX has the issue of low capital efficiency. With currently $1m liquidity sitting in the Balancer pool, it can hardly handle any significant volume without causing large price impact. Concentrated liquidity DEX such as UniV3 on the other hand, can apply liquidity where it’s needed the most, and thus minimize price impact for large trades even with limited capital.


At the same time, PALM has been managing liquidity for ACX/WETH on UniV3 for 19 weeks, with liquidity allocated from Risk Labs. The performance, especially in comparison with the Balancer pool, has been as intended.

  • The ratio of ACX/WETH in the initial deposit was about 90/10. Over time, PALM has gradually bootstrapped a decent amount of WETH (grey area)and pulled the ratio to about 50/60, which enables much stronger liquidity support for large volumes.

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  • As more WETH was bootstrapped, PALM allocated more liquidity from the inventory into the market, which leads to the decline of price impact for large swaps. As can be seen below price impact has since also stayed constant.

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  • When compared with the Velodrome pool (left), Balancer pool (middle), Uniswap/PALM (right) offers competitive pricing for large swaps. Although the pool TVLs are extremely different. $1M TVL on balancer, 560k on Velodrome, and only $50k in the market with PALM on Uniswap.

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  • Although balancers TVL is currently 20 times larger, in many high volume days Uniswap facilitates the majority of the onchain volume.

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  • In addition PALM has also earned Risk labs $15.5k in fees since June.

  • Lastly, for PALM, Risk labs has currently paid $1,337 in management fees. In comparison to currently bribing 750k ACX (currently $41,253) on Velodrome for 10 weeks, and having bribed 2.3m ACX ($125k) over the last 5 months on Balancer via Aura.

All the above demonstrates how capital efficient and cost effective PALM. We hope that the proven record of the running PALM vault for ACX will give more confidence to Across community so that the DAO can allocate POL into another PALM vault to further strengthen the liquidity depth for ACX.

Therefore, Arrakis proposes to provide Across DAO with the full spectrum of market making services on UniV3 with PALM to bootstrap and create deep on-chain liquidity. \

Proposal & Specification

Phase 1 - Accumulate base asset
Across DAO deposits a minimum $300k POL in ACX/WETH into a PALM vault. The ratio of ACX/WETH can be as low as 5/95. PALM will first pull that ratio towards 50/50 over time.

Phase 2 - Establish deep liquidity
Once the target ratio of 50/50 is reached, the focus is then on creating deep liquidity for ACX to minimize the price impact on both buy and sell side for large swaps.

During the deployment period, the Across DAO have complete visibility of the execution and performance of PALM via a custom dashboard, and retains full custody of the liquidity in the vault, which means that Across DAO can withdraw the liquidity or revoke the managing access from PALM at all times. PALM can only conduct market making with the liquidity in the vault and never be able to remove the fund.

For the services provided, Arrakis charges fees on two fronts:

  • Management fee: 1% AUM fee on a yearly basis
  • Performance fee: 50% of trading fees generate

Informal Poll / Temp check

  • In favor
  • Against
0 voters

Reference

For more information regarding Arrakis and Arrakis PALM, feel free to have a look at our docs and join our community. I’m also more than happy to respond to any comments here from the Across community about this proposal.

Arrakis.Finance

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3 Likes
2

Thanks for updating this proposal. The data does look very compelling.

One blocker we had discussed in the past is sourcing the base token - in this case WETH. I think if it’s only 5% of $300k ($15k), Risk Labs foundation can help with that. It can be a simple swap of ACX for WETH between the two.

1 Like
3

The economics of Arrakis PALM as compared to the other choices seems compelling. Across is getting larger transfers at less slippage with cheaper bribes. I’m in favor.

3 Likes
4

No brainer given the data.

What hasnt been said is that we should then cease liquidity mining for our LP users. Are you intending that to be a seperate vote?

2 Likes
5

Just in case it isn’t clear, can this be clarified that the 1% AUM fee would $3,000 based on the $300k POL deposit?

In the first round of Arrakis proposals, some folks had some concerns about fees.

6

This sounds very compelling. Is there any backward testing available showing how the system acts under stress assuming we would have had it implemented in the last 2-3 years?

7

I agree, 1% AUM sounds like a pretty hefty AUM fee but I am also interested in creating ways to expand ACX liquidity.

8

Just in case it isn’t clear, can this be clarified that the 1% AUM fee would $3,000 based on the $300k POL deposit?

In the first round of Arrakis proposals, some folks had some concerns about fees.

some considerations to make this as transparent and clear as possible:

  • the 1% AUM fee is taken from the vault tokens, therefore it is not denominated in USD terms.
  • assuming that the $300k TVL of the vault were to remain constant during the whole year, the AUM fees would indeed represent $3k.
  • the AUM fees are paid on a quarterly basis, so Arrakis has the right to claim a 0.25% AUM fee 4 times a year.
  • historically speaking, the trading fees earned by the PALM vaults greatly outpace the AUM fees that Arrakis takes.
9

I think we should also compare this to the emissions and bribes we are paying.

Reward locking
$2646 per week (7k acx/ day x 7 x 0.054)
Velodrome bribe
$4050 per week (75k acx/ week x 0.054)
Arrakis
$58 per week ($3k / week / 52)

Sorry that sounded very one sided - I want to add an edit here:
It’s not an apples to apples comparison. With arrakis we are taking risk so we are committing $300k of capital that can lose from IL or tail risk of something going completely wrong.

10

@arrakis_fremen - we are having some discussion at Risk Labs, but if it makes sense for the Across community we could consider swapping more acx for eth and make the ratio 30/70 eth/acx to start.
I think this would alleviate any selling concerns as you bootstrap and also provide more liquidity right away.
Any issues with that?

11

we are having some discussion at Risk Labs, but if it makes sense for the Across community we could consider swapping more acx for eth and make the ratio 30/70 eth/acx to start.
I think this would alleviate any selling concerns as you bootstrap and also provide more liquidity right away.
Any issues with that?

of course, that wouldn’t be a problem.

12

I think building deep protocol owned liquidity should be a priority and I support this partnership with Arrakis. Focusing our liquidity solutions around a platform that optimizes Uniswap liquidity is a great path to take considering Uniswap is the premier dex we all know and trust. I like the idea of a swap with Risk Labs to obtain more ETH to prevent sell pressure against ACX.

On a side note, we should further this partnership when the time is right. I would love to see Arrakis use oSnap(Announcing oSnap v2: seamless DAO governance with Optimistic Snapshot Execution | by dreamsofdefi | UMA Project | Sep, 2023 | Medium) to secure it’s treasury in the event that Arrakis decides to form a DAO and maintain a community treasury.

13

Agree! When they prepare to launch a token we’ll be all over them, right @arrakis_fremen !?
(we’ve talked to the team about oSnap)