Executive summary
Arrakis Finance stands out as a pioneering market-making infrastructure protocol, allowing for sophisticated algorithmic liquidity rebalancing strategies on Uniswap V3. Since its inception, Arrakis has marked significant achievements, including reaching over $1.7 billion in TVL at its peak and capturing more than 25% of Uniswap V3’s total TVL.
Currently (11.09.24) Arrakis vaults hold +$109M TVL and Arrakis actively manages the on-chain liquidity of more than 50 protocols via an automated hybrid infrastructure.
The point of this proposal is to introduce Arrakis PALM - Protocol Automated Liquidity Management - to the Lisk DAO to use PALM for its Uniswap V3 liquidity deployment. This automated liquidity management solution leverages organic trading volume on UniV3, eliminating the need for liquidity mining incentives and enabling highly efficient capital use to drive deep $LSK token liquidity.
Motivation
Protocol Automated Liquidity Management, is an on-chain market making mechanism that taps into the organic trading volume on UniV3. PALM autonomously makes markets for protocols in a trustless way to create deep and sustainable liquidity with high capital efficiency and customizability.
The major advantages of using PALM include:
- Zero incentives: No Liquidity Mining (LM) incentives needed to attract community funds, liquidity bootstrapping is done solely via market making and liquidity is 100% owned by the protocol’s DAO.
- No biased price impact: PALM conducts market making by setting up ranges / limit orders, no swaps involved.
- Trustless: the Lisk DAO retains the ownership of the liquidity and can withdraw at all times. PALM smart contracts only autonomously manage the liquidity but can never remove it.
- Highly customizable: PALM can be adjusted for various asset types and purposes beyond token launches and liquidity bootstrapping.
PALM has been deployed for over 50 protocols and counting. Protocols such as Maple Finance, MakerDAO, Lido, Sturdy Finance, Gelato, Redacted Cartel, Connext, Truflation, Spectral Labs etc. are benefiting from the high capital efficiency and cost effectiveness enabled by PALM.
Rationale
Arrakis PALM stands for Protocol Automated Liquidity Management, a system designed to manage liquidity on Uniswap V3 through sophisticated, algorithmic rebalancing. This approach not only saves resources but also stabilises the token’s market presence and fortifies a decentralised and resilient ecosystem. The strategic benefits of Arrakis PALM are:
Sustainable Liquidity without Incentives: Leveraging organic trading volume enables the $LSK token to sustain its liquidity without the need for continuous incentives, a fundamental step towards a more autonomous liquidity model.
Lisk DAO deposits $LSK and $wETH into a PALM vault. By setting up limit orders, PALM will first bootstrap $wETH to pull the ratio of LSK/wETH towards 50/50 over time.
Flexibility and Efficiency: Initially, liquidity can be predominantly $LSK (e.g. 80/20 inventory ratio), which PALM will adjust towards a 50/50 ratio, enhancing buy/sell support. But also more even inventory ratios are supported and can be deployed by the DAO.
Optimised Capital Efficiency: Through Arrakis PALM, the Lisk DAO can significantly reduce the capital required to maintain deep liquidity on Uniswap, thereby reallocating resources towards further development and growth.
Once the ratio of 50/50 is reached, the focus will be on further increasing the liquidity depth for $LSK, to minimise and equalise the price impact on both buy and sell side.
Reduced Slippage for Users: The sophisticated management of concentrated liquidity on Uniswap V3 allows for larger trades with minimal price impact, improving the overall trading experience.
Comparison of current and estimated price impact for buying LSK and WETH across different amounts
Transparency and Non-custodial Approach: The Lisk DAO multisig wallet retains full custody over the deployed liquidity, with all PALM operations verifiable on-chain.
DEX Liquidity at all times: Arrakis DEX market making strategies enable the Lisk DAO to have $LSK deep liquidity automatically managed at all times and perform algorithmic rebalances on UniswapV3 concentrated liquidity positions. This strengthens the on-chain liquidity and enables the Lisk DAO to generate return via the Uniswap trading fees earned on the deployed capital.
Specification
The Arrakis team uses the existing LSK/wETH pool on the 0.3% fee tier for UniswapV3. Arrakis then deploys a dedicated vault managed by the PALM smart contract for thisLSK/wETH Uniswap pool. The Lisk DAO deposits $800k worth of $LSK and $200k worth of $wETH into the PALM vault. PALM will allocate the provided liquidity in a concentrated and fully active market making strategy to facilitate trading on UniswapV3. The strategy initially operates to bootstrap a 50/50 inventory ratio over the first weeks. The primary objective is to create price stability by generating deep liquidity and reaching an even inventory over time.
For the services provided, Arrakis charges the following fees:
Arrakis Asset-under-Management (AUM) fee: 1% per year
Arrakis performance fee: 50% of trading fees the vault generates
Reference
For more information regarding Arrakis and Arrakis PALM, feel free to have a look at our docs and join our community:
Website: https://www.arrakis.finance/
Docs: https://resources.arrakis.fi/