Arrakis Finance is Growing, But Must Shed Dependence

The Land of Liquidity

Uniswap v3 was born out of the capital inefficiencies and LP trade-offs faced by its predecessor, Uniswap v2. Uniswap v2 employed a system where LPs would deposit assets in a 50-50 ratio into a liquidity pool. Every LP had the same percentage of P&L between two distinct points of time.

With Uniswap v3, liquidity providers (LPs) decide the price range in which they want to provide liquidity – now commonly known as “concentrated liquidity.” By allowing for liquidity provision in a user-determined price band, Uniswap introduced a new dimension of flexibility for LPs.

However, managing liquidity inside these price ranges is no simple task. If you set the range too tight, you will end up with price frequently outside your LP band. And if you set it too wide, you don’t accrue the amplification benefits of concentrating liquidity.

To remedy this, you would need to rebalance your liquidity fairly often. But rebalancing your LP position also incurs transaction costs, which can be expensive – especially on Ethereum. For retail users, this cycle is dangerous and can eat into their returns.

In a bid to fix this, a swath of Uniswap v3 vault products popped up. These vaults provide active management of LP funds by adjusting their price ranges to best capture trading fees. The cost of rebalancing is thus shared amongst multiple depositors. Despite the prevalence of this problem, most of these vaults failed to find traction – except for Arrakis Finance. And here’s why.

Arrakis Finance, previously known as G-UNI by Gelato, has seen its TVL soar to $1.4B today (and $1.8B at its peak). Two key events spurred Arrakis’ growth:

1. An integration with MakerDAO for G-UNI DAI/USDC LP tokens t