Summary
Deploy Arrakis PALM to conduct market-making for STRDY with Sturdy POL on UniV3.
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
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$1.7b in TVL at its peak (currently around $460m), across Ethereum, Optimism and Polygon
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25% Uniswap V3 total TVL
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90 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 STRDY, 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: Sturdy 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 GEL/WETH can be found in the dashboard, where it demonstrates the overall performance of PALM and how it’s able to bootstrap and deepen the liquidity regardless of the price action.
Background & Motivation
Currently, most protocols are still outsourcing liquidity via liquidity mining or bonding. There are two major drawbacks to this approach:
- High cost
Either LM or bonding, essentially, it boils down to spending the native token renting liquidity or buying it with a premium. With LM, as the incentive inevitably runs lower over time, mercenary LPs will leave and most likely sell their reward along the way. As to bonding, bonders will consistently arbitrage the premium and create a death spiral for the token price, as a discount has to be sustained in order to incentivize bonding. Neither of them is sustainable, and both will do more harm than good to the protocol and the community.
- Low capital efficiency
The easiest way to incentivize liquidity would be to deploy liquidity on UniV2 or the likes because of the fungibility. That would mean a huge loss in capital efficiency due to the nature of the constant-function market maker, which only accepts full range liquidity. A team can also wrap a UniV3 position with outsourced liquidity, but usually they would still deploy a full or very wide range for the ease of management. LPing on a concentrated liquidity DEX requires expertise and resources that most teams don’t have. Eventually, they end up with very low capital efficiency.
All of this could potentially present both a huge cost and a missed opportunity for Sturdy. The liquidity incentive can be reserved for better purposes that contribute to the development of the protocol, and Sturdy Treasury can consistently pocket a handsome amount of trading fees by LPing with high capital efficiency to absorb most of the volume.
To help Sturdy save the cost and capture the opportunity, Arrakis proposes to provide Sturdy 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
Sturdy initially deposits a certain amount of liquidity that is mostly made of STRDY, into a PALM-managed vault, e.g. STRDY/WETH in an 80/20 ratio. PALM will pull that ratio towards 50/50 over time. Note that protocols on average deposit around $300k-400k worth of liquidity initially into PALM, and more if it’s the first time the token enters the market.
As shown in the example below, PALM bootstrapped WETH for GEL/WETH steadily 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 STRDY and to minimize the slippage on both the buy and sell side of the volume.
As shown in the example below, the slippage for large trades has also reduced over time, especially after the 50/50 ratio was reached.
During the deployment period, the Sturdy community has full 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 Sturdy team can withdraw from the vault or revoke managing access to 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
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 Sturdy community about this proposal!