[FIP-05] Deploy Arrakis PALM to conduct on-chain market making for ONDO

Summary

Once the global-lock was lifted, deploy Arrakis PALM to conduct market-making for ONDO with Flux 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

  • Over $1.7b in TVL at its peak (currently around $200m), across Ethereum, Optimism, Arbitrum, Polygon, and BNB Chain
  • About 25% Uniswap V3 total TVL
  • More than 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 ONDO, 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.

  • Closely follow or outperform holding: since PALM only deploys a portion of the total liquidity at a time, plus the fees earned via concentrated liquidity absorbing most of the volume, PALM is able to keep the value of the deposit close to that of holding the same initial deposit, and in many cases outperform holding.

  • Trustless & transparency: Flux 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:

  1. 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.

  2. 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 Flux. The liquidity incentive can be reserved for better purposes that contribute to the development of the protocol, and Flux Treasury can consistently pocket a handsome amount of trading fees by LPing with high capital efficiency to absorb most of the volume.

To help Flux save the cost and capture the opportunity, Arrakis proposes to provide Flux 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
(Note that if nearly equal worth of ONDO and base asset are deposited, PALM will initiate directly with phase 2, as described below.)

Flux initially deposits a certain amount of liquidity that is mostly made of ONDO, into a PALM-managed vault, e.g. ONDO/WETH in an 80/20 ratio. PALM will pull that ratio towards 50/50 over time. Note that protocols on average deposit around $400k-500k worth of liquidity initially into PALM, and more if it’s the first time the token enters the market.

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 ONDO and to minimize the slippage on both the buy and sell side of the volume.

During the deployment period, the Flux 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 Flux 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

Since I’m not allowed to create a poll for a temp check, please feel free to comment and ask any questions. I’ll respond asap👍

1 Like

Hello,
Relying on a market maker seems more sustainable than liquidity incentives.
However, a 50% fee on trading fee seems steep.
We need to get quotations from other market makers.
Cheers,
Cocco

1 Like

Hi there,

Totally understood :+1:

What’s important to point out is that Flux doesn’t pay it. It’s the traders that trade through liquidity managed by PALM paying it. Additionally, Flux will share that revenue with PALM.

The more volume PALM can take in, the more fees will be earned, and that’s for BOTH Flux and Arrakis. Many protocols that rely on PALM to manage their liquidity actually are making a profit from it.

The alternative would be liquidity mining or having a conventional market maker. In both cases, not only will you not earn anything from it (LP gets all the fees), you’ll also have to pay either incentives or mm service.

So in terms of the financials, using PALM can create a positive net outcome, while the other alternatives for sure will only create negative net outcome.

1 Like

Hello,

I completely understand and agree. It’s crucial to note that Flux itself doesn’t cover these costs. It’s the traders who operate through liquidity managed by PALM that bear these expenses. Moreover, Flux will share this revenue with PALM.

The greater volume PALM can handle, the higher the fees earned, benefiting both Flux and Arrakis. Many protocols relying on PALM for liquidity management are actually turning a profit from it.

Compared to alternatives like liquidity mining or traditional market makers, which don’t yield any earnings (all fees go to LP) and may involve additional costs, utilizing PALM can lead to a positive financial outcome.

1 Like