Based on the previous proposal from Arrakis Finance, the major updates in this revision include:
- Deploy PALM for ACX liquidity management on Mainnet only
- The baseline PALM deposit allocated from Across DAO is set to $300k
- A review of the performance of PALM for ACX/WETH that was initiated about 2 months ago
Deploy Arrakis PALM to conduct market making for ACX on Mainnet UniV3, with POL allocated from Across DAO.
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 $200m), across Ethereum, Optimism, Arbitrum and Polygon
- More than 25% Uniswap V3 total TVL
- More than 80 projects have their liquidity managed via Arrakis vaults (both V1 and V2)
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, USDC, etc.) and attain deep and sustainable liquidity. The major advantages of using PALM are:
- 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 pull 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: no swaps involved, PALM conducts market making by setting up ranges / limit orders…
- Minimize or outperform IL: PALM is able to keep the value of the deposit close to that of holding the initial assets, and often outperform it.
- Trustless & transparency: Across DAO retains the custody 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 over 30 protocols and counting. Protocols such as Stargate, Kwenta, Pika, Premia, etc. are benefiting from the high capital efficiency and cost effectiveness enabled by PALM.
Currently, there are two major challenges in terms of ACX liquidity:
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, 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.
Even though in the same proposal a short term solution (“Reward Locking”) is proposed, it should only act as an interim solution as renting liquidity is never a sustainable solution and eventually does more harm than good to the protocol and token holders.
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 nearly 6 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 and pulled the ratio to about 40/60, which enables much stronger liquidity support for large volumes.
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.
When compared with the Balancer pool, PALM offers competitive pricing for large swaps.
For large volumes, such as the volume surge of ACX over the past 3 weeks, PALM undercuts the Balancer pool and take the majority of the flow.
In addition, PALM has also earned some decent trading fees for Risk Labs.
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.
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 generated
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!