[FIP-289] Add Arrakis LST Vaults of frxETH/FRAX (Mainnet) to FXS Gauge Controller

Voting ended over 2 years agoSucceeded

Summary

Add a gauge for each frxETH/FRAX Arrakis LST (Liquid Staking Token) Vault - one on Mainnet.

Mainnet Uni pool: 0x36C060Cc4b088c830a561E959A679A58205D3F56 PALM vault: 0xB00fbB12656Ba2580E4D8f54e1aa7b75408FD037

Background & Motivation

Arrakis Finance and Arrakis LST Vaults

Arrakis Finance is a non-custodial on-chain market-making protocol that builds both the infrastructure and the strategies that enables and execute sophisticated algorithmic market-making on Uniswap V3.

Arrakis LST Vaults are permissionless and incentivizable LP infrastructure that provide algorithmic market-making strategies for LST assets. They are designed to solve the critical challenges that LST protocols and LPs currently are facing:

High cost for maintaining deep liquidity Deep liquidity is crucial for LSTs as staying tightly pegged on the secondary market is what qualifies a liquid staking token liquid. Traditionally, it is exceedingly expensive to maintain sufficient liquidity depth and protocols have spent tens of millions worth of incentives for it.

Arrakis LST Vaults on the other hand tackle this issue via high capital efficiency with minimal capital requirement. Leveraging the concentrated liquidity feature of UniV3, the strategies use limit orders, asymmetric liquidity, and algorithmic rebalancing to minimize price impact for larger trades and therefore make liquid staking tokens actually liquid. This means that LST protocols can reduce their expenditure on liquidity mining incentives since less capital is required now to establish a liquid market.
IL (Impermanent Loss) risk for LPs LPs are in constant struggle between earning liquidity mining incentives and taking on IL risk. The amount of IL risk is directly correlated to the size of the exposure the liquidity has to the market.

Arrakis LST Vaults mitigate IL risk by managing the amount of liquidity exposed to the market at any particular moment for both bid and ask prices. This approach minimizes the likelihood of engaging in excessive buying and/or selling at unfavorable prices, hence reducing the IL risk.

How Frax can benefit from it

First of all, even though both frxETH and FRAX already have quite deep liquidity on their own, the direct liquidity for frxETH/FRAX is rather thin and poorly managed at the moment. Arrakis LST Vaults can help increase the liquidity depth of frxETH/FRAX while only requiring limited capital and incentives.

Secondly, frxETH is mostly paired with ETH or other LSTs, and FRAX is mostly paired with other stablecoins. A liquid market of frxETH/FRAX can efficiently route the swaps between frxETH and other stablecoins or between FRAX and other LSTs, which will lead to wider circulation of frxETH and FRAX.

Furthermore, LP positions in Arrakis LST Vaults can act as collaterals and be integrated into lending markets.

Arrakis has been assisting Frax with liquidity management since Arrakis V1 product, and we would like to strengthen this long-term relationship with more and better services that can further benefit the Frax community.