[COMP] Market Making Proposal - Arrakis PALM

Proposals
1

Summary

Deploy Arrakis PALM to conduct market-making on UniV3 for COMP.

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

  • ~$1.7b in TVL at its peak (currently around $460m), across Ethereum, Optimism and Polygon
  • Over 25% Uniswap V3 total TVL
  • Over 80 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 COMP, e.g. 90% or even higher, 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 biased price impact: PALM conducts market making by setting up ranges / limit orders, no swaps involved.
  • Trustless: Compound DAO retains the ownership of the liquidity and can withdraw at all times. PALM only autonomously manages the liquidity but can never remove it.

PALM has been deployed for a growing number of protocols and is performing exactly as designed. An example for GEL/ETH can be found in the linked 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, as one of the biggest DeFi protocols, only a fraction of the trading volume for COMP (< 0.5% of $20m daily volume over the past 3 months) is on-chain, while there is actually a decent amount of liquidity across several DEXs (~$5m in total, with most in Sushi).

This presents a huge missed opportunity: Compound Treasury could have consistently pocketed a handsome amount of trading fees by LPing in DEXs, even if just 10% of the volume had migrated on-chain.

Therefore, Arrakis proposes to provide Compound with the full spectrum of market-making services on UniV3 with PALM to bootstrap and create deep on-chain liquidity, so that it can compete against CEXs and divert the trading volume on-chain. This way, Compound Treasury can gain another source of revenue, and the DAO can offer easier access for people to buy the token and participate in Compound governance.

Specification

Phase 1 - Accumulate base asset

Compound Treasury allocates or migrates some liquidity (min. $500k, based on our experience with comparable protocols) into a vault managed by PALM. The ratio between the two assets can be decided by Compound DAO, and the weight of COMP can be as high as 100%. PALM will pull that ratio towards 50/50 over time.

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

During the time of deployment, Compound community has full transparency of the execution and performance of PALM via a custom dashboard, and retains full custody of the liquidity in the vault, meaning that at any point in time, Compound community can withdraw from the vault or revoke the managing access from PALM. 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

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 Compound community about this proposal!

Website: https://www.arrakis.finance/
Docs: https://resources.arrakis.fi/
Twitter: https://twitter.com/ArrakisFinance
Discord: Arrakis Finance

2

Arrakis Finance, a large number of UNI V3 LP positions in this protocol, We think it is a good idea.

1 Like
3

Although I believe that this is a good idea, the fees charged by Arrakis are exorbitant!
Not only they charge 1% of the AUM, but they also take 50% of the trading fees. That’s even more important than a hedge fund (20%).

I am a bit shocked that a reputable organisation like Arrakis would offer such bad terms to the Compound Community.

The performance fee should not be on the amount of fee generated but on the extra returns generated versus a passive strategy.

50% of the total fees generated is huge and we would still pay fees even if Arrakis deployed a very bad strategy. We cannot call this a performance fee.

We need more info and studies from Arrakis on why their strategy would be economically beneficial to the community. Are the strategies that they propose so complex and original that they warrant 50% fees?

I recommend that we propose clear KPIs (liquidity offered, extra returns versus passive strategy) and only pay a performance fee if those are met.This would create a real alignment of interest.

I am happy to use my expertise in LP to work with the community on those criterias.

1 Like
4

Thanks for the feedback ser :pray: Really appreciated.

I wanna make sure that I understand your point correctly, so what is the extra returns you are referring to?

Nevertheless, I think one thing that’s worth noting is that the primary objective of PALM is to make markets for COMP to create deep on-chain liquidity so that the overall trading volume can move on-chain. It is however NOT to make the LP value increase as the extra returns, which would more resemble an investment strategy while PALM is a market making one. Hence, it’d be more appropriate to compare our service and the commission for it with that of traditional market makers, rather than hedge fund.

Besides, although the execution of PALM is autonomous, it’ll still require maintenance, adjustment, optimization, etc. all included in the full spectrum of liquidity management service we provide. Basically, Arrakis would become the liquidity management arm of Compound.

I do agree that the word “performance” perhaps is a misnomer, as it totally depends on the volume that goes through the pool. The portion of the trading fees for Compound is rather a byproduct or bonus from the increased volume due to the effective market making by PALM, not an objective. Then a better question may be, between PALM and a traditional market maker, assuming that both provide same quality of market making service, then which one offers a better value (e.g. how much a traditional mm would charge, what additional benefit Compound could gain from a traditional mm, etc.), and which one offers better security (would a traditional mm require the custody of the fund to conduct market making, as opposed to the trustless setup of PALM?).

5

There is a slight difference with a market maker : is that Compound takes on his balance sheet any risk where the market maker would take it on his books ! Or would it be different for PALM?

I do believe that if we want to explore Arrakis services we would need a more thorough review and benchmark your services with other market makers. As you say there are lots of criterias that need to be taken into account to choose the most optimal solution.

It would also be appreciated that Arrakis does some proper research on why their solution is better than going with Wintermute,

1 Like
6

In the case of PALM, both assets in a pair will come from the protocol, i.e. POL, and PALM only fulfills the managing role. Although a protocol can also only supply its native token, which is more comparable to the scenario with a traditional mm.

If we were to compare the performance between PALM and a traditional mm, we actually know very little about how effective a traditional mm is, because it’s all done under the hood. That’s also one of the major pain points we aim to tackle - full transparency in market making execution, since everything is visible on-chain. It goes hand in hand with the custody risk from a traditional mm, while in our case it’s trustless.

From our end, PALM is being commissioned by a growing number of protocols, e.g. Gelato, Kwenta, Reaper, etc. just to name a few, and our clients have been very happy with the overall performance. The dashboard link in the proposal is an example that you can have a look at.

7

Out of curiosity, what is the procedure of Compound Governance once a proposal is made? How do move move forward from the conversation here?

Any guidance would be really appreciated!