What is Arrakis Finance?
Arrakis Finance is a market-making protocol built on top of Uniswap V3. Just like traditional market makers ensure that there is always a buyer and seller available for any given asset, Arrakis Finance ensures there is always enough liquidity for any given asset on Uniswap V3.
Arrakis Finance started in early 2021, shortly after the Uniswap v3 whitepaper was released. The introduction of concentrated Liquidity AMMs promised to finally disrupt the need for traditional CEXs in terms of efficiency, enabling AMMs to behave similarly to their Central Limit Order Book (CLOB) counterparts.
The Arrakis team set out to solve these problems by building a protocol that offers trustless market-making infrastructure and strategies. LPs can leverage Arrakis in order to create markets for crypto assets that exceed the efficiency and liquidity depth of those created on CEXs while enjoying a similar passive LP experience that they are used to from Uniswap V2.
Arrakis Finance derives its value from enabling projects to have deeper liquidity on Uniswap V3. With market makers willing to offer liquidity at every range, the project’s native token can enjoy better price stability. Some projects that use Arrakis vaults include Aave, MakerDAO, and Synthetix. Arrakis vaults have never been hacked.
Vaults on Arrakis Finance are smart contracts with embedded strategies. Basically, the smart contract is the “manager” of the vault. These are free to create and require no KYC. Managers may choose to implement a fee for manually managing the vaults.
One key aspect that makes Arrakis Finance safe is that the liquidity provider can always withdraw his funds at any time — the vault/manager can only move liquidity between tiers without having access to the deposited crypto assets.
How does Arrakis Finance work?
Arrakis Finance is a market-making protocol built on Uniswap V3. In order to explain Arrakis Finance, it is important to mention the features that make Uniswap V3 different from other liquidity pools.
Unlike traditional liquidity pools, Uniswap V3 adds concentrated liquidity spots. In practice, users can provide liquidity for certain price levels rather than the entire liquidity pool. This makes Uniswap V3 akin to the order book model we see in centralized services.
For example, users can provide liquidity for the DAI/ETH pair in the range of their choice. They can allocate $100 in the $800-$1200 range, and $500 in the $1200-$1600 range. LPs earn a portion of the trading fees should the price of ETH fall in any of these ranges. Leveraging concentrated liquidity positions gets increasingly more complex as the price of the crypto asset fluctuates. A crypto newcomer may find it overwhelming, and for good reason. Enter Arrakis Finance!
Arrakis Finance cuts down the complexity of managing liquidity positions on Uniswap V3, as it runs automated market-making strategies on users’ behalf. At its core, Arrakis is a collection of smart contracts that move funds to the most profitable price ranges, making the most out of users’ crypto.
Arrakis Vaults V1
Vaults are a collection of smart contracts that execute market-making strategies based on the rules set by vault managers. Vaults eliminate the question “where should I set my LP range?” Its smart contracts will automatically detect the most profitable strategy and hop between LP ranges.
In practice, anyone can be a vault manager who deploys vaults, executes strategies and earns LP fees from the LPs deposited into their vault. This opens the opportunity for projects and DAOs to create their private vaults, or opt into public vaults, open for everyone to join.
The manager account within the vault is completely permissionless, anyone and everyone can be a manager, however, the vault deployer has to specify who the manager should be.
For projects that want a pre-packaged solution, Arrakis DAO has deployed a strategy called Bene Gesserit. First of all, the team discusses the project’s liquidity goals, how long they want their liquidity, how deep they want it, and whether they are looking to deploy their own funds or want to run a liquidity mining scheme to attract outside capital.
Once the goal has been set, Bene Gesserit runs multiple simulations of price moves over the past months. These simulations test whether the assets can stay in the 95% profitability range at least for a few months. Each week, a vault rebalancing occurs to ensure liquidity remains in the profitable range.
In the case of the Bene Gesserit Strategy, the manager account is governed by a multisig that can only move the range with a 3/6 sign amount.
Arrakis V1 remains a Proof of Concept to demonstrate how Uniswap V3’s concentrated liquidity can be used to create shared liquidity management preferences that are automatically executed for all participating LPs. Projects that want to make the best out of Arrakis should use its second version.
Arrakis Vaults V2
Arrakis V2 Vaults were introduced in 2022. V2 is a next-generation market-making infrastructure built on top of Uniswap V3. This new version opens up the possibility for sophisticated market-making strategies for both volatile and pegged asset pairs.
Arrakis PALM
PALM is a more complex mechanism for bootstrapping liquidity for protocols. Traditionally, the process of adding liquidity to a trading pair is done via liquid mining or OTC deals. Each of these liquidity bootstrapping mechanism aims to provide enough inventory in the beginning. Liquidity mining is a popular way to reward early LPs with the project's token, while OTC deals imply selling discounted tokens to private investors.
PALM represents a unique way to bootstrap liquidity during the early stages. Imagine a project that wants to create a trading pair for its governance token and USDC, but the only asset they have is its governance token. In this scenario, the project will provide Arrakis with 100% of their governance token and 0% USDC. Arrakis vaults using PALM will actively manage the inventory to transition the 100:0 ratio to roughly 50:50, without ever directly swapping any assets itself on the DEX.
How to make money on Arrakis Finance?
Arrakis Finance can be a useful tool for providing liquidity on Uniswap V3. As of 2022, Uniswap V3 has over $2 billion in TVL, making it the most popular DEX in DeFi. If you are looking to make yields on your idle capital, Uniswap can be the perfect destination.
Arrakis Liquidity Pools
Because Arrakis is a market maker for Uniswap V3, users can earn deposits into the Arrakis Vaults and earn higher APR than using Uniswap V3 as a solo liquidity provider.
Here's how to provide liquidity on Arrakis Finance:
Open the Arrakis Finance app
Select the liquidity pool of your choice by clicking on the dropdown button
Input the amount of liquidity
Deposit
Approve the transaction
The level of risk is tied to the type of LP pair. For example, a newer token pair may offer a higher APR to incentivize liquidity bootstrapping. On the other hand, the risk of impermanent loss increases when compared to popular liquidity pools.
Arrakis Vault
V1 represents the legacy version of the Vault. While it's still open to use, the team recommends using the much more optimized V2 version. These Vaults allow for liquidity to be managed in an automated way on a concentrated liquidity DEX such as Uniswap V3. The mechanics of V1 are the same as of V2.
In order to open your Vault, follow these steps:
1. Launch a Uniswap V3 pair for your token and the base asset you would like to have your token trade against e.g. USDC or ETH
2. Create a vault on Arrakis
3. Choose a manager for the vault, and deploy the vault
4. Depositors can add and remove liquidity
