[GP] Onchain Market Making for SEAM on Base via Arrakis PALM

Ras · May 20, 2024, 11:54am

Introduction to Arrakis Finance and Arrakis PALM

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 amassing over $1.7 billion in TVL at its peak and capturing more than 25% of Uniswap V3’s total TVL.

Currently (22.04.24) Arrakis vaults hold +$145M TVL and Arrakis actively manages the on-chain liquidity of protocols via an automated hybrid infrastructure.

The focal point of this proposal is Arrakis PALM - Protocol Automated Liquidity Management. This innovative liquidity bootstrapping tool leverages organic trading volume on UniV3, eliminating the need for liquidity mining incentives and enabling highly efficient capital use.

Arrakis PALM

Protocol Automated Liquidity Management, is a novel 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 incentive: No LM incentive needed, liquidity bootstrapping is done solely via market making.
No biassed price impact: PALM conducts market making by setting up ranges / limit orders, no swaps involved.
Trustless: Seamless DAO retains the ownership of the liquidity and can withdraw at all times. PALM only autonomously manages the liquidity but can never remove it.
Highly customizable: PALM can be adjusted for various asset types and purposes beyond just liquidity bootstrapping.

PALM has been deployed for over 30 protocols and counting. Protocols such as Maple Finance, Sturdy Finance, Gelato, Redacted Cartel, Connext, etc. are benefiting from the high capital efficiency and cost effectiveness enabled by PALM.

Background & Motivation:

Arrakis PALM stands for Protocol Automated Liquidity Management, a system designed to manage liquidity on Uniswap V3 through sophisticated, algorithmic rebalancing. It enables the DAO to tap into organic trading volumes, creating a self-sustaining liquidity model that forgoes the need for external incentives. This approach not only saves resources but also stabilises the token’s market presence and fortifies the DAO’s vision for a decentralised and resilient ecosystem. The strategic benefits of Arrakis PALM are:

Sustainable Liquidity Without Incentives: Leveraging organic trading volume enables the SEAM token to sustain its liquidity without the need for continuous incentives, a groundbreaking step towards a more autonomous liquidity model.

Seamless DAO Treasury deposits SEAM and wETH into a PALM vault. By setting up limit orders, PALM will first bootstrap WETH to pull the ratio of SEAM/wETH towards 50/50 over time.

Flexibility and Efficiency: Initially, liquidity can be predominantly SEAM, which PALM will adjust towards a 50/50 ratio, enhancing buy/sell support.

Optimised Capital Efficiency: Through Arrakis PALM, the Seamless DAO aims to significantly reduce the capital required to maintain liquidity, 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 SEAM, 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.

Transparency and Non-custodial Approach: Seamless DAO retains full custody of the liquidity, with all PALM operations verifiable on-chain.

For this reason, it is proposed that Seamless DAO uses Arrakis PALM to manage its liquidity on UniV3, which will help Seamless to bootstrap deep liquidity for SEAM on Uniswap and create price stability.

Specification

Seamless DAO creates a 1% fee tier UniV3 pool for SEAM/wETH. Arrakis then deploys a dedicated vault managed by PALM for the pool. Seamless DAO deposits $900k worth of SEAM and $100k worth of wETH into the vault.
PALM will allocate the provided liquidity in a concentrated and fully active market making strategy and bootstrap a 50/50 inventory ratio initially. The primary objective is to create price stability by generating deep liquidity and reaching an even inventory over time.

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. I’m also more than happy to respond to any comments here from the Seamless community about this proposal!

Website: https://www.arrakis.finance/
Docs: https://resources.arrakis.fi/

Arrakis | Twitter | Discord | Docs

Smailov · May 22, 2024, 4:11am

Arrakis has made a good name and the benefits are clear. The proposal for SEAM market-making looks fantastic!

Guz_MassAdopt · May 26, 2024, 3:45pm

Completely in favor of supporting Arrakis PALM. Seeing the success Ampleforth has had since collaborating with Arrakis makes it a no-brainer for me in terms of seeing Seamless implement LM automation.

In fact, this proposal serves as a complementary piece to the Aera finance - Treasury Management proposal; further enabling Seamless DAO to participate in Base’s ecosystem and potentially creating active reward/incentive streams back into the DAO’s treasury .

One minor tweak:

May I propose introducing the performance fee distribution in tranches? Perhaps $250k every few months (or on a quarterly basis)?

whisp3r · June 4, 2024, 4:07pm

This seems encouraging to continue towards a goal of price stability and deeper liquidity for SEAM on Base. In favor on principle, is this initiative going to be in parallel to the ongoing Treasury Management Diversification effort with AERA?

richyRNG · June 4, 2024, 4:54pm

Per @Guz_MassAdopt , splitting into quartile tranches seems to make sense, so maybe 1/4 of the total $900k amount at a time, so the DAO can observe and evaluate the approach - additionally agree it’s a good idea for the DAO to explore multiple liquidity options.

One thing to note however: Aera Vault’s services have evolved to incorporate Arrakis it seems, so there may be a redundancy in this service now/in the near future - something for the DAO and community to consider

Ras · June 4, 2024, 7:54pm

@rapha_raffaelo as u might know we partnered with Aera in line with the Treasury Management Diversification effort. So probably u could clarify on how Aera’s use of Arrakis is different from the direct partnership between Seamless and Arrakis.

rapha_raffaelo · June 4, 2024, 9:26pm

Arrakis is looking forward to eventually have a potential future collaboration with Aera - but at the moment there is no partnership with Aera in place. Right now, the permissionless design of the Arrakis Protocol is open for every project to use the Arrakis protocol and it’s smart contract infrastructure as it’s public.

However, the extensive Arrakis market making experience, the Arrakis quant expert team, the custom MM strategies design, algorithmic strategy execution and the Arrakis off-chain data center / infrastructure for strategy computation / execution can only be accessed directly via becoming a client of Arrakis PALM (as offered to Seamless in the proposal above).

Ras · June 6, 2024, 6:20pm

[GP-6] Onchain Market Making for SEAM on Base via Arrakis PALM