Updated - [ACX] Market Making Proposal - Arrakis PALM

Proposals
1

Update

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

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 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.

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, 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.

  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 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.

    893Ă—368 12.8 KB

  • 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.

    1600Ă—430 51.6 KB

  • When compared with the Balancer pool, PALM offers competitive pricing for large swaps.

    975Ă—632 174 KB

  • 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.

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 generated

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!

Website
Docs
Audits
Twitter
Discord

2 Likes
2

Thanks for refreshing this proposal @barbarossa_Arrakis. I think better ACX liquidity on uni v3 does make sense. I have a few questions:

  1. How did you come to the need for $300k? There is some liquidity from Risk Labs already
  2. When is the 50% profit share divided? Is there a cadence where these profits are shared?
  3. For the 1% AUM fee does Arrakis ensure some amount of liquidity or uptime? For example, market makers for CEX would say they would guarantee x dollars of liquidity within a y % of depth. I think general question is how do we ensure Arrakis is doing some work for earning this 1%. If you were a bad actor you can just deploy very wide ranges and just earn 1%.
  4. Similar to 2) - when does Arrakis take this 1% fee?

A logistic question for Across DAO - how do we get the initial amount of WETH? The DAO only has ACX and UMA. If we want to make things simple and if it’s just a small amount of WETH to start we could consider a swap with Risk Labs given it’s the supporting foundation?

1 Like
3

All valid questions :+1:

This is going to be a separate vault with Across DAO’s fund. For the maintenance of each vault, there is an operational overhead. If an asset doesn’t have much volume, $3k is barely enough to cover the operational cost.

Fees are collected at each rebalance, and the part for the protocol is compounded back to the vault.

As explained in the first point, this 1% is essentially a somewhat hedge for operational cost, while the actual revenue for Arrakis is from the trading fee split. The deeper PALM makes the liquidity, the more volume PALM facilitates, and hence the more fees it earns. Therefore, Arrakis has every incentive to conduct the best practice in market making so that both Arrakis and the customer protocol can reap the highest rewards.
Another important aspect as opposed to a CEX market maker is the non-custodial nature of Arrakis. Protocols have the complete autonomy in deciding if they want to remove their liquidity, for reasons including not feeing content with the performance.

It is taken quarterly.

1 Like
4

This topic was automatically closed 30 days after the last reply. New replies are no longer allowed.