Compared with competition, cooperation among arbitrageurs can obtain greater benefits.
Written by: Leo Young
KeeperDAO is an on-chain liquidity underwriter. Similar to other AMMs, the Liquidity Provider deposits funds in the liquidity pool to obtain income. Keeper, also known as “liquidator”, uses KeeperDAO fund pool funds to capture on-chain profit opportunities. For example, arbitrage between different DEXs, liquidation of non-performing assets on lending platforms such as MakerDAO, Compound, and Aave.
The liquidity provider deposits funds in the KeeperDAO liquidity pool (liquidity pool). Get rewards based on the proportion of your own funds in the liquidity pool. Funds (including rewards received) can be withdrawn in part or in whole at any time. The current fund pool includes five types: ETH, WETH, USDC, renBTC, and DAI.
Source: https://app.keeperdao.com/
The Guardian is responsible for arbitrage among DEXs such as Uniswap, Kyber, Balancer, Bancor, and liquidation of non-performing assets on Aave, dYdX, Compound, and MakerDAO. In other words, the guardian is a “hunter” on the chain, looking for arbitrage opportunities while protecting the interests of users. The Guardian can use the funds from the pool to carry out arbitrage, and then return the arbitrage profits to KeeperDAO. KeeperDAO rewards liquidity providers, guardians and users who participate in it.
Before explaining KeeperDAO in detail, first understand the following concepts:
Priority Gas Auction (PGA)
Imagine that mempool is a room where transactions are waiting for packaged transactions. Someone gives high gas fees in order to allow their transactions to be packaged and confirmed in the next block. In order to achieve the purpose of giving priority to their transactions, traders compete for high gas fees is PGA.
Ethereum Mining is a block transaction packager. There will be many active powers in the package transaction, such as arranging transaction order, prioritizing a certain transaction, delaying a certain transaction… For example, in DEX transactions, someone will submit high amounts The transaction fee is used to preempt your own transaction to be completed before others. The profit from transaction fees is owned by miners, which is called miner extraction transaction (MEV). Studies have shown that the income of MEV is likely to be higher than the income of transaction fees.
Grim trigger
Also known as “cold trigger” strategy, a strategy of repeated games in game theory. Under the ruthless strategy, a participant betrays once, which will trigger the opponent to betray forever. It is called “cold” because it does not leave any chance for the opponent to correct. Participants in the unlimited game are frightened by the power of the “cold strategy” and can only actively choose to cooperate.
Arbitrage Game
With the rise of the AMM model DEX on Ethereum, the “Gas Fee War” that we can’t see is being staged all the time. In this endless chaotic competition, the profit of arbitrageurs is very small compared to the original profit, and traders get price deviation (slippage). The beneficiaries are always the miners who control the transaction, and they get the most value of MEV.
In order to avoid this kind of situation, KeeperDAO encapsulates the transaction/debt through a special smart contract to eliminate MEV. When a transaction occurs, the trader submits it to KeeperDAO, and KeeperDAO analyzes whether there is an arbitrage opportunity (through preemptive transaction or trailing transaction). If there is an arbitrage opportunity, KeeperDAO will give priority to the profit. After the transaction is completed, KeeperDAO casts a new $ROOK to reward the trader (keeper_fee) to make up for the loss caused by the transaction slippage. After rewarding traders with income, although the guardian gains less profit, the loss is less than the loss of the “Gas fee war” of PGA competition. It is a win-win situation for KeeperDAO and traders.
The mortgaged assets in the loan agreement are below a certain threshold, the assets will be automatically liquidated, and the borrowing users will suffer. Take Compound as an example. Mortgage assets need more than 150%. When the value of mortgage assets is less than 125%, it will be automatically liquidated. The liquidator can obtain 105% of the liquidated assets, and the remaining assets belong to the borrower. Then this 5% arbitrage space may produce a “gas fee war”. In order to avoid PGA, users can encapsulate the debt to allow KeeperDAO to liquidate slightly in advance (for example, 128%), and the profit will be returned to the user in $ROOK tokens. In this way, the guardian maximizes profits and reduces user losses.
KeeperDAO obtains arbitrage and liquidation priority, eliminates the “Gas Fee War”, maximizes profits, and minimizes losses for traders and users. At the same time, it reduces the risk that miners control transactions to obtain MEV value for Ethereum.
Cooperative game
How to promote the cooperation and mutual benefit of arbitrage traders and reduce the malicious contention of PGA is the key to economic incentive design.
KepperDAO encourages guardians to take turns to capture MEV value, win-win cooperation and profit sharing. Without PGA, all participants get more value.
To facilitate understanding, examples are as follows:
Zhang San found that there is an arbitrage opportunity between Kyber and Uniswap. You can exchange 1 ETH for 354 USDT on Kyber and 354 USDT for 1.01 ETH on Uniswap (for convenience, the DEX fee is ignored here). Obviously there will be an arbitrage opportunity of 0.01 ETH. Zhang San submitted a transaction to set the gas limit of 100,000, the gas price was 80 GWEI, and the transaction fee was 8,000,000 GWEI, or 0.008 ETH. There will be an arbitrage profit margin of 0.002 ETH.
At this time, Li Si also discovered this arbitrage opportunity and saw Zhang San’s transaction in mempool, so he gave a higher gas price of 90 GWEI. If this transaction is concluded, Li Si will get a profit of 0.001 ETH.
But Zhang San also saw someone bidding and gave a gas price of 95 GWEI, and the profit became 0.0005 ETH. Something is better than nothing.At this time, the block packaging confirmation is completed, and Zhang San made a profit of 0.0005 ETH. Unfortunately, Li Si saw no profit and was too late to cancel the transaction and lost 0.009 ETH.
The above example has not considered the use of Gas Token in actual transactions to reduce Gas fees, arbitrage traders cannot see all the transactions in the mempool, the game among many arbitrageurs, and the confusion of confusing transactions. The end result is the same: the more intense the competition among arbitrageurs, as the gas fee increases, the final profit of the arbitrageurs decreases.
What if there is less competition among arbitrageurs?
The same arbitrage opportunity, sometimes Zhang Sanneng arbitrage 0.0005 ETH, Li Sineng arbitrage 0.0005 ETH. What if Zhang San and Li Si both feel that such competition is uneconomical and decide to cooperate and share profits after taking turns arbitrage?
There are also 0.01 ETH arbitrage opportunities in Kyber and Uniswap. Zhang San submitted a gas fee of 80 GWEI, Li Si did not participate in the competition, and Zhang San made an arbitrage of 0.002 ETH. Zhang San and Li Si equally divided the income and each received 0.001 ETH. Zhang San’s income was twice that of the PGA competition, and Li Si did not suffer any losses.
To avoid the “Gas Fee War”, the guardian takes turns arbitrage, keeps GAS fees low, reduces MEV, and maximizes the value of arbitrage even after sharing profits. Although the real arbitrage process will be more complicated, the principle is basically the same.
What if an opponent uses PGA to raise gas fees? The guardian can adopt a cold strategy and conduct a “Gas Fee War” with the opponent in all subsequent transactions of the opponent until the opponent has no profit and withdraws from the competition.
The goal of the cooperative game is:
- The profit of the same guardian cooperation is higher than the profit of competition
- The sum of all guardian cooperation profits is higher than the sum of competition profits
- The relative profit of guardian cooperation is the same as the relative profit of competition
Development team and investors
KeeperDAO is jointly developed by the distributed system development company Talo and the digital asset management platform Amber Group. According to news from the chain, it was announced in July this year that Polychain Capital and Three Arrows Capital had led the seed round of investment of more than one million dollars.
Amber Group is a digital asset management platform that combines in-depth quantitative research and leading financial technology to build a variety of quantitative trading systems, trading service processes and trading tools. Tiantian Kullander is the CFO of Amber Group. Talo is a distributed system research and development company, and its founder Taiyang Zhang is also the CEO of the “Republic Protocol” REN. KeeperDAO was co-founded and managed by Tiantian Kullander and Taiyang Zhang.
$ROOK token economy
KeeperDAO V2 adds the native token $ROOK to reward liquidity providers, pass arbitrage opportunities to KeeperDAO users, and guardians who capture profits.
Native tokens not only solve the problem of economic incentives and profit distribution, but also solve the problem of the guardian taking a ride. In addition, $ROOK can also be used for community governance.
The initial total amount of $ROOK is one million. The distribution ratio is as follows:
It is currently in the initial distribution stage of tokens. 20% of the total is 200,000 ROOK rewards to liquidity providers and guardians, 60,000 rewards to liquidity providers, and 140,000 rewards to guards.
The reward block for liquidity providers is 11182745 to 11780885. The guardian reward block is 11185218 to 11783358. Each fund pool reward is different and calculated independently.
“Treasury.” The treasury reflects the value captured by KeeperDAO and is the intrinsic value support of ROOK. The use of these funds will be determined by community governance in the future, and can be used to develop open source projects, reward participants or distribute to ROOK holders.
How to become a guardian?
The Guardian provides trading strategies for KeeperDAO and returns the profits to KeeperDAO. According to the total profit in the fund pool, a $ROOK reward will be awarded according to the guardian return ratio.
If you have 50 ETH in your current account. There are two situations for arbitrage:
- Found that there is an arbitrage opportunity, 1000 ETH is required. If your wallet is insufficient, you need a flash loan from KeeperDAO. After the transaction is completed, return the loan amount and return the profit.
- It takes 10 ETH to find an arbitrage opportunity. You only need to use your own funds to trade. It may be necessary to conduct similar transactions multiple times a day. The Guardian can return all the returned profits to KeeperDAO in one transaction before the daily reward settlement, which can save transaction costs. The operation only needs to call the borrow function, borrow 1 wei, and return the profit and 1 wei to KeeperDAO.
future development
As the initial token distribution is completed, the future agreement will continue to evolve. Among the possible development directions are:
- The token holder entrusts $ROOK to the guardian, and encourages the use of smart contracts to capture on-chain profits (such as ensuring that the guardian implements a cold strategy against external competitors and guarantees cooperation between the guardians)
- Improve KeeperDAO’s ability to protect DeFi protocols from preemptive transaction attacks and return funds to interested parties
- Continue to develop to include more users and integrate more agreements
- Study common MEV issues and try to get more opportunities
appendix:
Contract security audit report: samczsun and Quantstamp and PeckShield
(If the above information is changed, the official statement shall prevail)
