[Arrakis Finance] [FINAL] [STIP - Round 1]

Archive Incentive Framework (Round 1)
1

SECTION 1: APPLICANT INFORMATION

Provide personal or organizational details, including applicant name, contact information, and any associated organization. This information ensures proper identification and communication throughout the grant process.
Applicant Name: Squirrel

Project Name: Arrakis Finance

Project Description: Arrakis Finance is the largest LP manager on top of Uniswap V3. We build market making infrastructure and strategies.

Team Members and Qualifications:
Kassandra - Cofounder and CTO of Arrakis, previously a senior smart contract engineer at Gelato Network. Before joining Gelato, Ari was a cryptography researcher focussing on privacy and state channels.

Hilmar Orth - Cofounder of Arrakis and Gelato Network. Before Gelato, Hilmar co-founded a private blockchain focussed startup in Berlin which helped companies like Novartis and Bayer build consortium EVM networks.

Squirrel - Head of BD & Growth; prior to Arrakis, lead growth at Abracadabra - the stablecoin protocol; co-founded one of Europe’s largest crypto and accounting tools - Accointing.

Project Links:

Website: http://arrakis.finance/
Non-Technical Docs: https://resources.arrakis.fi/
Technical Docs: https://docs.arrakis.fi/
Github: https://github.com/ArrakisFinance
Twitter: https://twitter.com/ArrakisFinance

Contact Information:
TG: Squirrel994
Twitter: @arrakisfinance
Email: info@arrakis.fi

Do You Acknowledge That Your Team WIll Be Subject to a KYC Requirement?: Yes

SECTION 2: GRANT INFORMATION

Detail the requested grant size, provide an overview of the budget breakdown, specify the funding and contract addresses, and describe any matching funds if relevant.

Requested Grant Size: 806k ARB

Grant Matching: Arrakis currently does not have a token but will in the future. Potentially, we could see grant matching from the LST protocols that use the services of Arrakis.

Grant Breakdown: 100% of the tokens will be used for liquidity mining.

Funding Address: 0x77BADa8FC2A478f1bc1E1E4980916666187D0dF7

Funding Address Characteristics: This is a 4/7 gnosis safe on Arbitrum

Contract Address: This will be provided at a later stage once vaults are deployed.

SECTION 3: GRANT OBJECTIVES AND EXECUTION

Clearly outline the primary objectives of the project and the Key Performance Indicators (KPIs) used to measure success. This helps reviewers understand what the project aims to achieve and how progress will be assessed.

Objectives: This grant will be used to incentivize liquidity on the Arrakis LST Vaults to make Arbitrum the most liquid chain for LST assets. The objective here is to have the lowest price impact for buying and selling LSTs (stETH, rETH, cbETH, frxETH).

7 LST Vaults will be deployed:
wstETH/WETH
wstETH/USDC
rETH/WETH
rETH/USDC
cbETH/WETH
cbETH/USDC
frxETH/FRAX

Key Performance Indicators (KPIs): The KPI here are: Volume facilitated, and overall volume growth verse other chains of these LST assets.

How will receiving a grant enable you to foster growth or innovation within the Arbitrum ecosystem?:

Arrakis LST Vaults provide an algorithmic market-making strategy. The algorithm is optimized for the market depth of LSTs and risk management for LPs. The strategy deployed on Uniswap V3 uses limit orders, asymmetric liquidity, and algorithmic rebalancing in order to minimize price impact for larger trades and make liquid staking tokens actually liquid. This means that Arbitrum can reduce their expenditure on liquidity mining rewards because less capital is required to establish a liquid market, while LPs can benefit from a strategy that efficiently manages their inventory and mitigates the risk of impermanent loss.

With this grant, Arbitrum should be able to become the number one place for LSTs, as can be seen with the current Lido LST vaults on mainnet and optimism theyre significant volume drivers. If LSTs are highly liquid, collateral backed stablecoins and LST lending markets on Arbitrum will flourish.

Justification for the size of the grant: The requested grant size will lead to each pool having 38.38k ARB as liquidity mining incentives per month for 3 months. This will allow each LST vault to receive a significant TVL (~ >$1m) and result in a highly liquid market due to a low price impact.

Execution Strategy:
The execution will run as follows:
If the grant gets approved, the ARB tokens would be sent to the funding address.
Then these 7 LST Vaults with gauges would be deployed:

wstETH/WETH - Rewards per month:38.38k ARB
wstETH/USDC - Rewards per month:38.38k ARB
rETH/WETH - Rewards per month:38.38k ARB
rETH/USDC - Rewards per month:38.38k ARB
cbETH/WETH - Rewards per month:38.38k ARB
cbETH/USDC - Rewards per month:38.38k ARB
frxETH/FRAX - Rewards per month:38.38k ARB

The process of deployment would likely take 2-4 days.
Once the pools and gauges are deployed, the gauge would be filled with on a weekly basis. Each week rewards are provided by Arbitrum gauges will be topped up.

Grant Timeline: The funds from the grant would be used over a 3 month period from the time of them being sent.

If this proposal is greater than 1M ARB, please provide details on any funding tranches or milestones your application aims to abide by:

Funding Tranches:N/A

Milestone Descriptions: N/A

SECTION 4: PROTOCOL DETAILS

Provide details about the Arbitrum protocol requirements relevant to the grant. This information ensures that the applicant is aligned with the technical specifications and commitments of the grant.

Is the Protocol Native to Arbitrum?: No, Arrakis Finance is deployed on top of UniV3 and thus is available wherever UniV3 exists.

On what other networks is the protocol deployed?: Ethereum Mainnet, Polygon, Optimism, Base

What date did you deploy on Arbitrum?: V1 was deployed on Arbitrum in 2021, V2 was deployed in January 2023.

Protocol Performance:
On Arbitrum:

  • Current protocols utilizing Arrakis PALM: Thales, Y2K, Premia, Unstoppable
  • TVL: $1m

We believe it is important to mention TVL in other places as we would like to help Arbitrum excel and think we can do this by advertising to our existing users on other chains to move to Arbitrum. This existing userbase could have a significant impact on Arbitrum.

  • Arrakis Finance is currently the largest Liquidity Manager and at its peaking has a TVL over $1.7b (currently around $200m)
  • More than 25% of the Uniswap V3 total TVL
  • 80+ projects have had their liquidity managed by Arrakis vaults, projects include: Lido Finance, Frax Finance, MakerDAO, Stargate Finance, UMA and many more.

Protocol Roadmap:
The relevant products involved in this protocol are Arrakis V2 and the Arrakis LST Vaults.

Arrakis V2: Arrakis V2 has been live since January 2023 and can be thought of as an abstraction layer on top of concentrated liquidity AMMs like Uniswap V3. It enables central limit order book (CLOB) like interactions. This allows market makers to offer and execute advanced strategies that up to this point have only been feasible on centralized exchanges (CEXs). The protocol itself is open for everyone to use and has no protocol fees. Anyone can become a vault manager that deploys vaults, executes market making strategies, and in return receives fees from the LPs who deposited into their vaults.

Liquidity providers, which can be DAOs, protocols, institutions or individuals, can either use private vaults that are exclusive to them, or opt into existing public ones that everyone can join. A Vault has a privileged manager role that can execute arbitrary market making strategies which can optimize for deep liquidity, trading fee APRs or mimicing traditional AMM invariants, such as constant product, stableswap, or Curve V2.

Arrakis LST Vaults: Arrakis LST Vaults are a new product built on top of the V2 infrastructure and was launched in September with the first user being Lido Finance.

Arrakis LST Vaults provide an algorithmic market-making strategy that LST protocols can utilize and incentivize through liquidity mining rewards. The algorithm is optimized for the market depth of LSTs and risk management for LPs. The strategy deployed on Uniswap V3 uses limit orders, asymmetric liquidity, and algorithmic rebalancing in order to minimize price impact for larger trades and make liquid staking tokens actually liquid. This means that LST protocols can reduce their expenditure on liquidity mining rewards because less capital is required to establish a liquid market, while LPs can benefit from a strategy that efficiently manages their inventory and mitigates the risk of impermanent loss.

Upcoming other products are vaults specific for other usecases such as stablecoins. Furthermore, we are also working on Uniswap V4 hooks.

Audit History: 3 Audits have been done by Watchpug, Statemind, and Sherlock and can be found here:
V2 Core: https://github.com/ArrakisFinance/v2-core/tree/main/audit
V2 Periphery: https://github.com/ArrakisFinance/v2-periphery/tree/main/audit

SECTION 5: DATA AND REPORTING

Provide details on how your team is equipped to provide data and reporting on grant distribution.

Is your team prepared to create Dune Spells and/or Dashboards for your incentive program?: Yes, all the vaults will have dashboards similar to this: https://dashboard.arrakis.finance/

Does your team agree to provide bi-weekly program updates on the Arbitrum Forum thread? Yes, we certainly can provide bi weekly updates in the form of dashboard snapshots and explanations.

Does your team acknowledge that failure to comply with any of the above requests can result in the halting of the program’s funding stream?: Yes.

We look forward to hearing your feedback and answering any questions!

4 Likes
3

For reference, Arrakis has been live on Arbitrum for 6 months and currently has under $1m TVL.

Please could you explain how Arrakis has contributed to the ecosystem and how are you are working with other protocols? Whilst I respect Uniswap, I don’t see how this drives that much value to Arbitrum itself.

38k per month per LSD pool sounds very very high for stable pools.

I think we should wait and see what other ALMs put together before supporting such a narrow-scoped proposal. I would much rather see more commitment to bringing in new users and builders into the ecosystem - this appears to achieve neither.

In my opinion, this offers limited value. Whilst I respect the size of Arrakis on mainnet, it has limited TVL and users on Arbitrum and therefore I am not sure meets the requirements for such a request. It fails to bring any new value into Arbitrum, and therefore I would rather support a broader liquidity incentive proposal.

2 Likes
5

keep supporting here till Super moon

6

Hey folks,

Just wanted to chime in with my two cents.

First off, hearing that Arrakis V2 has been on Arbitrum for 6 months, but the TVL is still under $1m compared to the $184m on the mainnet, and it makes me wonder if they’re really committed to making a difference on Arbitrum. To score a grant of this size, they should be showing more love to the platform and making a bigger impact.

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Now, about the proposal, it’s kind of thin. I mean, where’s the detailed plan for growing the ecosystem … And those liquidity mining rewards that are suggested, seem a bit random without solid reasoning.

I’m really scratching my head about how Arrakis has contributed to Arbitrum’s growth. Sure, they’re connected with Uniswap, but that doesn’t have much to do with Arbitrum eco itself. I’d love to see a clearer, more specific explanation of how Arrakis fits into the ecosystem now and moving forward.

While I appreciate the idea, it feels like Arrakis needs to show more dedication to Arbitrum before they start asking for grants. The proposal could use some beefing up in terms of commitment, a clearer value proposition, and more specifics. If Arrakis puts in the effort, it’ll make a much stronger case for support down the road, but for now, I’ll be voting against the proposal.

2 Likes
7

Hey @meyaf320219 and @kingofsparkles thanks for your comments and questions.

Im going to split this post into two parts:

1) Arrakis on Arbitrum thus far:

The TVL of Arrakis on Arbitrum thus far has been small. The main reason for this is that Arrakis V2 up until now was only available for private vaults. More concretely for our PALM (Protocol Automated Liquidity Management) product, which allows protocols to have deep protocol owned liquidity for their governance token, managed by a market making strategy on UniswapV3. For PALM, TVL is not the key metric. PALM optimizes for liquidity depth with low amounts of TVL so that protocols do not need to do any liquidity mining. If you want to learn more about that you can read about it here.

PALM on Arbitrum is currently used by: Premia, Y2K, and Unstoppable which are native Arbitrum protocols. We are constantly searching for more Arbitrum protocols that are interested in utilizing this solution.

With the LST Vaults we are only now starting with the V2 infrastructure being available for public vaults, and so hopefully we will be able to make a push on Arbitrum.

2) Arrakis commitment to Arbitrum moving forward

We believe that in the current environment of only a small group of overall crypto users existing due to the bear market it is important to encourage users to move from Mainnet to Arbitrum and explore the ecosystem, rather than focusing on incentivizing existing Arbitrum users to stay. As the largest LP manager on Mainnet LSTs In our eyes is a great way of doing so.

The product of liquid staking protocols are liquid staking tokens. Therefore, for these protocols to succeed, liquidity is a critical growth factor. If a liquid staking token fails to have low slippage, then it is not a liquid staking token and its utility is diminished.

By incentivizing LSTs to move over to Arbitrum and with Arrakis LST vaults making the markets in an extremely capital efficient manner it will result in Arbitrum having the best price execution for LSTs.

If the LSTs are extremely liquid the utility of these LSTs on Arbitrum will be really high. We are already now in talks with various stablecoin providers, and lending markets to accept the LST Vault LP tokens as collateral. Which will through these money legos again create more activity on Arbitrum.

Yes, we are not a native Arbitrum project but I think this is actually beneficial to Arbitrum as we can be the advocate of the users that we have on other networks to provide their liquidity on Arbitrum. Moving forward with our upcoming other products we hope to continually support the liquidity depth of various tokens on Arbitrum.

I hope that answers your questions, let me know if you have any other comments or concerns.

2 Likes
8

Firstly, thank you for your proposal and keen interest in the Arbitrum ecosystem.

Introduction and Rationale

Automated Liquidity Managers (ALMs) are growing to become a foundational sector of DeFi. As v3’s (concentrated liquidity) complexities are difficult to manage for the average user, ALMs provide great products that allow for the inclusion of all market participants while significantly contributing to deeper liquidity across ecosystems. Active management is often beyond the knowledge/skill-base of the average LP. ALMs like Arrakis can provide a seamless approach to increase fee capture and reduce IL for passive LPs.

A recent case study by Arrakis demonstrated that using their V2 PALM vaults increased fee generation on the Kwenta/wETH LP by ~423% compared to the infinite range Kwenta/wETH LP on Velodrome. When looking at Arrakis on mainnet in aggregate, vaults have outperformed holding strategies by ~7-8% since July.

Arrakis’ strategy mentioned in the proposal comes with allocations to core ETH LST pairs. We believe that bolstering liquidity for these pairs on Arbitrum (via incentives and optimization of CL strategies) can attract mainnet liquidity and, in turn, attract more DeFi activity to the ecosystem.

However, we believe the proposal as is, would not be effective.

Major Concerns

Fees

  • Arrakis PALM vaults currently charge a 1% management fee (per year over principal) and a 50% performance fee (over trading fees the vaults generate).
  • The proposal suggests an additional 5% fee from the ARB allocated while stating that work on their end takes limited time and effort.
  • We believe the additional 5% fee on top of their existing fee structure is not justifiable as currently explained.
  • We recommend Arrakis to remove this additional fee and route 100% of the incentives to end users.

ALMs and their Usage with LSTs

  • The proposal states that the purpose of the ARB incentives is to bolster LST liquidity on Arbitrum.
  • More often than not, LST liquidity is derived from stable-swap, constant sum AMMs (sAMMs).
  • While we can see that some of the pairs are not low volatility derivates of themselves (i.e. ETH/stETH), the value-add of an ALM for LSTs is minimal.
  • We recommend that Arrakis focus on liquidity pairs that could largely benefit from ALM services outside of LSTs.

Potential Redundancy of ALM-based Proposals

  • There are many ALM providers hoping to service LPs on Arbitrum and funding each individually may be redundant.
  • We believe a group proposal between ALMs, such as Uniswap Proposal 45, (potentially in cooperation with a DEX) would be the most effective and inclusive use of ARB distribution.

Minor Concerns

  • Arrakis is not an Arbitrum native protocol and does not plan to incentivize liquidity on an Arbitrum native DEX.
  • There is a lack of empirical data regarding enhanced LP fee generation via ALM services on LSTs.

Summary

Castle Capital appreciates the efforts put forth by Arrakis and the products they offer to LPs. However, in its current form, we do not support the proposal moving forward.

Namely, we believe issues regarding fees, benefits to LPs, and redundancy need to be addressed.

Our recommendations can be summarised as follows:

  • Arrakis should review the fee levied on ARB as well as their overall management and performance fees
  • Arrakis should focus on liquidity pairs that could largely benefit from ALM services outside of LSTs
  • Arrakis and other ALMs bring forward a group proposal, such as Uniswap Proposal 45, (potentially in cooperation with a DEX) encompassing an entire ecosystem strategy for liquidity on Arbitrum

We hope that our comments are constructive and are seen in a positive light for the benefit of the broader ecosystem.

2 Likes
9

Hey @Squirrel ,
some points

  • According to your application (846k ARB), your category would be Lighthouse Grants; this indicates > $15M Arbitrum Network TVL; Arrakis has less than 6% of this requirement

  • The timing of the Arbitrum deployment is unclear;
    March 27 (according to https://defillama.com/protocol/arrakis-finance )
    2021 according to

you indicate that it arrived at Arbitrum together with PALM, which, according to the note, did not deploy before January 2023. Would you clarify this?

  • You have KPIs from the result of the grant received by Lido

  • Do you have comparative metrics regarding TVL and Volume of LST in other chains, which compare the performance of Arrakis vs other dexes

  • Regarding

can you improve that?

  • As a final point, the request is equivalent to 80% of the tvl that Arrakis has in Arbitrum
1 Like
10

Great to see Arrakis Finance building on Arbitrum! AMM Specialists are much needed in the space!

6 Likes
11

Hey @Jadmat,

Thanks for your comments and questions.

So a quick clarification:
Arrakis V1- The first Arrakis product that was a “simple” LP manager meaning it would set a static range, which protocols could provide liquidity mining rewards to. Without liquidity mining rewards this product would not attract any LPs.

Arrakis V2- The second iteration of the Arrakis Market Making infrastructure, which allows real market making strategies to be run with multi LP position, Multi fee tier LPing and more. Arrakis V2 exists in a private vault setting and public vault setting.
Arrakis V2 Private Vault Setting - Curently has the PALM product built on top which launched in Jan 2023 and requires no liquidity mining incentives, and purely is a product for protocols POL.
Arrakis V2 Public Vault Setting - The first and current only product on top of this is the LST Vaults deployed as mentioned a few weeks ago. In order to attract capital it requires liquidity mining incentives.

Considering that Arrakis has not had a token (yet :eyes:) only external liquidity mining incentives brought TVL, in the V1 this was mainly still happening on Mainnet as this is where most protocols still wanted their liquidity. As of June 2022 we did not really focus on growth and maintenance for the V1 product as we were heavily working on Arrakis V2. As mentioned above we are working with protocols on Arbitrum that are using PALM, since this is focussed on POL, TVL is not the right KPI to look at.

  • Increase volume to the wsteth/usdc pool
  • Decrease price impact and overall have better price execution

We started the Lido LST Vaults on September 9th, and as you can see here volume has shot up ever since, also on the price impact side the strategy is working extremely well.

You can see how these are currently doing here:
https ://info.uniswap.org/#/pools/0x4622df6fb2d9bee0dcdacf545acdb6a2b2f4f863
Pool Price Impact - https://dune.com/queries/3018010/5013287?number_of_days_n26d66=3
Pool Performance Overview - https://dune.com/queries/3017629/5021682?number_of_days_n26d66=30&pool_e15077=UniV3+USDC%3AwstETH+0.05+Ethereum

Currently LST Vaults are active on Mainnet from Lido, and on Arbitrum, the ones on Arbitrum however are incentivized with a very small amount of $ARB via Merkl, due to the LST Vault strategy Arrakis is providing the best APR here though.

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On Arbitrum what you can see is that the WSTETH/ETH pool on Uniswap is taking all the volume, Curve and Camelot facilitates pretty much no volume.

A proposal is being put up right now with Frax, as well as discussions are ongoing with Lido and the other LST providers.

This is correct, we want to grow on Arbitrum, further more we want to get people to move their LSTs from other networks to Arbitrum, and have them be active in the Arbitrum space. Which is also the reason why these tokens will be used for direct liquidity mining.

12

So what date did you deploy on Arbitrum?

I see an LST LP on Optimism too, incentivized.

It would be interesting if they could bring us metrics that put Arrakis above other dexes, in terms of efficiency in transacting LST volume.

As a personal opinion, you should consider reducing the Requested Grant Size

13

Hello @Squirrel thank you for submitting. Could you please make the following changes to your proposal to comply with the program rules?

  1. You mention “5% (42.3k) will be taken as a payment to Arrakis Finance.” This is not permitted as the grant is to only be used for incentives as stated in the following stipulation.
  1. Since the 7 LST Vaults you mentioned that will receive incentives are not yet deployed you will be required to share these addresses in your bi-weekly updates once they are deployed as per the following.
  1. Please note that the Funding Tranches piece of the incentives framework has been replaced by funds being streamed biweekly.
  1. Under the “Protocol Performance” section please only include data such as TVL from Arbitrum not all chains.
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Arrakis V1 in 2021, Arrakis V2 in January 2023.

This can be seen from the price impact that one gets when swapping. UniV3 on Optimism currently is the cheapest place to swap wstETH.

Although there is “only” 670k in TVL and the wstETH/USDC fee tier of this pool is 0.05%, this pool still takes almost 50% of the volume. In comparison to the largest pool on Optimism being the Gyroscope pool, here being on a lower fee tier and having more than 7x the TVL.

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Pool info:
Gyroscope: Gyroscope Protocol
Uniswap: Uniswap Interface

15

Hey @Matt_StableLab,

Thanks for the heads up, just tried to edit it, but i believe because im a new contributor on the forum it doesnt allow me to (no pencil icon to edit). Could an admin give me those rights? Then I will make the changes.

16

We appreciate Arrakis, and have used their vaults on other chains. However, we believe Arrakis should (and will) receive incentives from dexs that require vaults in order to incentivize pools (eg. Uniswap). This makes more sense to us than Arrakis receiving a grant directly. It is also a fairly large amount for a protocol that does not currently have a presence on Arbitrum.

17

Hi @MotusCM,

Thanks for your feedback.

The main reason we are making a proposal ourselves is because we would like to help the LST market specifically expand on Arbitrum. There is still a lot of opportunities especially in regards to a larger ecosystem expansion around LSTs. We are here not focussing on liquidity mining in general, but purely focussed on liquidity mining for the growth of LSTs. As mentioned previously the sole product of “Liquid Staking Tokens” is the aspect of them being “liquid”.

A lot of the comments here are in regards to us currently not having a large presence on Arbitrum, we believe that this is more a positive than a negative for Arbitrum as we are more likely to bring over new users such as the current mainnet ones, rather than incentivizinz existing users that are already active on Arbitrum.

18

Hey @Squirrel, I think the edit access has been adjusted now you should be able to make the necessary changes.

19

Any protocol built on top of AMMs is already going to directly benefit from grants. I think its very obvious why this doesn’t make any sense. You would be basically double dipping. It would be better if the grant went directly to the AMM you are building on top instead of you before money is extracted from protocol fees.

20

Hey, yep I have made the adjustments. Thanks!

21

Hey,

Thanks for your comments. As mentioned before, we are focussed purely on the LST side, which will allow growth of LSTs and its wider dapp ecosystem on Arbitrum to occur. A grant to Uniswap would very likely be focussed on overall liquidity increase, which is also beneficial to the Arbitrum ecosystem, but doesn’t focus specifically on the growth of LSTs as our proposal does.

Hope that explains the rational here.

1 Like
22

Thank you for these changes! Your submission now meets all requirements to be considered for a snapshot vote.