Title: ACX Market Making Proposal - Arrakis PALM
Related Discussions: “Community Owned Liquidity” NFT Project Funding Request
Deploy Arrakis PALM to conduct market-making for ACX with Across’ POL on UniV3, for both Mainnet and Optimism.
Introduction to Arrakis Finance and PALM:
Arrakis Finance is Web3’s trustless market-making infrastructure protocol that enables running sophisticated algorithmic strategies on Uniswap V3.
Since launch, Arrakis has achieved
- Over $1.7b in TVL at its peak (currently around $205m), across Ethereum, Optimism, Arbitrum, Polygon and BNB Chain.
- Over 25% Uniswap V3 total TVL
- Over 80 projects have their liquidity managed via Arrakis vaults
Arrakis PALM - Protocol Automated Liquidity Management is a novel liquidity bootstrapping mechanism that taps into the organic trading volume on UniV3. It is the first product built on top of the Arrakis infrastructure.
In essence, PALM helps protocols bootstrap their base asset inventory (ETH, DAI, etc.) and 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.
- Low requirement in base asset: the initial liquidity can be made of mostly ACX, and PALM will progressively balance it towards 50% to create an equal buy/sell support.
- High capital efficiency: by autonomously and actively managing concentrated liquidity, especially once a sufficient amount of base asset has been bootstrapped, PALM can further reduce the slippage for large trades even if with limited overall liquidity.
- No biased price impact: PALM conducts market making by setting up ranges / limit orders, no swaps involved.
- Trustless & transparency: Across retains the ownership of the liquidity and can withdraw at all times. PALM only autonomously manages the liquidity but can never remove it. All executions of PALM can be monitored on-chain with full transparency.
PALM has been deployed for a growing number of protocols and is performing exactly as designed. An example for KWENTA/WETH can be referenced to demonstrate the overall performance of PALM and how it’s able to bootstrap and deepen the liquidity regardless of the price action.
In particular, the Kwenta case is especially relevant to Across given that it has liquidity on both Velodrome and UniV3 through PALM, and we’ve analyzed the KWENTA liquidity situation on both platforms. The general conclusion is that not only has PALM managed to create a similar liquidity depth (reflected via price impact) with less than 20% of the liquidity on Velodrome, we also made a handsome sum of profit (~$35k) for Kwenta Treasury via trading fees over 3 months. Perhaps most importantly, Kwenta Treasury still owns the liquidity in the end and PALM has also managed to beat the impermanent loss. We will release an in-depth article about it soon.
Currently, there are two major challenges in terms of ACX liquidity:
High liquidity rental cost: 2.3m ACX is given away as LM incentives in the form of bribes via Aura Finance. Based on the average price of ACX since the incentive campaign started (December 2022), this bribe allocation represents roughly $125k, and has bootstrapped around $900k liquidity.
Most probably the incentivized liquidity is going to leave once the reward runs out. 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. Renting liquidity is never a sustainable solution and eventually does more harm than good to the protocol and token holders.
Low capital efficiency: ACX liquidity resides in a 50/50 Balancer pool, resembling a constant function market maker that only accepts full range liquidity provision. Meanwhile, the on-chain volume of ACX has been mostly below $30k daily, which indicates a rather low capital efficiency, i.e. <0.03, given the amount of ACX liquidity on Balancer (~$900k).
All of this presents both a huge cost and a missed opportunity for Across:
- The bribe could have been reserved for better purposes that contribute to the development of the protocol.
- Across could have adopted a market making solution like Arrakis PALM that actively manages UniV3 positions with high capital efficiency and low capital requirement, and still suffices the on-chain volume and even consistently pockets the trading fees for Across treasury.
To help Across save the cost and capture the opportunity, Arrakis proposes to provide Across with the full spectrum of market-making services on UniV3 with PALM to bootstrap and create deep on-chain liquidity.
Specification & Implementation:
Phase 1 - Accumulate base asset
Across initially deposits a certain amount of POL into a PALM vault on both networks. Based on our past experience and the current on-chain volume of ACX, we suggest that the minimum deposit be $200k per vault. The deposit can be mostly made of ACX, e.g. 90/10 in ACX/stETH, and PALM will 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 market-making to create deep liquidity for ACX and to minimize the slippage on both the buy and sell side of the volume.
During the deployment period, the Across community has complete visibility into the execution and performance of PALM via a custom dashboard, and retains full custody of the liquidity in the vault, which means that the Across community can withdraw from the vault or revoke managing access from PALM at any time. PALM can only conduct market-making with the liquidity deposited in the vault and will 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 generated
The potential downside may be that Across Treasury would have to allocate a certain amount of POL for PALM to manage, which may incur opportunity cost. However, given that the alternative would be spending ACX as incentives as opposed to retaining the ownership of the POL, this downside is rather trivial in our opinion.
Yes - employ Arrakis PALM for ACX liquidity management
No - seek for other alternatives instead
Abstain - no vote