On-chain Market Making for NEXT - Arrakis PALM

Abstract

Deploy Arrakis PALM to conduct on-chain market making with Connext DAO Protocol Owned Liquidity on Uniswap V3.

Motivation

Create deep liquidity for NEXT on Uniswap v3 (Ethereum & Arbitrum).

Rationale

Currently, most protocols are still outsourcing liquidity via liquidity mining or bonding. There are two major drawbacks to this approach:

High cost

Either LM or bonding, essentially, it boils down to spending the native token renting liquidity or buying it with a premium. With LM, as the incentive inevitably runs lower over time, mercenary LPs will leave and most likely sell their reward along the way. As to bonding, bonders will consistently arbitrage the premium and create a death spiral for the token price, as a discount has to be sustained in order to incentivize bonding. Neither of them is sustainable, and both will do more harm than good to the protocol and the community.

Low capital efficiency

The easiest way to LP is to deploy liquidity on UniV2 or the likes because of the low complexity. That would mean a huge loss in capital efficiency due to the nature of CFMM. A team can also wrap a UniV3 position with outsourced liquidity, but usually they would still deploy a full or very wide range for the ease of management. LPing on a concentrated liquidity DEX requires expertise and resources that most teams don’t have. Eventually, they still end up with very low capital efficiency.

Taking either of these two options would present both a huge cost and a missed opportunity for Connext. Instead, PALM can help Connext establish a deep and sustainable liquid market in the most capital efficient and cost effective way that benefits all parties:

For the team, more resources can be reserved for protocol development rather than providing liquidity, since PALM only needs a fraction of what is typically required. Below is an example of how capital efficient PALM is compared with a much better funded pool but with no active liquidity management.

For the Treasury, it has the opportunity to consistently pocket a handsome amount of trading fees by allocating POL for PALM to make markets.

For Connext community, deep on-chain liquidity can support the distribution of NEXT and therefore the decentralization of the DAO, since people are more willing to permissionlessly trade the token without incurring large price impact.

Key Terms & Specifications

14.4m NEXT to an Ethereum Mainnet PALM vault 5.77m NEXT to an Arbitrum PALM vault

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

Steps to Implement

1. Arrakis deploys vaults on behalf of Connext DAO
2. Connext DAO deposits NEXT into these vaults
3. Market making begins

Allocation

20.17m NEXT will be used in total.