Abstract
It is highly advantageous for a DeFi money market protocol like Radiant Capital to have its governing DAO control liquidity in its token market at the lowest possible cost.
In so doing, the DAO can ensure high liquidity for its token at all times, allowing large amounts of capital to invest in the DAO without price slippage in all market regimes.
The original solution to this problem – pool2 liquidity mining – rents liquidity at a high cost to the protocol without long-term benefit. Ultimately, pool2 liquidity mining grinds down the token price through the continual sell pressure. Due to the low token price, the governing DAO is left without liquidity and dramatically reduced treasury purchasing power.
This proposal addresses both shortcomings of this original solution: sustainable pool2 liquidity controlled by the DAO (protocol-owned liquidity or POL) and strong treasury purchasing power.
Motivation
- Diversify the DAO treasury from 100% RDNT into a near majority ETH share without crashing the RDNT token price by continually selling on the open market or issuing discount bonds
- Create POL on Uniswap v3 to reduce the need to rent liquidity at a high price via liquidity mining
Rationale
Diversification of treasury
Radiant Capital DAO should diversify its treasury of RDNT to maintain purchasing power and optionality in all market regimes.
ETH the balance sheet asset
While stablecoins like USDC or DAI are also attractive assets to have on the balance sheet of the DAO, stablecoins have several drawbacks:
- de-peg risk
- censorship risk (DAI is basically wrapped USDC, and USDC is centrally controlled)
- jurisdictional risk (Radiant Capital is a decentralized entity and accordingly, having large amounts of US-domiciled centralized stablecoins on its balance sheet presents long-run tail risks)
ETH, however, is the purest DeFi collateral, accepted everywhere across all EVM chains and easily leveraged to mint stablecoins themselves. Moreover, with the emergence of its proof-of-stake derivatives and deflationary tokenomics, ETH can also be converted into an interest-bearing derivative.
While the rehypothecation of ETH is not the subject of this proposal, it is sufficient to assert ETH is the best asset to accumulate first on the balance sheet of the DAO.
ETH highly liquid across EVMs
Similarly, given its highly liquid status across the broader EVM ecosystem, ETH is highly suitable as a liquid trading pair for the RDNT token.
Key Terms
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POL: Pioneered by Olympus DAO to provide liquidity to tokens on decentralized exchanges. Instead of providing incentives to the market to provide liquidity to liquidity pools, the protocol-owned liquidity model instead utilizes a “bonding” mechanism. Bonding essentially involves the protocol selling their tokens at a discount to buyers, who in exchange will provide another token (e.g., ETH), which forms part of the protocol’s treasury. The treasury can then be deployed to provide liquidity directly to DEXs (earning trading fees) and can be invested to generate returns.
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Arrakis v2 Market-Making Strategy Features:
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Multiple Concentrated Liquidity Positions: Enables the construction of an arbitrary combination of liquidity positions in a Uniswap V3 pool, e.g. a Curve V2-like liquidity distribution in Uniswap V3.
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Cross-Fee Tier Vaults: Enables liquidity provision in different fee-tiered pools simultaneously and moves liquidity across fee tiers seamlessly.
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Inventory Management: Enables using only a certain portion of the deposited capital for LPing at any given moment, with the option of connecting to any swap routers.
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Cross Protocol Rebalancing: Enables aggregating liquidity sources from DEXs or directly mintable protocols.
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Non-Custodial: Ensures that liquidity deposited by arbitrary depositors can be withdrawn anytime only by the depositors themselves, as managers do not have custody of the liquidity deposited.
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Fungible: The fungibility of Arrakis vaults makes them highly composable and enables an easy integration into DeFi, e.g. used as collateral in lending markets.
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Specifications
Overview
Arrakis v2 is a market-making infrastructure protocol for Uniswap v3. Liquidity providers can use Arrakis v2 vaults to manage liquidity in an automated, capital-efficient, and non-custodial manner.
Protocol Automated Liquidity Management (PALM) is a liquidity bootstrapping mechanism built on top of Arrakis v2 that utilizes organic trading volume on Uniswap v3 to enable protocols to create deep liquidity for their protocol tokens.
A PALM vault acquires the base asset inventory needed to create deeper sell-side liquidity using the organic trading demand within Uniswap v3. This method is instead of selling tokens outright or paying third parties to effectively rent inventory via liquidity mining.
PALM vaults pay management and performance fees for automated liquidity management services. The management fee is calculated as a percentage of principal liquidity deposited into the PALM vault. Performance fees are collected separately from the market and require manual redemption.
How PALM works
See How it works for a complete overview of PALM.
In the RDNT/ETH market, RDNT is the quote asset, and ETH is the base asset. Any ratio of quote-to-base can be initially deposited into the PALM vault, for example, 100:0 RDNT:ETH.
The PALM vault will warehouse RDNT tokens but outside the market. Arrakis will actively manage the RDNT inventory inside the market from a 100:0 ratio to roughly 50:50. This rebalance is achieved without taking liquidity (swapping on the taker side) by changing the allocation of RDNT and ETH provided into the market on the maker side as the price changes over time.
Since the PALM vault is not taking liquidity, it does not create direct sell pressure. This vault is particularly advantageous compared to the token sell pressure created by liquidity mining or bonding initiatives.
Once the 50:50 quote-to-base asset ratio is reached, the PALM vault will transition the protocol-owned liquidity strategy to a strategy intended to keep the market as liquid as possible. It can remain in this steady state indefinitely.
Technical Overview
See PALM Technical overview for more information.
PALM enables users to create a “private” vault that runs automated strategies on behalf of the vault owner via the Gelato Network keeper infrastructure.
Only vault owners can add and remove liquidity from their private vaults. In addition, vault owners can pick from whitelisted strategy templates and further configure the strategy with custom parameters.
PALMTerms.sol
This is the entry point for protocols (or any user) to deploy a vault managed by the PALMManager, which runs customizable automated liquidity provision strategies via the Gelato Network keeper infrastructure. In addition, it handles the quarterly recurring management fee, deducting a small percentage of principal liquidity deposited into PALM vaults.
PALMManager.sol
This is the entry point for the Gelato Network keeper infrastructure to rebalance all PALM vaults according to each vault’s defined strategy. In addition, it handles the performance fee (the share of the trading fees earned by the vault liquidity in Uniswap v3).
Market Parameters
PALM is currently offered in private beta by Arrakis. Additionally, Radiant Capital DAO has been accepted into the pilot intake.
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Market:
- RDNT/ETH Uniswap v3 - fee tier 0.3%
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Networks:
- Arbitrum
- Mainnet (after Radiant deployed to mainnet)
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Assets Under Management (AUM):
- Starting AUM roughly USD $1,200,000 @ USD $0.08 RDNT/USD
- Quote to base asset ratio 100:0
- Quote: 15,000,000 RDNT
- Base: 0 ETH
Commercial Terms
Commercial Terms (paid to Arrakis):
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Management fee (percentage of AUM)
- Annual Fee: 1% of AUM, quarterly recurring
- AUM is calculated by quarterly snapshot and paid per quarter in advance. Ie, every 3 months, 0.25% of the existing liquidity in the vault is taken
- The commitment is on a yearly basis, though a protocol can withdraw anytime. Ie,. if a protocol decides to withdraw 6 months after entering the 1-year term, PALM will take the management fee for the entire year
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Performance fee (share of taker swap fees)
- Fee: 50% of taker swap fees
- Taker swap fees are redeemed continually when greater than transaction costs.
- The DAO share is auto-compounded back into the POL
Steps To Implement
TBD
Timeline
Immediate as approved and implemented.
Overall Cost
TBD