Onchain Market Making for $LSK on Ethereum via Arrakis PALM

[rapha-raffaelo]

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/

Arrakis | Twitter | Discord | Docs | Mirror

[przemer]

Looks good to me, as the transferred funds remain under the DAO’s ownership, and the 1% fee per year seems reasonable. However, the fee could become an issue in the future if we want to support multiple pools.

Since the DAO treasury doesn’t have ETH, how we go about that?

[adamant.im]

Hi,

I’m not entirely sure about Arrakis PALM specifically, but ensuring LSK liquidity on a DEX is crucial.

If your post leads to a formal proposal, we’ll support it with our current 286k vpLSK.

[adamant.im]

Hi,

No ETH ⟶ buy it.

[dominic]

@rapha-raffaelo correct me if I am wrong, but I believe there is also the option to fund it with 100% LSK and have Arrakis rebalance over time, correct? If I remember well, this would mean there is more slippage at the beginning, until the two sides even out a bit. I think I saw once the pool gets to 80%LSK / 20%ETH it would be projected to be relatively stable from there on out.

But will leave you to fill in details / options for rebalancing to some ETH if that is the blocker here.

[rapha-raffaelo]

@dominic your explanation is correct. Arrakis PALM vaults can also be launched with 100% $LSK token, however we see significant improvements in on-chain liquidity and price stability at more even ratios, thus the suggested initial 80/20 distribution. After starting with 100% $LSK token supply our algorithms will require some time to convert LSK to wETH via natural orderflow.

[rapha-raffaelo]

You can find more information regarding Arrakis PALM and our DEX market making strategies here: https://resources.arrakis.fi/

[rapha-raffaelo]

Implementation Steps after the Proposal:
To use Arrakis PALM the Lisk DAO has to perform the following steps:

• Deposit liquidity (as described under specification) via the DAO’s multi-sig account into the Arrakis vault created exclusively for the DAO
• No further management / actions is required

The Arrakis team operates the market making strategies for the vault and will automatically adjust the liquidity position in UniswapV3 via its infrastructure. Earned trading fees are automatically reinvested and a real time monitoring dashboard including Vault- and Pool-Analytics will be available to the DAO.

[Filmmaniak]

Generated by ChatGPT 4.0:

If I were an investor holding LSK tokens and aiming to capitalize on the current or upcoming bull run, my reaction to Lisk’s decision to work with Arrakis Finance for liquidity management on Uniswap would likely be positive, but cautious. Here’s how I would evaluate and react to such a development:

1. Positive Outlook on Liquidity Management:

• Increased Liquidity: Arrakis Finance specializes in optimizing liquidity on decentralized exchanges like Uniswap, which means it would likely increase liquidity for LSK tokens. This would make it easier for large investors to trade without significantly impacting the price, reducing slippage, and making the market more efficient.
• Price Stability: Better liquidity management usually results in more stable prices. Given that a highly illiquid asset can be prone to volatile price swings, this partnership could help stabilize the price of LSK, which might help build confidence among traders and long-term holders, potentially driving up demand.
• More Efficient Market: With algorithm-driven strategies managing the liquidity pool, I’d expect smoother, automated adjustments to changing market conditions, which means the price could reflect a more accurate supply-demand balance. This could attract more liquidity providers to the Uniswap pool, further improving liquidity.

2. Increased Earning Potential:

• Pool Fee Sharing (50%): The fact that 50% of pool fees would be shared with the Lisk DAO is a positive. If I participated in Lisk governance or staked LSK in the DAO, I could potentially earn passive income through the pool fees. This could provide an additional revenue stream while holding the token, on top of capital appreciation.
• Potential Boost in LSK Value: As the partnership makes it easier for institutional and retail investors to enter and exit positions with less friction, higher trading volumes could contribute to a gradual appreciation of LSK’s price, especially in a bull market.

3. Bull Run Strategy – Liquidity is Crucial:

• In a bull market, token liquidity becomes especially important as more investors want to buy in and sell out at peak times. By improving liquidity through Arrakis, I’d be more confident that I could sell my LSK tokens near the top of the market without suffering from price slippage or getting stuck in a highly volatile and illiquid market.
• Exit Strategy: If I plan to sell at the peak of the bull run, Arrakis’s management of liquidity could help ensure there’s enough buying demand and smooth price movement during times of high trading activity, making it easier for me to exit my position when the time is right.

4. Risk Considerations:

• Smart Contract Risk: I’d be cautious of any smart contract vulnerabilities inherent in Arrakis’s PALM vaults. While Arrakis has a strong reputation and is trusted by other protocols, I’d want to ensure they’ve undergone audits and are battle-tested on Uniswap.
• DeFi Ecosystem Risks: Since Uniswap and other decentralized exchanges are part of the broader DeFi space, any regulatory crackdowns or systemic issues in DeFi could impact the liquidity of LSK. However, this is a general market risk I would consider as part of any DeFi investment.

5. What I Would Do as an LSK Investor:

• Monitor the Market: I’d closely monitor the LSK/ETH or LSK/USDT liquidity pool on Uniswap, tracking how liquidity improves after Arrakis begins managing it. If liquidity improves and the market shows bullish signals, I’d be more comfortable holding LSK for a longer period.
• Participate in Governance: If possible, I would look into participating in Lisk DAO’s governance to have a say in decisions regarding fee distribution or any further liquidity management proposals. This would give me more influence over how the system operates.
• Consider Yield Opportunities: I’d explore opportunities to stake LSK in the liquidity pool if Arrakis’s management makes it lucrative enough. This could be a way to earn yield while still holding my tokens in the bull market.
• Set Sell Triggers: Given that liquidity is being managed, I’d be more confident in setting my sell price targets. I might set automatic sell orders to capture gains during the bull market, knowing that liquidity will be robust.

Conclusion:

Overall, if Lisk decides to work with Arrakis Finance, I would view it as a positive move that improves the liquidity, stability, and efficiency of the LSK token market on Uniswap. This would make me more confident about holding my tokens through the bull run and possibly selling them at higher prices without worrying about liquidity issues or price slippage. However, I would remain cautious about potential DeFi risks and keep a close eye on how the partnership progresses.

Example Calculation for Arrakis Finance Partnership with Lisk:

Let’s say after assessing the factors:

• Positives (Pros):
  • Increased liquidity on Uniswap: 9/10
  • Price stability during the bull run: 8/10
  • Fee sharing with Lisk DAO: 7/10
  • Enhanced market confidence: 7/10Total Pros: 9 + 8 + 7 + 7 = 31
• Negatives (Cons):
  • Smart contract risk: 5/10
  • Potential reliance on DeFi market conditions: 6/10
  • Regulatory risks in DeFi: 4/10Total Cons: 5 + 6 + 4 = 15

Now, to calculate the percentages:

• Percentage of Pros: (31 ÷ (31 + 15)) × 100 = 67.4%
• Percentage of Cons: (15 ÷ (31 + 15)) × 100 = 32.6%

Result:

• Pros: ~67%
• Cons: ~33%

This means that, in this example, about 67% of the analysis is positive and 33% is negative based on the weights and importance of the factors.

Conclusion:

While this method provides a structured approach to calculate the relative weight of pros and cons, the outcome heavily depends on subjective judgment and how important each factor is to you as an investor. It’s not an exact science, but it helps provide a clearer understanding of where the majority of the value lies.

I don’t know if arrakis finance have any future but I’m more in favour of it than against. Not ideal thing for me but might help in bull run with higher token price after all despite blocking rapid growth. The main question is whether it is players with large capital who inflate the price or smaller players if smaller players then better no. Why I say yes to this is because I think that project stability factor will play a major role in a current bull run after previous bull run memecoin hype bad investor experiences. People will likely put their money on more established projects with good liquidity levels.

Lisk team should deeply consider critical vulnerabilities or exploits possibilities for Arrakis Finance’s PALM - please prove us that you are safe. We know that you have not faced any publicly reported critical vulnerabilities or exploits but you rely on smart contracts this means risk of:

• Smart Contract Bugs
• Impermanent Loss Risk
• Oracle Manipulation
• Liquidity Fragmentation
• Administrative Privilege Risks
• Third-Party Risks (Integrations)

Tell us how you manage those risks and your plans about improving protection against possible exploits etc. Thanks.

[grumlin]

I am against it. Firstly, I have considerable experience in this. Secondly, no one is protected from impermanent losses. Any range adjustment results in a loss unless the fees collected exceed the loss incurred during the adjustment. Thirdly, at this stage, I don’t see the point in increasing liquidity in a narrow range on DEXs; it would make more sense to create a pool from 0 to infinity for all this liquidity. Fourthly, if we claim that there is a point, then what range will be chosen? I don’t see the sense in ‘locking’ the price in a range from $0.5 to $1.5 per Lisk. Or, if the community has such thoughts, perhaps we need to consider what people want from the project and what kind of returns (multipliers) can be expected here. Fifthly, if the price increases 2-3 times, most of the tokens will be bought up by the market, which means more tokens will be ready to be dumped back into the market, mostly from the DAO tokens. Sixthly, Arakis previously had $2 billion in locked funds, and now only $100 million remains. This is neither good nor bad, but at the very least, it’s something to think about.