Over the last few weeks, Arrakis Finance has reached out to Alchemix DAO about the creation of Alchemix-related LP positions on Uniswap v3. Unlike Uniswap v2 and nearly every other on chain AMM, each LP position in Uniswap v3 is a unique NFT with a customizable and specific range of prices you are willing to LP at. This presents a challenge when trying to incentivise liquidity on Uniswap v3, and this is exactly where Arrakis Finance Uniswap v3 LP Tokens come in. Their protocol creates a fungible ERC-20 LP position that has a spread of liquidity that mimics the typical x * y = k formula but since it is range bound in a range of one quarter to four times the starting price, it provides a much greater concentration of liquidity than typical AMM curves, lowering slippage for traders.
Arrakis has kindly already created a UNIV3 LP for alUSD/alETH, token name “Arrakis Vault V1 alETH/alUSD (RAKIS-23)”. Anyone is free to deposit into it to test it out.
Users can interact with it on their browser via: https://beta.arrakis.finance/vaults/1/0xE0A34a39c694fFc1beCEcf5bd948e534931C1105
In collaboration with Arrakis, we are proposing a trial run in incentivising Arrakis Vault V1 alETH/alUSD Tokens via our native StakingPools contract. Currently, the vast majority of liquidity for alUSD is against stablecoins, and similarly alETH is mainly paired with ETH. By having a sufficiently deep alUSD/alETH pool, it will accomplish the following:
-efficiently incentivise concentrated liquidity for alAsset pair.
-create a direct path for Alchemix users to exchange their alAssets with one another.
-create arbitrage opportunities that utilize our liquidity on other exchanges.
-increase volume for alAsset pairs means increase real APY in trading fees for all alAsset LPs.
For example, if there is a large change in the price of ETH, then subsequently all pairs associated with ETH need to rebalance to the current accepted market price. This creates large arbitrage opportunities for traders that rebalance the pool, regardless the direction of the market. As traders take advantage of these price discrepancies, pairs tied to synthetic assets also need to rebalance. For example, if ETH pumps, someone would sell USDC for alUSD on Curve, buy the temporarily cheap alETH on Uni V3, then sell the alETH for ETH on Curve. Each step along the way in these hops generates trading fees for LPs, thus creating additional real APY in the form of accrued trading fees.
We are proposing an 8 week trial of the Arrakis alUSD/alETH vault being incentivised to provide 100 ALCX weekly. At the end of the 8 week period, we will need a subsequent vote to extend the incentives further. If the outcomes are favorable, it might warrant further exploration for how Arrakis and Alchemix can collaborate in the future as well as they are working on their V2 infrastructure and PALM product.
Some potential risks with Arrakis Finance is that there is some (albeit minimal) human interaction needed with their contracts that is handled by the Arrakis team. This is to ensure that the current range is within their ideal parameterization. If there is a volatile event in crypto, the LP will need to adjust its range. This action is inherently safe, but it does require operators, and thus timeliness, reliability, and human error are all factors. That said, Arrakis has had a good track record and is a professional team. We are confident in their ability to run these contracts, and if we so choose, they can hand control of the vault to Alchemix DAO for us to operate.
As always, there exists contract risk. In addition to inheriting any risk associated with alUSD or alETH, LPs would also be exposed to risk in the Uniswap v3 protocol, Arrakis smart contracts, and the Alchemix StakingPools contract. But again, everything here has been audited and deployed for months/years, presenting minimal contract risk.