We are excited to introduce Arrakis Liquid Staking Token (LST) Vaults, the first Arrakis V2 Public Vaults specifically for liquid staking tokens. Alongside the launch, we are also excited to present its first user - Lido Finance.
The Primary Challenge of Liquid Staking Protocols
The product of liquid staking protocols are liquid staking tokens. Therefore, for these protocols to succeed, liquidity is a critical growth factor. If a liquid staking token fails to have low slippage, then it is not a liquid staking token and its utility is diminished. The challenge of maintaining such deep liquidity is the exceedingly high costs that protocols must bear. As an example, Lido spent $176 million in 2021, $101 million in 2022, and has, thus far, expended $11 million in 2023 as liquidity mining expenses. The majority of liquid staking protocols lack the capital for such expenditures, and even if they do possess it, their goal should be to become profitable protocols without significantly inflating their governance token supply.
Arrakis LST Vaults
Arrakis LST Vaults provide an algorithmic market-making strategy that LST protocols can utilize and incentivize through liquidity mining rewards. The algorithm is optimized for the market depth of LSTs and risk management for LPs. The strategy deployed on Uniswap V3 uses limit orders, asymmetric liquidity, and algorithmic rebalancing in order to achieve the goal of minimized price impact for larger trades and making liquid staking tokens actually liquid. This means that LST protocols can reduce their expenditure on liquidity mining rewards because less capital is required to establish a liquid market, while LPers can benefit from a strategy that efficiently manages their inventory and mitigates the risk of impermanent loss.
LST protocols have specific expectations regarding an acceptable price impact. To achieve this, they require a certain amount of liquidity. With the Arrakis LST Vaults, protocols engage with Arrakis to determine the desired price impact. Arrakis then conducts simulations to assess the minimum amount of liquidity required to achieve this desired price impact. The protocol then defines how much liquidity mining incentives they allocate. After the dedicated LST Vault goes live, protocols receive a monitoring dashboard and can adjust their liquidity mining allocations over time.
On the opposite side of the liquidity mining equation are the LPers. These actors are interested in earning liquidity mining rewards while also being cautious about their LP performance. The Arrakis LST Vaults takes risk into account in this context, specifically regarding the amount of capital exposed to market risk at a particular moment for both bid and ask prices. This approach minimizes the likelihood of engaging in excessive buying and/or selling at unfavorable prices.
The First Deployed LST Vaults: Lido Finance
We are extremely excited to launch the first LST Vaults with Lido Finance in order to decrease their costs and increase their capital efficiency. Anyone interested in earning wstETH or OP rewards can deposit into these vaults at 14:00 UTC on the 8th of September. The liquidity mining rewards will be distributed over a 1 month period.
If you are a liquid staking protocol that is looking to deepen your liquidity while decreasing your liquidity mining costs, feel free to reach out to us on discord.
Arrakis is a protocol that builds trustless market making infrastructure & strategies on Uniswap V3.