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Background

To improve capital utilization, Uniswap v3 requires users to set a price range when adding liquidity.

For example, suppose the current ETH price is fluctuating between $1990-2010. If the user sets the ETH-USDT LP price range at
A. $1000-$3000
B. $1900-2100
C. $2101-$4000

then A and B will receive LP rewards, but B will receive more rewards than A.

Similarly, the risk of taking impermanent losses is greater than A. C will not receive any LP rewards.

Therefore, Uniswap v3 LPs need to.
1/ Adjust the liquidity price range at any time based on token price fluctuations
2/ Keep the tokens they provide at a 50:50 ratio
3/ Balance the gains and impermanent losses

This led to the need for Uniswap v3 liquidity management and the emergence of protocols such as Arrakis, xToken, Gamma (formerly Visor Finance), Charm.fi, Mellow and others.

Introduction to Arrakis Project

Arrakis Finance (https://www.arrakis.finance/), formerly G-UNI, as shown below, provides a UI through which users can directly provide liquidity to Uniswap v3 for additional LP rewards. Ethereum, Polygon and Optimism are currently supported.

The protocol automatically adjusts the liquidity price range, rebalances token ratios based on strategy, and more importantly, the protocol is permissionless, non-custodial and openly-governed by the Arrakis DAO.

According to DeFiLIama data, Arrakis TVL currently stands at $1.24 billion, accounting for 25% of Uniswap TVL, with a monthly growth rate of 127% at one point.

In that article (https://medium.com/arrakis-finance/selecting-a-uniswap-v3-range-da34d8741089), Arrakis explains the basic strategy principles that make the gains consistently outweigh the impermanent losses in the long run. TVL illustrates the effectiveness of the strategy.

Uniswap v3 Liquidity Strategy Project Cross-Sectional Comparison

Gamma

Previously, the most well-known program in this category would be Visor Finance. unfortunately, Visor suffered consecutive hacking attacks and not only $1.6 billion in funds were stolen, but also the vVISR infinite casting bug was discovered.

The protocol was later restarted and renamed to Gamma, with a current TVL of $3.57 million.

Firstly, the market is definitely worried about Gamma's security and the consensus is damaged by the theft of Visor.

Secondly, there are fewer pools to choose from on Gamma, only 15. In contrast, Arrakis covers almost all of the Uniswap v3 mainstream token pools.

Charm.fi

Previously did Options and Cube Token products, not very successful, recently shut down these two products, the focus shifted to Uniswap v3 liquidity management.

Currently there are only 3 pools available and the strategy price range is relatively large. The product is relatively early and has a lot of room for improvement.

Current TVL $4.72M.

xToken

This protocol was developed over a long period of time and later changed its business direction to mainly face projects to Uniswap liquidity incentives.

Projects that want to launch on Uniswap v3 can use this protocol to launch the pool and provide incentive tokens.

The protocol creates a platform between users and projects. Currently, the quality of projects using the platform to bootstrap liquidity is average.

The current TVL is $2.84 million.

Mellow Protocol

The product has not yet been released.

In summary, in a comparison, Arrakis, at $1.11 billion TVL, is in a monopoly position among similar projects and is the absolute head of the pack.

Tokenomics

Arrakis will launch token SPICE, using veToken model, locking SPICE to get xSPICE, gaining governance rights and increasing pledge revenue.

SPICE is expected to go live in 2023.

More details to be announced.

Project Analysis and Evaluation

1/ How big is the market where Arrakis is located?

The chart above shows the monthly trading volume of Uniswap. Despite the downward trend in trading volume since last December, the volume is still showing a multiple order of magnitude growth in the long term.

In June 2022, Uniswap monthly volume was $46.9 billion, up $32.7 billion, or 3.3 times, compared to the peak volume of $14.2 billion in the summer of DeFi in September 2020.

TVL follows the same trend. The TVL in June 2022 is $5.3 billion. $1 generates $8.84 in transaction volume per month.

In June 2022, the protocol revenue was $59.1 million. $1 TVL generated revenue of $0.011 per month, with an average monthly return of 1.1% and an average annualized return of 13.2%.

The Uniswap protocol was born in a bear market in late 2018, saw explosive growth in the summer of 2020, and has been in development for just four years through a full round of bull and bear conversion tests by July 2022.

And it is clear from the chart above that, as a trading platform, Uniswap's trading volume and revenue increased with the market's dramatic shocks, which was particularly evident in May 2021 and November and December 2021.

This is despite the fact that both of these time points are during the transformation of the market from a bull to a bear market.

Therefore, bull and bear market transitions will not play a decisive role in the survival of Uniswap, except for long periods of extreme bear markets.

What really determines the life and death of Uniswap is the cannibalization of Uniswap's trading share by other protocols.

Such as Curve's domination of stablecoin exchange, and Synthetix liquidity model, nibbling on large transactions, and Launch platforms like Balancer, nibbling on new Uniswap coins coming online. Then there is the replacement of AMM by newer and better trading algorithms.

Such as Curve's domination of stablecoin exchange, and Synthetix global liquidity model, the cannibalization of large transactions, and Launch platforms such as Balancer.

Also, newer and better trading algorithms, an alternative to AMM.

But to date, Uniswap is one of the absolute leaders in the DEX space and has maintained growth for a long time.

2/ What are the core competencies of the project? Does it create barriers? Competitive situation?

Arrakis algorithm can be found in the article (https://medium.com/arrakis-finance/selecting-a-uniswap-v3-range-da34d8741089), and more practically, let's look at the data.

Currently, Uniswap has the largest trading pairs in terms of volume and revenue, as shown in the graph above.

First, sorting the Arrakis pairs by TVL, there is $1,182.2 million in DAI/USDC liquidity, or 95.3% of the total liquidity of the protocol.

It can be noticed that the third place in TVL, agEUR/USDC liquidity, drops directly to $15,772,000.

Second, the top 7 Arrakis liquidity pool TVL, all stablecoin trading pairs, have a total volume of $1,228 million, accounting for 99% of the protocol's total TVL.

The other trading pairs have a TVL of $12 million.

Therefore, Arrakis is the protocol that market makers of stablecoins such as DAI and agEUR, choose to use when providing liquidity to Uniswap v3.

The Gamma protocol has a high APR for the main trading pairs due to the use of native tokens to incentivize liquidity, and a staggering 147.51% APR for ETH/USDC.

Despite the super high APR, the Gamma Protocol TVL has dropped from over $7 million in early June to over $3 million. And since last December, the TVL has always shown a downward trend.

Charm.fi currently supports only 3 trading pairs, which are ranked at the top of Uniswap in terms of volume and revenue.

From the disclosed data, Charm.fi capital utilization is lower compared to Uniswap v3. For example, for the ETH/USDC pair, Charm.fi utilization is 14.6%, while Uniswap v3 is 84.5%.

In summary.
(1) On demand. Currently, Uniswap v3 liquidity management project, the demand comes from the Buisness-side. Such as Maker decentralized management of DAI, and the demand of market makers.
Secondly, Uniswap's mechanism of distributing rewards according to the proportion of funds, also determines that institutions and large investors are the main force in providing liquidity and earning APR.
According to Dune data, Arrakis currently has 76 independent addresses. (Except for a few projects that offer native tokens to stimulate users with high APR to provide liquidity)
Currently, the demand for Uniswap users' stablecoin positions has increased due to the market, and the TVL share of Arrakis, from 16.677% in early June, has increased to 25%.
In the future, in the event of a market rebound, Arrakis TVL may continue to rise, but the percentage will fall.

(2) About core competencies. Based on the first point, the safety of funds, the stability of protocol performance and the resource situation are the current sources of core competencies for this type of project.
The safety of funds, especially the non-custodial attributes, is very important. At a time when CeFi is frequently mined, the non-custodial attribute may even be one of the deciding factors for the success of the protocol development.
Based on this, it is difficult for Gamma to regain consensus and compete with Arrakis in a short period of time.

(3) Regarding the development stage, Uniswap v3 liquidity management projects are in the early stage, such as Charm.fi, Mellow Protocol algorithm or product still needs to be polished and developed, Arrakis product is relatively mature.

(4) Based on the above 3 points. MakerDAO had initiated a proposal to approve the minting of $1.75 billion DAI based on Arrakis liquidity, one after another.

DAI's market maker, by providing DAI/USDC liquidity in Uniswap v3, anchors DAI to USDC prices and prevents de-anchoring.
Arrakis has also reached cooperation with Maker, Aave, OlympusDAO, Frax, Synthetix, Fei Protocol, with more obvious resources and first-mover advantage, and is the leading project in this field.

3/ Future direction of the project? How expandable is the business? Can business expansion expand market value?

Currently, the main source of demand for Arrakis' business is other protocols. In the future, it is foreseeable that Arrakis business can be expanded in two directions.

(1) To incentivize more Uniswap v3 liquidity providers, such as institutions and large investors, to use Arrakis based on the native token SPICE.
(2) As a liquidity middle layer, lending liquidity to other protocols, similar to CEX "borrowing depth".

Scenario (1) is one of the foundations of scenario (2). Attracting more liquidity through scenario (1) allows SPICE to pull demand through scenario (2) based on the veToken model.

Maker protocol based on DAI/USDC transaction pair collateralization, casting DAI, has actually expanded the new scenario of Arrakis liquidity usage.

Also according to officials, in the future, in addition to LP position scenarios combined with loan/borrowing or option markets, Arrakis will give birth to.
a. delta-neutral LP positions with automatic hedging
b. complex long positions on centralized AMMs
c. Cross-AMM positions
d. Cross-chain liquidity

etc. scenarios.

4/ What about team?

Arrakis was founded by the team of Gelato, a smart contract platform on ethereum with token GEL and a current FDV of $123 million. According to the official description, the team currently has 30 members from 10 countries, including Switzerland, Germany and Spain.

The founders have only made Gelato's work experience public on Link. The other founder does not disclose relevant experience.

5/ Social media situation?

6/Potential replacements are?

As things stand now, Arrakis may be replaced when market makers for stable coins such as DAI are no longer needed to make markets, or when better market making tools become available.

Of interest is the global liquidity model represented by Synthetix and Gmx, which have the advantage of no slippage on large exchanges. However, in the short term, Uniswap v3 market making is still necessary and the global liquidity model is not very open, users need to purchase SNX collateral for sUSD or GLP within Gmx in order to participate in market making.

7/ Under what circumstances can barriers be broken?

(1) Arrakis has security issues.
(2) Uniswap v3 team introduces liquidity management tools by themselves or other teams.

8/ How can we tell when a barrier is broken? Indicators are?

Short term.
(1) Whether there are security issues with Arrakis.
(2) Arrakis TVL, especially the TVL percentage of DAI on the protocol.

Long term.
(1) Percentage of TVL of non-stable coins on Arrakis.
(2) Arrakis TVL
(3) SPICE price.

9/ What are the people and drivers of token selling and buying, respectively? Can the demand for token purchases be sustained? Can it offset token sell-offs? Can business expansion increase demand for tokens?

At this time, SPICE has not yet announced the exact distribution and economic model. We can only extrapolate from the available information.

SPICE will use a veToken model similar to CRV, pledging SPICE, getting xSPICE, and gaining the right to govern and BOOST earnings.

The value of VeToken lies in the bribe.

It is the various protocols, competing for liquidity, buying and pledging SPICE to get xSPICE and thus access to Arrakis' liquidity that makes the veToken model valuable. Just as Terra and Frax compete for liquidity in Curve.

On the other hand, if the protocol itself is not available, allowing other protocols to compete for liquidity, even with the veToken model, it is ineffective in the long run, as in the case of veRBN and veANC. because user pledges only serve to increase lock-in returns, the incentive is limited and unsustainable.

The SPICE sell-off mainly comes from the "mine, withdraw, sell" generated by the liquidity incentive. (Disregarding the team incentives, fundraising assets generated by the selloff)

SPICE buying, when analyzed according to the CRV framework, comes from the need for bribery and boost gains. We need to focus on whether SPICE can make users generate the need for bribery or boost gains.

Therefore, the indicators to judge the potential value of SPICE can focus on.
(1) The number of Arrakis independent addresses.
(2) The average pledge age and pledge percentage of SPICE
(3) The emergence of ‘Arrakis war’ or not
(4) In addition to stable coins, veToken new bribe growth point
(5) The deployment of cross-chain liquidity

Regarding the SPICE valuation, it can be analogous to CRV.
Curve's current TVL is $4.98 billion and CRV FDV is $2.25887 billion.
Arrakis current TVL is 1.24 billion USD and SPICE FDV is more reasonable at 562 million USD. (With Arrakis war), you can review the SPICE price based on the final SPICE allocation here.

10 / risk?

(1) systemic risk, such as protocol security issues.
(2) cyclical risk, the market bull and bear switch, SPICE price decline.
(3) Substitutability risk.

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