Simple Summary
- This proposal will deploy 500,000 ARB tokens to Arrakis Protocol Automated Liquidity Management to conduct market-making for the Arbitrum (ARB) token in Uniswap v3.
- Arrakis PALM is a liquidity bootstrapping mechanism that taps into the trading volume on Uniswap V3 and enables the DAO to provide liquidity and generate yield without selling any ARB tokens.
- This strategy will be run for six months after deployment. DAOplomats will update the DAO on the strategy’s success and path forward after the end of the trial period.
Abstract
1Inch DAO recently got over 2.58M Arbitrum (ARB) tokens for the DAO launch. The ARB tokens account for about 14% of the AUM of the DAO treasury. This proposal aims to utilise 20% of the airdropped tokens to provide liquidity to the Uniswap V3 pool on Arbitrium using Arrakis’ Protocol Automated Liquidity Management (PALM). PALM is an automated LP management tool which uses innovative methods to bootstrap and manage liquidity on a Uni V3 pool.
This approach enables the DAO to provide single-sided liquidity in a 100:0 ratio to a Uniswap V3 50:50 pool and generate yield in the form of fees.
Motivation
The 1inch DAO has received 2.58 M ARB tokens as part of the Arbitrum DAO airdrop. Utilising the airdropped tokens for the benefit of the DAO is crucial since it consists of about 14% of the DAO treasury. Upon initial research, it was found that the tokens could generate passive yield by LPing in a risk-minimised manner.
Liquidity Providing (LPing) means providing crypto assets to a DEX to facilitate trading two assets while collecting fees on those trades. The Arbitrium tokens have generated around $36.59k in fees with a TVL of 44M on Uniswap V3.
Traditionally providing liquidity to a Uniswap V3 pool requires the capital to be split among 1:1 the assets, in our case, 50% in ARB and 50% in WETH. The 1inch treasury on Arbitrium only has ARB and USDC tokens, which requires selling to the newly airdropped tokens to provide liquidity. Selling the ARB tokens gifted by the Arbitrum DAO to gain enough WETH would provide mixed signals and is not ideal for the sustainable relation between 1inch and Arbitrum DAO.
Uniswap V3 allows managing reneged positions, providing liquidity to only a specific price range. To gain maximum exposure to the trading fees, Liquidity Provides manages and Adjusts their positions close to the price range! These are generally on-chain actions which require a lot of resources and coordination.
Arrakis Finance is a Web 3 infrastructure built on Gelato, enabling sophisticated algorithmic strategies on Uniswap V3. LPs can automatically manage and execute different strategies to maximise the yield generated from fees.
Using Arrakis, 1inchDAO can strategically deploy ARB tokens to the pool without selling any ARB tokens and generate up to 13% ARY.
Why Arrakis PALM?
Arrakis V2 are concentrated liquidity contracts which let users deploy and manage custom strategies on Uniswap V3 positions. PALM is an automated LP management strategy built on Arrakis V2, utilising single-sided liquidity.
Low capital requirement: the initial liquidity can be entirely in ARB, e.g. 100% of ARB and PALM will progressively balance it towards 50%.
An equal buy/sell liquidity ratio will significantly reduce slippage, especially with concentrated liquidity managed by PALM.
No price impact on ARB: PALM conducts market making by setting up ranges/limit orders, no swaps involved.
Trustless: 1Inch DAO retains the ownership of the liquidity and can withdraw at any time. PALM only autonomously manages the liquidity but can never remove it.
Security:
Audits: https://github.com/ArrakisFinance/v2-palm/tree/main/audit
Specification
The Market making is divided into two phases
- Bootstrapping phase
- Equal Market Depth Phase
Bootstrapping Phase
As motivation mentions, an Arrakis V2 vault will be deployed on top of ARB-WETH 0.3% pool with 100% in ARB.
The Vault will then set positions and rebalance the pool systematically. Depending on the number of trades routed through the pool and the vault, Arrakis can attain a 50:50 balance in ARB-WETH ratio.
Time period: Open, depending on the number of trades.
Equal Market Depth Phase
Once the vault has reached the desirable ratio, the vault will deploy the deepening strategy and follow the price range closely.
How does PALM work?
Once the tokens are deployed, and a trade happens in the vault, PALM will deploy a portion of the capital in three positions:
Asset Range,
Mid Range
Base Range.
If the price moves upwards, PALM will call a range to rebalance to reflect the ratio change in the pool. The rebalance will make the new Asset range the middle range position with the gained asset (WETH). To further balance the position ARB will be added or removed to the protocol reserve.
The pool adjustment heavily depends on price volatility, trading fee and slippage.
The balancing time is dependent on the total volume.
Further read https://resources.arrakis.fi/palm/examples
** Strategy Stimulation.**
The following chart is a backtesting simulation done on the Uniswap ARB/ETH pair since the inception of the ARB token.
Capital allocated: 500,000 ARB and 0 ETH
Uniswap V3 Pool: ARB/ETH fee: 0.05%
Deployed capital: 5%
Allocation
Percentage
Base Range (0-30)
1.5%
Mid Range (31-60)
1.0%
Asset Range (61-100)
2.5%
Total Allocation
5.0%
Range Size: 6 tick spacings
Asset Rebalance Threshold set to 4.8, meaning 48 ticks from asset range limit (towards the mid-range) Base Rebalance Threshold set to 1.2, meaning 12 ticks from base range limit (towards the mid-range)
Rationale
Providing liquidity is one of the easiest ways to generate yield on the ARB token holdings. Most strategies involve selling ARB to get WETH to provide liquidity. There are protocols like Bancor, which supports single-sided liquidity on Ethereum, but the market on L2 isn’t that mature!
Uniswap, on the other hand, is one of the most used protocols with a robust amount of pools.
Arrakis Vault has already attracted more than $200M TVL in a short period of time and DAOs such as Gelato, Stargate Finance, Ampleforth, and Kwenta are currently using PALM.
Considerations
- Potential bug in the strategy and the code
- 1inch DAO will own 0.025% of the UNI V3 0.05% pool