Proposal: Use Arrakis PALM for Deepening DAO Owned Liquidity

Ampleforth Governance
1

Summary

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

Arrakis and PALM

Arrakis Finance is a trustless market-making infrastructure protocol that enables running algorithmic strategies on top of Uniswap V3.

Since launch, Arrakis has acquired:

  • >$1.7b in TVL at its peak (currently around $460m), across Ethereum, Optimism and Polygon

  • >25% Uniswap V3 total TVL

  • >80 projects have their liquidity managed via Arrakis vaults

A SPOT/USDC Arrakis vault is already used within the Ampleforth ecosystem to create an easy entrypoint to being a SPOT Liquidity Provider. It is also used as a way to tokenize LP positions so the geyser program can work with Uniswap V3. This vault currently holds > 40% of the SPOT/USDC liquidity pool on Uniswap.

Arrakis PALM, Protocol Automated Liquidity Management, is a liquidity bootstrapping mechanism that taps into the organic trading volume on UniV3.

PALM is designed to bootstrap liquidity by acquiring more base asset inventory. For instance, the Forth DAO can seed liquidity with an initial asset ratio of 90/10 in FORTH/ETH. PALM can progressively balance it towards a target ratio, like 50/50, only by taking advantage of the volatility to make markets for FORTH. Not only will this approach save the DAO Treasury from spending ETH on liquidity and FORTH/AMPL/SPOT on LP incentives, but it will also put no downward pressure on FORTH price since the market-making is done via setting up LP positions instead of doing swaps.

During the time of deployment, the Forth DAO community would have full transparency of the execution and performance of PALM via a custom dashboard, and it retains full custody of the liquidity in the vault. At any point in time, the DAO could withdraw the fund 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.

A case study of Arrakis’ first PALM deployment for Gelato’s GEL token showed very good results, accumulating from 2 ETH to nearly 170 ETH in under 3 months.

Arrakis charges two fees:

  • Management fee: 1% AUM fee on a yearly basis

  • Performance fee: 50% of trading fees generated

Read more at–

Website: https://www.arrakis.finance/

Docs: https://resources.arrakis.fi/

Current State of FORTH Liquidity

FORTH is listed on a variety of Tier-1 centralized exchanges like Binance, Coinbase, Kucoin, Kraken and does in excess of $5M of daily volume. Despite this, there is no meaningful FORTH liquidity onchain. Creating a pool onchain would allow the DAO to tap into the already decent volume in the surrounding ecosystem.

The Forth DAO Treasury currently owns 3.8M idle FORTH tokens. Deploying some of these into PALM would simultaneously support the ecosystem by providing liquidity and also safely diversity the treasury over time.

Proposed Phase 1 Deployment

The DAO also holds $1.14M of AMPL/ETH liquidity on Uniswap V2, which includes ~552 ETH (~$595K). We could utilize 10% of the ETH in the AMPL/ETH pool to initialize the FORTH PALM vault in a 90:10 FORTH/ETH configuration.

That would initialize PALM with approximately:

  • $540K in FORTH and

  • $60K in ETH

totaling ~$600K to start.

Since PALM is a new system, an option to minimize risk is to start with $200K of assets, then reserve a follow on with the remaining $400K after a period of observation–perhaps after 1 quarter.

Phase 2

After 50:50 equilibrium is reached, the DAO can revisit market making objectives. Since PALM is non-custodial and exists onchain, the DAO retains ownership of the assets and is free to withdraw them at any time. At this point, we can revisit if/how to adjust the parameters, or if/how much liquidity should be added or removed.

For example, the DAO could maintain the vault as is, repurpose the accumulated ETH and deepen AMPL or SPOT liquidity, or deploy the ETH for yield completely independently.

Previous Related Discussions

https://forum.ampleforth.org/t/ampleforth-should-acquire-protocol-owned-liquidity-on-eth-mainnet

https://forum.ampleforth.org/t/geyser-refresh-for-january-23rd-2023

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I support this proposal. On-chain liquidity is important for the health of the ampleforth ecosystem, and deploying a small portion of the assets to support Forth liquidity seems prudent.

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Thanks for the proposal @Brandon !
I’d be more than happy to answer any comments from Ampleforth community and move this collaboration forward!

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I’m supportive of the ForthDAO taking an active role in market-making its own token ecosystem :100:

Ensuring sufficient liquidity on neutral exchanges (eg Uniswap) is an essential part of giving everyone the same chances to enter and exist the ecosystem.

About Arrakis PALM

I do not have any experience or background knowledge of Arrakis and their PALM system. However, skimming through their audit reports (https://github.com/ArrakisFinance/v2-palm/tree/main/audit, https://github.com/ArrakisFinance/v2-palm/tree/main/audit) it seems that the manager role is quite powerful and needs to be trusted.

Screenshot 2023-03-11 at 17.27.09
Screenshot 2023-03-11 at 17.27.091057Ă—652 217 KB

(Screenshot from one of PALMs audit reports, see https://github.com/ArrakisFinance/v2-palm/blob/main/audit/arrakis-v2-core-and-palm-statemind-audit-rev2.pdf at page 8)

Maybe @barbarossa_Arrakis can bring in some more clarity regarding this issue?
My questions are:

  • Can we have a fully trustless manager, perhaps by having the manager being a DAO managed contract?
  • How can we reasonably assume that rebalancing does not drain the position due to MEV, especially in the context of the rebalancing parameters being openly in the public mempool before execution?

Independent of the above-mentioned issues, I would advocate for such a “risk minimized” start.

About Increasing the DAOs holdings of ETH

Very much in favor of increasing the ETH holdings of the DAO.

The DAO has real costs in regard to the oracle providers, whose costs are denominated in ETH due to having to push their reports on Ethereum. From that perspective, holding a substantial amount of ETH is existential for AMPL to guarantee a lively oracle system.

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Thanks for such a thoughtful feedback ser :pray:
Definitely very much appreciated!

To address your questions:

  1. The trustless property of PALM comes from the fact that it is not able to remove the liquidity. However, as you rightfully pointed out, there is a certain trust element at the moment, which is that Ampleforth would still have to trust Arrakis team for setting up the proper parameters and correctly pushing them on-chain from our backend. We intend to reduce our accessibility to intervention as much as possible, though the tradeoff is the opportunity cost if every time we have to require access from the DAO first when a change is required, especially for emergent situations. Overtime, we intend to make PALM more autonomous and minimize the trust layer on us.

    Currently, the mitigation to this risk in case we go rogue (I’m probably the worst PR lol), is to monitor the vault activities through the dashboard we provide dedicated to your vault or on-chain data if you prefer going even one step further, and revoke the manager role from PALM if you deem necessary.

  2. On a high level, the most basic layer of protection is the built-in inventory management, i.e. only a portion of the total liquidity is deployed at a time to prevent a liquidity drain over the entire vault. As to the liquidity deployed, in order to prevent an MEV attack, there is a slippage control in place, i.e. addLiquidity with a minDeposit0 and minDeposit1 that does not allow for the price to move beyond reasonable slippage.

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Many thanks for the reply!

Correct me if I’m wrong, but the trust does not seem to stop after the initial setup. Arrakis needs to continuously push them onchain, leading to the DAO having to continuously trust Arrakis to not change parameters.

This seems to support my upper point.

Were there already situations in which Arrakis changed parameters due to emergency situations without consulting the appropriate stakeholders before?

This is good to know! Thanks again for the thoughtful answer! So the DAO can at any point revoke all permissions regarding Arrakis? Not sure how much security this actually creates during extreme situations, as the DAO utilizes a timelock for governance actions (which ofc is never favorable in the moment of an emergency :sweat_smile:)

I like it! :100:

Yeah MEV is a tricky thing. Do you know by any chance whether the minDeposit arguments are computed off- or onchain? (Note: This is important regarding MEV bots that simulate tx executions, ie if the arguments are computed onchain during the execution of the tx a frontrunner can mutate the state the computation is based on and therefore influence the result).

Last question: Does Arrakis utilize private mempools (eg flashbots)?

Conclusion

As always, it boils down to a risk/reward question. Personally, I’m a strong advocate of DAOs being sovereign on their blockchain and taking part in the social governance regarding “the land they are living on”, ie they should hold ETH.

The DAO also needs to keep an eye on the costs regarding the oracles, which are denominated in ETH. (Does anyone know how much the Ampleforth genesis team pays per month in ETH for their oracle? Or how much of the initially allocated ETH is left? These costs are currently not expenses paid by the DAO directly… yet)

On the other side, new systems such as Arrakis have high risks - from technical problems to trust requirements up to liquidity management issues.

Therefore, I’d like to start with a low stake and revisit this discussion after some time passed, evaluating whether the stated goals were met and whether Arrakis managed to show progress regarding trust minimization.

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I like hanging out here. You guys ask good questions and we can learn a lot from it as well :smile:

So I’ll respond to this together with the feedback above.
The trust bestowed on us is adjusting parameters as agreed. Other than the manager role revoke, which can be a bit cumbersome, our current idea to completely abolish the trust layer is to implement an off-chain oracle check that monitors and permits any parameter change pushed from our backend. Though we don’t have a timeline when it’s gonna be implemented yet. And fortunately, so far we have not encountered any instance of emergency, and we try to minimize the possibility of its occurrence by implementing the said safeguards before hand.

Correct. And an (easier perhaps) alternative is just to withdraw the liquidity out of the vault.

It is off-chain.

Yes.

Happy to provide more info if needed :+1:

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Hey there,

Out of curiosity, how do we move forward with this proposal?

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Thanks for the discussion everyone. It seems there’s support for moving forward, with a risk minimized ramp up period.

I’ve posted a signal vote here, using the proposed $200K + $400K allocation, which should open for voting tomorrow.

https://signal.ampleforth.org/#/proposal/0x44903b6fc5f4b78c450e9a8873e530e6f1d9e00c2c4485b50ad4491b48c22d21

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The onchain, executable vote is posted here:
https://www.tally.xyz/gov/ampleforth/proposal/14

Voting will begin April 12th, so make sure your votes are delegated onchain before then!

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Hey Ampleforth community!

Finally, we have officially initiated PALM for FORTH/WETH on Uniswap and you can find the status of the vault here:
https://dune.com/arrakis_finance/palm-mainnet?vaultName_e48fe2=selection+by+address&vault_tf7a34=0xe2cbdbc298d884a2ded6b554702f514ed3364264

Thanks for the support for this proposal and we are looking forward to further assisting Ampleforth with even more liquidity once the community is satisfied with the current vault performance!

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After a bit less than a year, the PALM vault has achieved its primary Phase 1 liquidity objective of reaching a 50:50 FORTH/ETH ratio.

Phase 1

The performance over this period is best seen on this dashboard:
https://dashboard.arrakis.finance/?network=ethereum&vault=0xe2cbdbc298d884a2ded6b554702f514ed3364264

The vault was seeded following the two-staged risk minimized approach of:

  • 51,500 FORTH ($172,593) + 10.4 WETH ($19,240) on 4/21/23
  • 99,108 FORTH ($339,771) + 17.5 WETH ($32,048.72) on 5/1/23

Totaling:

  • 150,608 FORTH + 27.9 WETH worth ~$563,652.72 at the time

It now holds:
77,447 ($555,294.99) FORTH + 197.77 ($671,389.596) WETH worth ~ $1,226,684.59 today

Now we can discuss what to do for Phase 2.

Phase 2

There is unfortunately no way to partially withdraw assets from PALM, so the DAO would need to withdraw all or nothing. This is one restriction of the PALM system. Then, if it wanted to start a new program, it could initialize a new vault.

So I propose that the DAO reclaim all the assets at this time.

It’s worth noting that the PALM vault holds an 87.96% share of the UniV3 liquidity. If we want to keep some remaining liquidity onchain in the meantime, we could reserve some amount to keep in an unmanaged infinite band. Perhaps 10% of the reclaimed assets, but I’m open to hearing everyone’s thoughts on this.

In terms of what to with the reclaimed assets, there are a number of initiatives that could be considered, including:

  • Combining the assets with even more FORTH to create a second, larger run on PALM
  • Deepening AMPL/ETH liquidity on UniV2
  • Deepening SPOT/USDC liquidity on ETH and/or Base
  • Deepening WAMPL/ETH liquidity on BASE
  • Deploying FORTH/ETH liquidity to BASE, if we wanted to leverage FORTH as an incentive token on Aerodrome

However, I propose that we table this specific discussion until the next geyser refresh round, so that it can be considered holistically within the ecosystem. Given the current geyser schedule, this should happen within the next week or so.

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I didn’t participate in the discussions back then, but I’m pleasantly surprised now by the results of this.

So basically, over the span of a year, the DAO was able to convert it’s FORTH into ETH without actively selling into the market and it also additionally made around $50k or 4.4% profit. (Using the prices you provided)
150,608 FORTH + 27.9 ETH = $1,174,572
77,447 FORTH + 197.77 ETH = $1,226,684

If the intention was to increase liquidity and to diversify the DAO’s treasury, I think it would be a bit too drastic to reduce the DAO-owned liquidity by 90%, especially given the fact that the DAO owns almost 88% of the total univ3 liquidity. Perhaps, I misunderstood your wording.

What might be reasonable though, is to reuse the 77,447 FORTH and start with a new round of 90:10 ratio again. That would be around 16.35 ETH and claim the rest of the ETH, effectively halving the liquidity owned by the DAO.

Regarding the use of funds, I’m in favour of using it for the SPOT-USDC pool. It’s in desperate need for more liquidity. The success of SPOT will be crucial to the success of AMPL and FORTH.

Convert the newly gained ETH into USDC & mint SPOT with the massive AMPL treasury. It would support the stability of SPOT, if the DAO chooses to spread the current Arrakis liquidity to a wider range.

An option would be to create a wide-range LP position (if not infinite) to cover the prices outside of the neutral rebase zone, while the Arrakis vault covers the middle range, essentially fulfilling the idea of a 2-tiered liquidity range.

The downside is that the DAO would lose exposure to ETH. However, I believe that providing deeper liquidity for SPOT will result in more value generation than just holding onto the ETH.

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How would our decisions here with DAO owned liquidity affect the allocation of geyser rewards?

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One example is-- If the DAO wanted to run an incentive program on Aerodrome with FORTH tokens, the platform requires a FORTH pool first. That pool also needs to be some multiple larger than the incentive amount to meet liquidity needs for the token receivers.

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