Pre-proposal: IDOL - Improving Dex / Onchain Liquidity

[b3nnn]

TLDR

We propose to address known UX issues and ease and costs to participate by increasing DEX liquidity. Arrakis offers an optimal solution for our specific needs, and we are requesting 250,000 LPT for deployment to a Uniswap v4 pool which will significantly reduce slippage for ecosystem participants

Motivation

The Capital Markets Advisory board made improving onchain liquidity a tactical recommendation, specifically sighting:

• Low liquidity levels on our DEX pools (primarily Uniswap on Arbitrum). This creates high slippage when trying to transact with any size, and might refrain larger stakeholders or participants from buying LPT

• The much higher ratio of available liquidity on centralized exchanges compared to DEXs drives participants to rely on centralized platforms, exposing them to the inherent risks associated with centralized providers

• Further, centralised exchanges often don’t support L2 withdrawals. This results in delayed bridging and withdrawal processing between L1 & L2, impairing overall UX and the efficiency of orchestrators as it relates to capital allocation

In short, improved L2 Dex liquidity is essential for both current and future participants in Livepeer.

Recommended Solution

How to address our challenges is relatively straightforward to describe:

• Increase the amount of liquidity on targeted DEX pool/s

• Ensure the solution is executing against this goal as agreed

• Use funds wisely, ensuring a good balance between what we pay and what we receive

Any solution will require liquidity from the on-chain treasury to start bootstrapping an optimal asset mix. In addition to this liquidity requirement, using a traditional market maker is likely a major expense (in the range of $15-20K per month). While traditional market makers can do a good job in actively managing liquidity, especially on centralised exchanges, they often present new or additional challenges:

• Market makers typically operate through asset loan agreements, using our capital to actively manage liquidity across venues. While this model provides flexibility and professional management, it can make visibility into how and where assets are deployed more challenging.

• Compared to centralized venues, on-chain liquidity provision is often less economically attractive for market makers. As a result, they may prioritize other strategies or venues where returns are higher, which can limit incentives to deepen on-chain liquidity.

• Ensuring that capital is being used effectively by traditional market makers remains challenging, as it requires clear visibility into capital deployment and a deep understanding of the alternative strategies they pursue.

While none of this is insurmountable, it requires significant thought, effort and time to ensure oversight and manage risk.

Arrakis pro is an ideal solution to addresses these challenges.

Arrakis specifically addresses each of these challenges because:

• It is built specifically for managing onchain liquidity on DEXs

• The assets are stored in a vault controlled by a multisig made up of Livpeer Foundation members. This means the treasury, via the Foundation, can withdraw and return the liquidity at any time

• Because it is onchain, and through the features provided in Arrakis pro, we can check and confirm at any time where our assets are and what strategies are being applied.

• It rebalances positions by setting up ranges / limit orders, no swaps involved. The solution algorithmically minimises price impact given the allocated capital and bootstraps base asset liquidity without causing negative selling pressure.

• Arrakis leverages sophisticated algorithms to increase capital efficiency for the deployed capital and reduce slippage for traders on the DEX pools.

Arrakis vaults hold ~$170M TVL and the team actively manages the on-chain liquidity for over 100 protocols. Projects such as MakerDAO, Lido, Morpho, Gelato, Redstone, Wormhole, Across, Euler, Usual, Syrup, Venice.ai, Ether.fi, etc. are benefiting from the high capital efficiency and cost effectiveness for DEX liquidity optimization enabled by Arrakis PRO.

For more information regarding Arrakis and Arrakis Pro, feel free to have a look at their docs or join their community:

Arrakis | Twitter | Resources

In addition, the team are present here and will address any questions directly - hello @Arrakis

The Ask

We want to significantly decrease slippage and costs for orchestrators and other participants to interact with the network through onchain liquidity.

We are asking for 250,000 LPT (approx. $1M in USD value) to be held in a multisig controlled by the Livepeer Foundation, to be deployed via an onchain vault with Arrakis as a concentrated pool on Uniswap v4.

Management of concentrated liquidity on Uniswap V4 allows for larger trades with minimal price impact, improving the overall trading experience. Savings to participants are substantial at approx. $1500 in slippage reduction on a $25,000 sale of LPT (estimate based on data below).

Comparison of current and estimated price impact (after successful ETH liquidity bootstrapping) for buying LPT and ETH across different amounts

Specification for Livepeer

1. The Arrakis team uses the existing LPT/ETH pool on the 0.3% fee tier for UniswapV4

2. Arrakis then deploys a dedicated vault managed by the Arrakis Pro smart contract for this LPT/ETH Uniswap pool.

3. The Livepeer Foundation team establish a ⅔ Multisig for custody of the funds. If the proposal passes, funds are transferred onchain to this multisig account

4. Through this Livepeer Foundation multisig, we deposit $1 million worth of $LPT into the Arrakis Pro vault. Transfers in and out of the vault are controlled by the multisig, meaning they cannot be deployed or moved by Arrakis elsewhere

5. Arrakis Pro will allocate the provided liquidity in a concentrated and fully active market making strategy to facilitate trading on UniswapV4.

6. The strategy initially operates to bootstrap ETH to establish a 50/50 inventory ratio over the first months. The primary objective is to create price stability by generating deep liquidity and reaching an even inventory over time.

For the services provided, Arrakis charges the following fees:

Arrakis Asset-under-Management (AUM) fee: 1% per year, waived for the first 6 months

Arrakis performance fee: 50% of trading fees the vault generates

FAQ

What are the risks of this model?

• Deploying funds to DEX pools bears smart contract risk and general market risk (e.g. token exposure, impermanent loss). Arrakis smart contracts have been audited by leading security firms and currently secure +$150M TVL (https://docs.arrakis.finance/text/resources/audits.html)

What happens to the capital required?

• The capital required is deployed by the Livepeer DAO, via a Foundation controlled multisig, to a self-custodial smart contract vault and can be withdrawn at any point in time. Arrakis does not hold custody, nor control the funds deployed outside of the mandate to manage DEX liquidity on Uniswap V4 for the respective trading pair.

Will this impact the current liquidity on CEXs?

• Arrakis mandate is to gradually improve on-chain markets and provide deeper liquidity for the respective pair over time on DEX markets. CEX markets will not be affected.

How does the Arrakis model differ from standard AMMs (like Uniswap v3)?

• Arrakis provides a sophisticated on-chain market making service, running dedicated algorithmic market making strategies.

• Instead of manually deploying funds into the CLAMM pool, Arrakis algorithmically rebalances the position and runs active liquidity management strategies.

Will our liquidity still be actively managed, or will it be passively allocated in a vault?

• Close to 100% of the liquidity deployed with an Arrakis vault is actively deployed to the Uniswap CLAMM pool and provides liquidity. Small shares of liquidity remain in the vault as token reserves for rebalancing purposes.

How is the strategy for the vault determined — who sets the parameters, and how often are they rebalanced?

• Arrakis quant team fine tunes the strategies and engages in period review cycles along with 24h-365day monitoring and alerting.

Who controls or can modify the AMM strategy parameters?

• Arrakis strategies are designed, deployed and maintained by professional quant traders. The Foundation can be involved in discussion in regular intervals as needed to further align on achieving the stated goals.

Will the community have visibility into performance and strategy updates?

• The Foundation delegates will receive access to a custom real time analytics dashboard and can share periodic updates to the forum for the community.

What happens to the liquidity if the vault underperforms or becomes unbalanced?

• Liquidity is actively rebalanced towards a 50:50 ratio by placing one sided limit maker orders. In adverse market scenarios strategies will adjust to certain market volatility settings.

How do fees compare to centralized market makers?

• Centralized market makers work in two models: a) Loan & Option b) Retainer Fix Fee payment. Arrakis works on a profit sharing of trading fees earned (50% captured by the Livepeer DAO, 50% retained by Arrakis for the services provided)

How will LP performance be measured?

• LP performance will be measured by market depth, price impact, slippage improvement, total volumes facilitated.

What happens after funds are returned?

• It’s important to note that the liquidity in the vault can remain deployed indefinitely, but also returned to the onchain treasury or control by the voters at any time. As funds will now be held in both ETH and LPT, the community can be involved in discussions about how returned funds are stored or used.

This is a large proportion of the current treasury. What gives?

• We recognise that this is a large ask relative to the current size and value of the treasury. The size and value of the treasury will be addressed in a separate proposal. As it relates to this proposal, consider that we will reduce slippage costs by approx 2-3X on every dex transaction. The ROI on this proposal will be quite substantial.

[Karolak]

regarding the Arrakis performance fee: 50% of the trading fees the vault generates — does that also mean they’ll cover 50% of any losses? What about MEV or sandwich attacks? Who absorbs that risk?

A 50/50 split also implies that roughly 125k LPT would need to be dumped and swapped to ETH. How is that going to be executed — TWAP, market order, limit order? at what price? What happens to the earnings afterward? Will they be recycled back into the pool or extracted to the treasury?

Overall, I like the idea. The flexibility to withdraw assets at any time if a larger treasury request comes up is useful. And it’s good that the treasury funds can finally be put to work instead of just sitting idle.

[Arrakis]

Hi @Karolak, Thank you for the questions. Let us address them for you.

Performance Fee & Loss Coverage
The 50% performance fee applies strictly to the trading fees generated by the vault. These fees arise when the vault facilitates swap volume, which is exactly the behavior we aim to maximize by providing deep, efficiently placed liquidity.
As with any DEX LP position, impermanent loss is an inherent risk, and we do not offer loss coverage. What we do provide is an active management system designed to significantly reduce IL relative to passive or manual LPing.

Protection Against MEV & Sandwich Attacks
We’ve engineered multiple layers of defense that make typical MEV vectors either ineffective or economically unviable:

1) Rebalance-level validation of total underlying assets:
Each rebalance verifies the total asset composition, preventing attackers from manipulating token inputs/outputs in a way that could produce a profitable sandwich.

2) TWAP-based pricing enforced via oracles:
Rebalances follow TWAP pricing rather than single-block prices, and when available, we enforce oracle pricing directly on-chain. This removes the timing window that MEV searchers normally exploit.

3) Multi-block MEV becomes the only theoretical avenue, and is prohibitively expensive:
With both mechanisms in place, an attacker would need to coordinate multi-block manipulation to influence a rebalance, something that is extremely costly and practically infeasible.

4) Extensive auditing:
These attack vectors are well-known, and our contracts have undergone audits by three independent firms. No vulnerabilities related to MEV/sandwich manipulation were identified.

On LPT Sales, Execution, and Handling of Earnings
Arrakis Pro uses custom algorithms to place one-sided limit orders that gradually convert the base asset into the quote asset as organic demand trades through the pool. This is effectively a TWAP-like, programmatic process rather than a discretionary market or limit order. Once the inventory is balanced, we transition from the bootstrapping phase to the maintenance strategy, where the system continuously manages ranges to preserve deep bid/ask liquidity.
All earnings generated for the DAO are automatically compounded back into the vault to increase liquidity depth and overall performance. If the DAO prefers, funds can, of course, be withdrawn to the multisig at any time.

[vires-in-numeris]

Hey Arrakis team, thanks for the proposal.

Personally, I think the 50% performance fee is a bit high considering that Livepeer will fully cover any IL. In theory, Arrakis could set a really thight range to maximizes the fees but also the IL. Are there any guardrails regarding this?

Have you done any backtesting for your strategy? E.g. for past years LPT/ETH performance. This would give us at least some data on the expected IL vs fees.

Also, why the 0.3% pool and not the 1% pool? Given that this pool will be the only DEX liquidity and LPT/ETH is quite volatile, the generated fees would probably be a lot higher. So the performance fee could be dropped to e.g. 20% and Arrakis should still get roughly the same amount.

[Arrakis]

Thanks for your comments @vires-in-numeris A few clarifications from our side regarding the points above:

• Negative IL should be minimal here, largely because the position starts with 100% LPT inventory. The strategy is designed so that the pool gradually builds ETH exposure over time through fees and natural order flow, rather than taking immediate directional IL risk or causing any active sell pressure.
• Arrakis runs some of the most advanced LP management strategies in the industry, with a focus on combining capital efficiency with risk management. The objective is to sustain capital in the long term. The strategies are actively managed and maintained by our in-house quant team.
• Regarding backtesting: simulating active LP strategies on historic data is inherently limited. Outcomes won’t accurately reflect future performance because (1) active LP strategies change the shape of the pool as they operate, (2) competitor LPs / on-chain trade volume react in real time, and (3) the bootstrapping nature of this strategy—which starts 100% LPT and accumulates ETH over time— is not clearly replicable on historic data.
• As for the 0.3% vs 1% pool: we chose the 0.3% tier because it is currently the deepest LPT/ETH pool on Uniswap, making it the most appropriate benchmark for evaluating and attributing impact during the Arrakis engagement. It also ensures comparability to the existing liquidity environment while reducing fragmentation during the bootstrap phase. If the community prefers, we can also adjust and deploy funds on a 1% fee tier LPT/ETH pool.

[Titan-Node]

@b3nnn

Savings to participants are substantial at approx. $1500 in slippage reduction on a $25,000 sale of LPT (estimate based on data below).

While I understand that more liquidity can benefit larger single transactions, the table does not account for CEX arbitrage bots that re balance the pool after every swap.

From what I see on-chain, even small $500 swaps often trigger Binance bots to re balance the pool within seconds.

I would argue the slippage on $25,000 swap made in $1,000 - $2,000 increments would be minimal or mostly static.

Of course this introduces a whole other argument that requires incremental sells (which is annoying) but overall not sure how impactful more liquidity is considering the trade offs, risk and sell pressure to add the liquidity.

just my 2 cents

[ChaseMedia]

I agree with @Titan-Node here. From my understanding the amount of sell pressure this would create could cause a substantial drop in the price of the token. If providing liquidity is your goal to be more appealing to investors, the initial drop might do the opposite and especially now with the token price being low.

As an operator and investor in the protocol this makes me very uncomfortable.

My view is that this seems to be focusing on a problem that isn’t the most prominent problem we should be solving. From the original proposal it states ‘attract top builders’ and ‘improved builder onboarding’. Is driving more demand to the network not the area we should be focusing resources on instead?

Apologies if I am not understanding this correctly, these are just my thoughts.

@b3nnn I think you were also saying in the Watercooler that for new SPE proposals, coin issuance to be graduated over time based on milestones achieved and merit (apologies if I have that wrong or it was someone else : ) ). Therefore asking for 250,000 LPT in one go in a 2/3 multisig for custody is an enormous ask which requires a huge amount of trust.

[b3nnn]

Thanks for the great questions and analysis. A couple of points just to make sure we keep aligned on the purpose here.

@ChaseMedia

My view is that this seems to be focusing on a problem that isn’t the most prominent problem we should be solving. From the original proposal it states ‘attract top builders’ and ‘improved builder onboarding’. Is driving more demand to the network not the area we should be focusing resources on instead?

The original proposal made clear that we would be focusing on actively managing our capital to support our goals. Attracting top builders is absolutely a top priority, and both were included in the proposal

@Titan-Node

From what I see on-chain, even small $500 swaps often trigger Binance bots to re balance the pool within seconds.

CEX bots will continue to operate through the pool and pay fees to the liquidity provider (us!). Individual trades don’t happen in isolation and bots will extract value from the pool, but larger liquidity reduces the amount of value bots can extract (lower price movements means smaller arb opportunities for bots)

@Titan-Node

I would argue the slippage on $25,000 swap made in $1,000 - $2,000 increments would be minimal or mostly static.

Of course this introduces a whole other argument that requires incremental sells (which is annoying)

The whole other argument is a core UX issue we made the proposal to resolve I love the hacky nature of startups as much as anyone, but it is at odds with the Capital Markets Advisory Board’s ambition to have Tier 1 Capital Practices. Incremental sells can work to reduce slippage of course but makes us seem a bit unserious

@vires-in-numeris

Also, why the 0.3% pool and not the 1% pool?

Arrakis covered some key considerations about analysing impact and performance, but to me “generate fees” is a nice outcome of protocol owned liquidity rather than a core objective of this proposal. We can make generating fees a more prominent objective if there is a strong desire to do so, but an increase in fees this way is increased costs (relative to 0.3% fee) for participants… I’m not sure that is a net benefit

[b3nnn]

One last point to add..

@ChaseMedia

Therefore asking for 250,000 LPT in one go in a 2/3 multisig for custody is an enormous ask which requires a huge amount of trust.

The trust here is secured onchain.. the multisig provides secure custody and can withdraw funds from the vault and return them to the treasury at any time.

But I also understand that 250,000 LPT is a big ask relevant to the current size of the treasury. While this is a major priority, I think people may be more willing to consider this proposal on its merits when rewards to the treasury are turned back on. So it would be great to get some signal on this.. please let me know what you think:

• Move this to a proposal now
• Wait for LIP101 to restart treasury rewards first

[vires-in-numeris]

Thank you for your comments and answers and happy holidays!

@Arrakis

Negative IL should be minimal here, largely because the position starts with 100% LPT inventory. The strategy is designed so that the pool gradually builds ETH exposure over time through fees and natural order flow, rather than taking immediate directional IL risk or causing any active sell pressure.

What do you mean by “negative” IL? If the position starts with 100% LPT and starts selling once the LPT/ETH price increases, that’s by definition IL (unless ofc if the position ends up as 100% LPT again).
And given that the LPT/ETH price has been trending downwards in the recent months, I’d expect frequent rebalancing (and therefore making the IL permanent) is required to keep the range active.
Also I’m wondering how you’re planning to get to 50/50 ETH/LPT under the current market conditions without actively selling LPT? Would you just remove any gained ETH during short upticks from the active range?

@Arrakis

Arrakis runs some of the most advanced LP management strategies in the industry, with a focus on combining capital efficiency with risk management. The objective is to sustain capital in the long term. The strategies are actively managed and maintained by our in-house quant team.

That’s a nice marketing text but it answers absolutely nothing, sorry Fact is that you have an incentive to generate as many fees as possible, while carrying none of the risk of setting a tight range to generate those fees. So I’d still like to know what your min/max/target range (ticks/percentage) is and at what point rebalancing occurs.

@Arrakis

As for the 0.3% vs 1% pool: we chose the 0.3% tier because it is currently the deepest LPT/ETH pool on Uniswap, making it the most appropriate benchmark for evaluating and attributing impact during the Arrakis engagement. It also ensures comparability to the existing liquidity environment while reducing fragmentation during the bootstrap phase. If the community prefers, we can also adjust and deploy funds on a 1% fee tier LPT/ETH pool.

The 0.3% pool is the deepest since Livepeer Inc. has its liquidity there. Regarding the other question: Would you be willing to reduce your fee share in a 1% pool?

Another question: Is there a minimum duration for the liquidity deployment or are we free to withdraw the liquidity (full or partially) at any time?

@b3nnn :

@b3nnn

Arrakis covered some key considerations about analysing impact and performance, but to me “generate fees” is a nice outcome of protocol owned liquidity rather than a core objective of this proposal. We can make generating fees a more prominent objective if there is a strong desire to do so, but an increase in fees this way is increased costs (relative to 0.3% fee) for participants… I’m not sure that is a net benefit

I don’t see generating fees and treasury diversification as a niche objective here. I’m all for more DEX liquidity, but I’m questioning whether it makes sense to sacrifice treasury yield and diversification for a slightly better slippage reduction?

[Authority_Null]

@b3nnn

MakerDAO, Lido, Morpho, Gelato, Redstone, Wormhole, Across, Euler, Usual, Syrup, Venice.ai, Ether.fi, etc.

Do we (Livepeer) have any contacts at the listed protocols who can speak on their experience working with Arrakis?

[Arrakis]

Hi @vires-in-numeris

@vires-in-numeris

What do you mean by “negative” IL? If the position starts with 100% LPT and starts selling once the LPT/ETH price increases, that’s by definition IL (unless ofc if the position ends up as 100% LPT again).

IL occurs essentially when the pool is selling LPT in an uptrend or if ETH if sold for LPT on a token downtrend. Given current market dynamics and starting a vault with 100% LPT tokens (eliminating the downside IL), the IL for this proposal should be negligible. The targeted 50/50 ratio in the vault is achieved slowly over time and without causing any negative sell pressure. The primary objective of this proposal is reducing slippage for traders buying LPT while bootstrapping some liquidity.

@vires-in-numeris

That’s a nice marketing text but it answers absolutely nothing, sorry Fact is that you have an incentive to generate as many fees as possible, while carrying none of the risk of setting a tight range to generate those fees. So I’d still like to know what your min/max/target range (ticks/percentage) is and at what point rebalancing occurs.

Regarding strategies, we have min/max ranges based on market volatility and dynamic adjustments based on volume and price thresholds which are not publicly disclosed. With 100% LPT tokens there is not possibility nor incentive to quote too narrowly and our objectives are long term relationships with our customers, as funds remain self custodial.

@vires-in-numeris

The 0.3% pool is the deepest since Livepeer Inc. has its liquidity there. Regarding the other question: Would you be willing to reduce your fee share in a 1% pool?

Considering current volumes on the Uniswap pool, fees earned should be negligible and Arrakis fee tiers are standard to align our incentives with the objectives of the DAO (thus equal 50/50 split). There is no minimum usage period for the vault, as the funds are self-custodial. However, the setup requires time and effort from Arrakis and the DAO, which makes a long-term collaboration beneficial for both parties.