We are excited to introduce Arrakis V2, a next generation market making infrastructure built on Uniswap V3. This new release allows everyone to build and execute sophisticated market making strategies for both volatile and pegged asset pairs in a trustless and non-custodial manner.
In 2021, Arrakis released the first version of its decentralized market making protocol, which enabled the creation of fungible, managed, and trustless vaults that wrap Uniswap V3 liquidity positions. Arrakis V1 quickly became the go-to venue for deploying liquidity on Uniswap V3, with over $1.8bn TVL accounting for 25% of all liquidity on the protocol at its peak. The most common use case for V1 Vaults were managing tightly pegged pairs, for example stablecoins like DAI <> USDC.
Arrakis V1 was a PoC to demonstrate how Uniswap V3’s concentrated liquidity can be used to create shared liquidity management preferences that are automatically executed for all participating Liquidity Providers (LPs). However, V1 vaults lacked more advanced functionalities that could have allowed more flexible and complex market making strategies to be employed for pairs with more distinct volatility profiles, especially volatile pairs.
These functionalities are what Arrakis V2 finally realizes, offering a complete feature set to utilize Uniswap V3’s capital efficiency in order to create deep liquidity for any asset pair.
Arrakis V2 can be thought of as an abstraction layer on top of concentrated liquidity AMMs like Uniswap V3, it enables central limit order book (CLOB) like interactions. This allows market makers to offer and execute advanced strategies that up to this point have only been feasible on centralized exchanges (CEXs). The protocol itself is open for everyone to use and has no protocol fees. Anyone can become a vault manager that deploys vaults, executes market making strategies and in return receives fees from the LPs who deposited into their vault.
Liquidity providers, which can be DAOs, protocols, institutions or individuals, can either use private vaults that are exclusive to them, or opt into existing public ones that everyone can join. Vaults have a privileged manager role that can execute arbitrary market making strategies that can optimize for deep liquidity, trading fee APRs or mimic traditional AMM invariants, such as constant product, stableswap, or Curve V2.
Vaults are the vehicles that carry all the features of Arrakis V2, and also the interface where users can deposit liquidity into the protocol. They come with different properties that dictate who can deposit into them (Access) and who operates the associated strategy (Manager).
There are two types of Vaults, Private and Public:
Private vaults allow only whitelisted addresses to deposit into them, e.g. they can be used by a protocol or DAO for protocol owned liquidity.
Public vaults on the other hand allow anyone to deposit liquidity.
Both types of vaults can have three different manager types, which define who runs the strategy thus the Vault’s trust assumptions:
Trustless vaults have pre-defined on-chain strategies encoded in smart contracts as their managers. These vaults enable LPs to have their liquidity managed in a trustless and automatic manner, similar to a Curve V2 like model. Vaults could be static or dynamic.
Managed Vaults are operated by professional market makers running more sophisticated strategies off-chain, who are trusted. These vaults will enable LPs to enjoy the most advanced market making strategies, required that they trust the manager entity behind the vault.
Self Managed Vaults can only be used by individual entities, which are managers at the same time. These vaults are usually for sophisticated traders or proprietary market making firms.
It is now possible for managers to deploy a collection of custom positions instead of creating only a single position on Uniswap V3. This makes V2 vaults significantly more flexible and allows for an endless supply of custom strategies to be built on top of Arrakis. For example, this feature allows managers to create strategies that treat Uniswap V3 similar to a CLOB exchange, where the collection of many limit orders constructs an efficient order book.
Visualized below, instead of having only one position like in the left image, you now can have a collection of arbitrary positions that together form a curve, such as in the right image.
LP positions in a vault can be allocated across multiple fee tiers simultaneously. Trading volume often migrates amongst different fee tiered pools for a certain pair, depending on the liquidity depth in a certain price range. In Arrakis V2, multiple fee tiered pools can be bundled into a single vault, and the liquidity migration will take place all under the hood automatically.
Managers can define what percentage of a vault's inventory should be at risk in the market at any given moment in time. They can decide when more inventory should be injected into or ejected out of the market. This allows managers to leverage better risk management in their strategies.
In certain instances, to move liquidity from one price range to another, a different asset composition is required, which means managers may need to rebalance the inventory composition. Rebalances can be executed on any DEX or directly on protocols that allow native token redemptions. This way, Arrakis V2 vaults have access to all the liquidity sources and slippage can be minimized.
The technical details of all the features mentioned above can be found here.
To demonstrate key features in practice, we have visualized two examples below, one for a pair consisting of pegged assets, and another for a volatile one.
In this example of a pair of dollar pegged assets, close to the peg, a large portion of the liquidity is in the 0.01% fee tier. Further away from the peg, providing liquidity becomes more risky, thus the vault automatically deposits the liquidity in the 0.05% and 0.3% fee tier.
Meanwhile, there can still be a good amount of sidelined assets inside the vault, which based on changes in volume or volatility can be injected into the market.
Conversely, in this volatile pair example, a liquidity distribution is configured that mimics those of a CLOB, where liquidity becomes deeper further away from the current price. The strategy applied here can move these liquidity positions based on predefined parameters, such as always maintaining a spread of at least 1%.
If you would like to try out Arrakis but do not know where to get started, have a look at our step by step tutorial, walking through the whole process of deploying a strategy on V2 here.
Arrakis V2 finally enables sophisticated market making strategies to come on-chain and DEXs such as Uniswap V3 to rival its centralized counterparts in terms of liquidity depth and efficiency.
The release of Arrakis V2 marks a significant milestone for both Arrakis and the broader DeFi ecosystem, but that’s not all. Arrakis has also built the first liquidity bootstrapping product on top of this new infrastructure - PALM (Protocol Automated Liquidity Management). For more info, take a look at what Arrakis PALM enables here.
The Arrakis V2 contracts will be deployed in the next couple of days on Ethereum, Polygon, Optimism, and Arbitrum. The audit reports will be released with the deployment.
You can find the full repository here.
A user interface for V2 is currently not available, this is something that we are working on.
On Monday 19th December 2022 at 5PM UTC, we will host a Twitter Spaces AMA where we hope to answer all your questions about Arrakis V2 & Arrakis PALM. Feel free to submit questions ahead of time here.
If you are interested in working with us or want to utilize Arrakis V2 and need help, feel free to go through our onboarding process here.
Arrakis is a protocol that builds trustless market making infrastructure & strategies on Uniswap V3.