[Smilee Finance] LTIPP Application - FINAL

SECTION 1: APPLICANT INFORMATION

Applicant Name: Albiwara

Project Name: Smilee Finance

Project Description:

Smilee is leading the volatility revolution in DeFi, and the creators of the Impermanent Gain derivative.

  1. Smilee offers traders the best asymmetric derivative in all of DeFi to go long, short, or delta neutral with up to 10,000x leverage, no liquidations, and a one of a kind exponential (convex) payoff.
  2. Smilee is rewriting the standard for DEX-style LPs by offering real yield derived from Implied Volatility (IV) instead of volume; Properly compensating LPs for their risk while eliminating common pitfalls through pre-set concentrated liquidity ranges, auto-rebalancing, no exposure to toxic order flow, and more!

Team Members and Roles:

  • Metadato – Co-Founder & CEO
  • Albiwara – Co-Founder & COO
  • Tempesto – Co-Founder & Quant Lead
  • Dezzeus – Lead Dev
  • Dalail4m4 – Lead Dev
  • Gio – BD Lead
  • Larpseidon – Marketing Lead
  • Quantiik – Creative Director
  • Rephill – Quant
  • Guglie – Smart Contract Dev
  • Hartick – Smart Contract Dev
  • Mike – Frontend Dev
  • MCC – UI/UX Designer

Project Links:

Contact Information

Point of Contact: albiwara

Point of Contact’s TG handle: albiwara

Twitter: albiwara

Email: alberto@smilee.finance

Do you acknowledge that your team will be subject to a KYC requirement?: Yes.

SECTION 2a: Team and Product Information

Team Experience

Metadato, CEO @ Smilee Finance – https://x.com/metadatoeth

Experience: Entered DeFi in 2017. Previously funded LoanXchain (RWA tokenization platform) backed by Deutsche Bank and Swiss Stock Exchange’s F10. Previously IBD at Deutsche Bank and UBS.

Albiwara, COO @ Smilee Finance – https://x.com/albiwara

Experience: Crypto investor since 2018, start-up strategic advisor and BA. 5+ yrs experience in M&A and strategy at BNP Paribas, CA-CIB and Generali.

What novelty or innovation does your product bring to Arbitrum?

Smilee was born around the creation of a world-first convex derivative—Impermanent Gain—that delivers novel benefits to traders, LPs, and DeFi as a whole.

Let’s specify each of those verticals:

Traders

  • Receive the best asymmetric derivative in crypto for speculation or complex portfolio structure

Liquidity Providers

  • Generate yield based on IV—properly compensating them for their volatility risk. Quantitative Research

Arbitrum’s DeFi layer as a whole

  • Smilee is the first protocol to repurpose the phenomenon of Impermanent Loss, turning a bug into a feature, strengthening the entire spot market by empowering LPs to hedge risk whilst delivering the benefits highlighted above.

Let’s analyze Traders and LP benefits in further details:

Traders: here’s a pretty simple infographic that clearly shows how Smilee Impermanent Gain compares versus Calls/Puts or Perps.

It’s worth noting that Smilee convex payoff does not only reward users more, the more they are right, but can also serve as a hedge against Impermanent Loss for DEX LPs.

Moreover, IG has an additional benefit vs Perpetuals (Options or Perps) which is its non-liquidable property.

LPs: here’s attached another chart highlighting the major findings from our Quantitative Research.

The above chart refers to data from June 8, 2022, to May 31, 2023, for:

  • Historical daily data related to the ETH-USDC 0.05% Uniswap V3 pool.
  • Forecasted Smilee Premiums with Utilization Rate = 75% and average Weekly Turnover of 2.5x over the same time period.

The main takeaways from the research are:

  • Smilee’s cumulative APR in the observed period is forecasted at 66.8%, which is higher than Uniswap’s APR, equal to 55.74%.
  • 75% Utilization rate on Smilee also implies 25% less Impermanent Loss suffered by LPs.
  • At high levels of utilization rate, selling volatility shows much higher returns with the same or lower level of risk.
  • At a low utilization rate, Smilee provides lower returns than Uniswap, but with significantly less Impermanent Loss.
  • On Uniswap, Just In Time (JIT) liquidity can further reduce returns for LPs, while on Smilee this is not possible as liquidity can only be added at the start of each epoch.

Overall, selling volatility seems to have a more favorable risk-reward profile than providing liquidity on Uniswap.

Last but not least, here’s an infographic that synthesizes Smilee protocol design and its major components.

It’s worth noting that:

  • The maximum amount that LPs can lose its the Impermanent Loss
  • The maximum amount that Traders can lose it’s the Premium paid
  • Every time traders buy or sell Impermanent Gain, the protocol delta is atomically hedged by swapping on the underlying DEX
  • The delta hedging allows traders to buy and sell Impermanent Gain and realize profits without necessarily extracting value from LPs

The benefits offered by Smilee’s products simply don’t exist anywhere else in DeFi, and they’re coming to Arbitrum, the home of DeFi innovation, first.

Is your project composable with other projects on Arbitrum? If so, please explain

Yes. Given its synthetic design, Smilee is highly composable.

Smilee is natural partner of DEXs – since Smilee Volatility AMM is atomically hedged during every trade, by integrating other Decentralized Exchanges (DEXs) on the Arbitrum network to expand our roster of tradable assets. Currently, Smilee supports Uniswap v3, but is looking to integrate Camelot and Trader Joe in order to support more Arbitrum native assets.

Moreover, Smilee LPs having the same payoff of DEX LPs creates interesting dynamics and potential integrations with automated liquidity management & LPDFi protocols like Arrakis, Gamma, Orange Finance.

Last but not least, Smilee will have real-time Implied Volatility data for every asset tradable, which will allow for the creation of a fully on-chain Volatility Oracle that can be integrated by other DeFi protocols—this could be the dawn of a new pricing mechanism in decentralized spot markets.

Do you have any comparable protocols within the Arbitrum ecosystem or other blockchains?

No. Smilee take on Impermanent Gain is the perfect cross section between a Perp and an Option:

  • Has akin simplicity of using a Perp (no strike selection, just go long, short, or both)
  • Has expires like Options (it’s not perpetual, comes with clear costs)
  • Has much higher leverage than a Perp, and the leverage is “embedded” like in Options (users don’t need to select leverage)
  • The maximum loss is the premium like in Options (there are no liquidations)
  • Users can open / close positions at any given moment (like Perps)
  • Smilee protocol is by design never exposed to bad debt, and always perfectly balanced

How do you measure and think about retention internally? (metrics, target KPIs)

We are currently working on Dune dashboards for public querying. Retention can be broken down into multiple categories for Smilee:

  • Users
    • Daily/Weekly/Monthly Active Users = New Users + Existing Users
    • Total Users = Traders + LPs
  • Trade
    • Daily/Weekly/Monthly Average Notional Volume
    • Daily/Weekly/Monthly Average Premium Volume
  • Earn
    • For each Earn Vault
      • TVL
      • Utilization Rate
    • Total TVL
    • Average Protocol Utilization Rate

We plan to continuously track & analyze data to assess the efficacy of our product, strategy and growth activities. At the same time, we typically gather feedback from our users on Discord to better understand how we can improve and tailor our roadmap accordingly.

Relevant usage metrics - Please refer to the OBL relevant metrics chart 5. For your category (DEX, lending, gaming, etc) please provide a list of all respective metrics as well as all metrics in the general section

General All general metrics in the OBL relevant metrics chart are relevant. These metrics include: Daily Active Users, Daily User Growth, Daily Transaction Count, Daily Protocol Fee, Daily Transaction Fees, Daily ARB expenditure & User Claims and Incetivised User List & Gini Coefficient.
Options All Options metrics in the OBL relevant metrics chart are relevant. These metrics include: TVL, Trading Volume, Open Interest, List of Traders, List of Liquidity Providers, Fees.

Do you agree to remove team-controlled wallets from all milestone metrics AND exclude team-controlled wallets from any incentives included in your plan: Yes

Did you utilize a grants consultant or other third party not named as a grantee to draft this proposal? If so, please disclose the details of that arrangement here, including conflicts of interest (Note: this does NOT disqualify an applicant): No

SECTION 2b: PROTOCOL DETAILS

Is the protocol native to Arbitrum?

Yes. Smilee has been publicly building the protocol on Arbitrum since late 2022.

On what other networks is the protocol deployed?

None.

What date did you deploy on Arbitrum mainnet?

The Protocol is currently live on Arbitrum One, and was deployed on March 14, 2024.
TxID: Arbitrum Transaction Hash (Txhash) Details | Arbiscan

Do you have a native token?

At the moment Smilee has no token, but plans to release one during 2024 on Arbitrum.

Past Incentivization: What liquidity mining/incentive programs, if any, have you previously run? Please share results and dashboards, as applicable?

None.

Current Incentivization: How are you currently incentivizing your protocol?

None.

Have you received a grant from the DAO, Foundation, or any Arbitrum ecosystem related program?

Smilee has received a grant from the Arbitrum Foundation, as well as a Questbook grant for new ideas to build a Impermanent Loss calculator and hedging tool using Smilee.

Protocol Performance

Smilee ran a Testnet Trading Competition on its v.169 product during November / December 2023.

  • Signups: 2,059
  • 604 Active Users (33% conversion rate)
  • 65 Active Teams (10% of individual participation)
  • First 5 traders earned 5,000%+ returns
  • Earn LPs earned ~8% returns during one month of competition

Smilee officially launched on Arbitrum One on March 15, 2024.

  • ETH, BTC, ARB and GMX are available for trading
  • TVL: $1.5M

Protocol Roadmap

  • Smilee was deployed on March 14, 2024
  • The team has already collected more than US$ 2.5M pre-committed liquidity. These $2.5M have been secured from our strategic investors and partners, with a small portion (around 15%) from OGs community members.
  • Out of these $2.5M, $1.5M have already been deployed in the protocol
  • For the following weeks the expected TVL Growth is from $2M to $5M, thanks to LTIPP incentives
  • The Team plans to expand the range of tradable assets and substantially increase the liquidity available during the following months
  • The Team has already identified 5+ assets that can be listed on Smilee for trading. This includes assets with liquidity also on DEXs that are not Uniswap, which will be integrated. These assets are:
    • Uniswap: ETH, BTC, ARB, GMX and LINK
    • Camelot: GRAIL, PENDLE, RDNT
    • Trader Joe: JOE
  • Thanks to its synthetic design, Smilee will be able to reach 7+ tradable assets by the end of the year
  • Smilee plans to reach a projected TVL of US$ 5M by the end of the quarter

Audit History & Security Vendors

  • Smilee has run a successful audit with Trust Security (link)
  • The Team also run a Sherlock Contest which ended on March 6th (link)
  • The team has tested 30+ invariants with a well-known security researcher
  • Smilee math has been reviewed by two math PhD expert in DeFi
  • In total, Smilee has spent US$ 200K+ in security
  • The team has launched a Bug Bounty day one here: Smilee Smart Contracts: Program Info | HackenProof

Security Incidents

None.

SECTION 3: GRANT INFORMATION

Requested Grant Size: 150,000 ARB

Justification for the size of the grant

Assuming ARB Price of 2$

Grow Smilee TVL
Smilee currently has $1.5M TVL. Smilee is looking for more liquidity for its Earn Vaults in order to scale activity accordingly, up to a target of $5M.

Base TVL = 1,500,000
Target TVL = 5,000,000
Incentives APR = ~22%
USD Equivalent of Earn Incentives = 255K USD
ARB Equivalent of Earn Incentives = ~127.5K ARB

Boost Trading Volume
In order to achieve a target weekly trading volume of ~$9 million (computed assuming an average protocol utilization rate of 75% and a weekly turnover of 2.5x), we plan to introduce fee rebates for our users. These rebates will effectively reduce trading costs, incentivizing new users to trade Impermanent Gain. To know more about how Smilee Fees are structured, please refer to our documentations (link). Rebates would apply exclusively to the “Trade Fee”.

USD Equivalent = (TVL * Utilization * Turnover) * Fees * 12 Weeks
USD Equivalent = ($5M * 75% * 250%) * 0.04% * 12 = $45,000

ARB Equivalent = ~22.5K ARB

Note: Achieving this level of volume and transactions on the platform should also serve to greatly increase users. These newly acquired users, if retained, are likely to continue pushing volume and driving fees on the platform for LPs.

Grant Matching

No.

Grant Breakdown

  • Fee Rebates: 15% or 22,500 ARB

  • Earn Vault Incentives: 85% or 127,500 ARB

Funding Address: arb1:0x00f255C93906CB59CCfF6b21f7Bf9dC0Ca30e09A

Funding Address Characteristics: Gnosis Safe with 3 out of 5 Signers

Treasury Address:

eth:0x1d9B87727784C3fCF2919DDbBBaE6969eeA73189

arb1:0x0466B6D3b75628A54b09Ad81aE0E6FfafDEa1565

arb1:0x179280423F99609BdbC189CF763cDd6850871bFA

Contract Address:

WETH/USDC Vault: Contract Address 0x7F2C0F9D927bcd9a2E1CDf22ff11bef07964b0e9 | Arbiscan

ARB/USDC Vault: Contract Address 0xC948D7456D3CEda873367eF4Fa4A21654131221B | Arbiscan

WBTC/USDC Vault: Contract Address 0x55c950c3AB445DEdBbeDF3Da0cA3445b460F201f | Arbiscan

GMX/USDC Vault: Contract Address 0x45c0C776242C2ea752A4B152902F203Af40D7924 | Arbiscan

Fee Manager: Contract Address 0xfF7699c47326516759bE8902e87d09BCf4700d75 | Arbiscan

SECTION 4: GRANT OBJECTIVES, EXECUTION AND MILESTONES

Objectives

When framing the milestones for the current year on Arbitrum, we approach them from 3 verticals:

  1. TVL of $5M
  2. Weekly Trading Volume of ~$9M
  3. Expand Ecosystem with 1 DEXs

[TVL]

Smilee’s limiting factor for scaling TVL is the current spot market depth on Arbitrum. In its current state, there’s ~$500M in liquidity combined amongst the major DEXs on Arbitrum. Given the fact that we have liquidity depth requirements on an asset pair basis, ~$250M of that total liquidity is addressable by Smilee.

Therefore, a reasonable target for Smilee over the incentive program would be $5M (~2% market share).

Arbitrum incentives will help us achieve that, and later scale beyond as demand increases and Smilee expands the number of DEXs supported.

[Trading Volume]

Taking into account the above TVL premises, which represents the weekly tradable notional volume, the team conservatively assumes:

  • an average utilization rate of 75%
  • a weekly turnover of ~2.5x

Based on the above, it can be assumed that $5M in TVL can generate on average ~$37.5M in trading volume each month, or an average of ~$9M per week.

[Ecosystem]

Right now Smilee is integrated with Uniswap v3, but we plan to integrate with one more DEX, such as Camelot, Sushi and Trader Joe, in order to:

  1. Increase the number of tradable assets on Smilee to 5.
  2. Build mutual Liquidity <> Impermanent Gain vaults to offer automatically hedged Gamma strategies to users.

Execution Strategy

Distribution mechanism for Trade Fee Rebates related to “Boost Trading Volume”:

  • Weekly ARB Airdrop to rebate Trade Fees paid by users

Distribution mechanism for LP Incentives related to “TVL Growth”:

  • Weekly ARB Airdrop Earn Vaults LPs
    • WETH/USDC: 40% incentive allocation
    • WBTC/USDC: 40% incentive allocation
    • ARB/USDC: 15% incentive allocation
    • GMX/USDC: 5% incentive allocation

What mechanisms within the incentive design will you implement to incentivize “stickiness” whether it be users, liquidity or some other targeted metric? [Provide relevant design and implementation details]

We plan to make an acute effort on creating markets for long-tail native Arbitrum assets on partnered DEXs.

Considering they’re underserved elsewhere, we’re confident it will help create a diverse & robust ecosystem of supported assets on Smilee making it a premiere place to trade, LP, and more on Arbitrum.

KPIs

For our Weekly Impermanent Gain Vaults, the best performance indicators would be, on an epoch-to-epoch basis:

  • Trade
    • Notional Volume
    • Premium Volume
    • Protocol Fees
  • Earn
    • TVL
    • Utilization Rate

Grant Timeline and Milestones

Per the previous section providing more context, the dates are as follows:

1. TVL

  1. $2M – March
  2. $3M – May
  3. $5M – June

2. Weekly Trading Volume

  1. ~$2.25M – March
  2. ~$5.625M – May
  3. ~$9M – June

3. Ecosystem

  1. 4 Trading Pairs – March
  2. 5 Trading Pairs – May
  3. 6 Trading Pairs – June

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

Smilee’s novel positioning and its tailor-made derivative designed to leverage DeFi building blocks will provide unprecedented features to traders, LPs, and Arbitrum DeFi infra as a whole, making Arbitrum the only place to access this value.

Receiving the grant will ensure more users are educated on volatility trading, as well as adopt & leverage the tools provided by Smilee for a long time to come as we further embed ourselves in the overall ecosystem.

Do you accept the funding of your grant streamed linearly for the duration of your grant proposal, and that the multisig holds the power to halt your stream?

Yes.

SECTION 5: Data and Reporting

OpenBlock Labs has developed a comprehensive data and reporting checklist for tracking essential metrics across participating protocols. Teams must adhere to the specifications outlined in the provided link here: Onboarding Checklist from OBL 8. Along with this list, please answer the following:

Is your team prepared to comply with OBL’s data requirements for the entire life of the program and three months following and then handoff to the Arbitrum DAO? Are there any special requests/considerations that should be considered?

Yes, we are prepared to comply.

Does your team agree to provide bi-weekly program updates on the Arbitrum Forum thread that reference your OBL dashboard? [Please describe your strategy and capabilities for data/reporting]

Yes, we will provide bi-weekly updates.

*First Offense: In the event that a project does not provide a bi-weekly update, they will be reminded by an involved party (council, advisor, or program manager). Upon this reminder, the project is given 72 hours to complete the requirement or their funding will be halted.

Second Offense: Discussion with an involved party (advisor, pm, council member) that will lead to understanding if funds should keep flowing or not.

Third Offense: Funding is halted permanently

Does your team agree to provide a final closeout report not later than two weeks from the ending date of your program? This report should include summaries of work completed, final cost structure, whether any funds were returned, and any lessons the grantee feels came out of this grant. Where applicable, be sure to include final estimates of acquisition costs of any users, developers, or assets onboarded to Arbitrum chains. (NOTE: No future grants from this program can be given until a closeout report is provided.)

Yes.

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.

Hello @Albiwara ,

Thank you for your application! Your advisor will be @JoJo.

Please join the LTIPP discord and ping your advisor in the general chat so they can create a new channel and start communicating with you.

@cliffton.eth please mark this as final when possible, thanks! I cannot edit the title.

Hey there I’ve amended the title post to reflect that this proposal is FINAL. All the best!

Smilee Finance Response to Arbitrum DAO Delegates’ Feedback and Revised Proposal

Following the rejection of the initial proposal from the LTIPP Council, we’re submitting this new one on Snapshot with a few modifications, as per Clarified Process for Non-Council Recommended Applications.

Summary of Council feedback received (excluding who voted yes):

  • GMX: Expresses reservations regarding the proposal due project maturity, performance metrics, and grant size relative to current status.
  • KAREL: Suggests resubmitting the proposal in a later grants window with a reduced ask after demonstrating greater traction.
  • GFX: Argues against financing fee subsidies to a grantee, citing the finite nature of grants funding.

Smilee Protocol launched shortly before the LTIPP application program deadline, but lacked proper tracking tools to demonstrate performance and traction.
Given that we launched on March 15th, as of today, Smilee has been live for slightly more than 5 weeks, (with one week of trading paused for redeploying new smart contracts) and has achieved the following performances:

  • Total Value Locked (TVL): $2M (increased cap from $2M to $3M on April 11, 2024)
  • Trading Volumes: $13.7M
  • Premium: ~$67K for Liquidity Providers (LPs)
  • Unique Traders: 166

Please note that as replied here to @pedrob , recent market performances influenced negatively our TVL. Even though we haven’t disclosed any incentives, our TVL increased by more than 15% in a period of market downtrend.

Full details here:

Source: https://defillama.com/protocol/smilee-finance#tvl-charts

Detailed performance metrics can be viewed at:

In response to feedback from the Council and recent performance trends, we propose resubmitting the application with a reduced grant amount by eliminating the fee rebate component.

Setting the new grant request at 140K ARB, we will implement the following incentive scheme:

  • Grow Smilee TVL from $2M to $5M.
    • Incentives APR = ~14%, less than 15% as suggested;
    • USD Equivalent of Earn Incentives = ~165K USD (Assuming ARB Price of 1.18$)
    • ARB Equivalent of Earn Incentives = 140K ARB

Therefore, Smilee Finance update our request to 140,000 ARB