Friktion <> SRM Grant Proposal

Context

The Friktion Labs team is proposing an incentive program aimed to spur growth and mass adoption of the Serum DeFi ecosystem. Friktion is already deeply integrated in the Serum ecosystem, and this partnership aims to strengthen that relationship by growing adoption of its existing products.

The purpose of this proposal is to strengthen the partnership incentivize further work on driving mass retail adoption of Serum infrastructure through a grant of 3M SRM.

Why Friktion + Serum?

  • Friktion is a DeFi portfolio management protocol that bridges the gap between retail participants and the largest liquidity providers in the DeFi ecosystem using Serum as the primary infrastructure and execution for its strategies.
  • Friktion has traded $2.7b in options volume using Serum Markets since launching on Solana Mainnet Beta in December 2022 (historical
  • Friktion offers an array of DeFi portfolio management strategies spanning options, perps, and power perps - driving adoption for Serum
  • Friktion has accrued ~$300k in Serum trading fees + rent in its 9 months, with that number estimated to grow exponentially as Friktion scales up.
  • Projects that Friktion has composed with using Serum infrastructure:
    • Mango Markets (perpetuals), Investin.Pro (DeFi hedge funds), Jupiter (DEX aggregator), Serum Permissioned Markets, Realms

Friktion TVL:
link

Options

  • Friktion runs weekly call and put overwrite strategies using native Serum markets as its exchange infrastructure that pays full Serum Fees. Friktion has exchanged over $2.5B+ worth of options notional on Serum.

Options Cumulative Volume:
link

  • Friktion currently has the largest Serum covered call strategy in all of DeFi, with over 3M in TVL. This Volt provides a source of yield that provides long term holding incentives of Serum’s native token. The Volt has traded over $200M+ of volume so far.

Serum Cumulative Volume:
link

Basis:

Friktion’s Volt #04 Basis strategy puts on a short perpetuals future position and a long spot position via Serum on Mango. The Volt had $8M deposited in its peak and currently sits at $3.1M. This represents almost half of the SOL open interest on Mango. This activity generates Serum fees on both the perpetuals future and the spot trading. It is important it allowing retail participants access operationally intensive sources of yield from order book trading on Serum. The Volt currently sits on over $20M of volume

Basis Perps OI:
link

Entropy (Power Perps)

Friktion’s Volt #03 Crab strategy utilizes Entropy, a volatility perpetuals exchange on Serum that was forked from Mango. It currently has power perps and fixed maturity implied volatility perpetuals. The aim of the exchange and the Volts on top of it is to allow retail users to access yield from complex volatility strategies from order book trading using Serum infrastructure. Entropy is fully open source.

The exchange has over $1.6M of OI and over $50M of volume.

Entropy OI:
link

Increasing Serum Adoption

The purpose of this proposal is to strengthen the partnership incentivize further work on driving mass retail adoption of Serum infrastructure through a grant of 3M SRM.

  • Incentives for existing options Volts (with emphasis on Serum Volts) to continue to drive new users to portfolio management solutions built on top of Serum as well as expand options Volt offerings to a wider array of tokens.
  • Incentives for Basis strategy to drive strong retail participation of basis trading on Mango perpetuals exchanges and Serum spot markets and expand the breadth of markets used.
  • Expand developer resources and liquidity dedicated to Entropy, the volatility perpetuals exchange. Onboarding retail access to sustainable sources of yield for a diversified portfolio will greatly benefit the ecosystem. Currently only have 1 dev working on the improving and maintaining the entire exchange.
    • Power perpetuals are one of the most innovative DeFi products in the market today, which makes providing liquidity (market making) challenging. This grant would be used to make MMing more competitive to allow Friktion Volt#03: Crab Strategy to scale in capacity.
  • R&D for new automated derivatives and spot trading strategies in the pipeline to increase retail activity on Serum.
  • Serum Treasury Management:
    • After researching Serum’s financials, rewards, treasury holdings over time, and SRM holder distribution we believe the Treasury requires a risk-managed way of diversifying out of native token that does NOT increase centralization of Serum as the protocol grows.
    • Friktion proposes a Treasury income generation strategy the cost-benefits of a call overwriting strategy and how Friktion is suited to ensure Serum receives best in market execution and risk management. We want to provide an architecture around a future Serum DAO Treasury Management Committee to help moderate and provide structure for Treasury allocation decisions.
6 Likes

3 million is an absurdly high request amount. This is asking Serum DAO to subsidize a whole different project’s incentives, when you can use make your own farm token for whatever purpose. Last I checked, Friktion’s use of Serum was incredibly limited, to using a new Serum market every week for some off-chain auction process. The base tokens are worthless other than within Friktion’s ecosystem. That volume has literally zero economic value to Serum. I actually think external projects like Friktion that piggy back of Serum’s development should maybe even be making economic contributions TO the DAO, not FROM the dao and taking 3M in SRM. In my opinion, this request is ridiculous.

Additionally, they were permissioned markets when I checked the blockchain earlier this year. Literally zero economic value to the decentralized ecosystem and composability.

hey Skynet, we appreciate your feedback.

For the options Volts, Friktion uses permissioned Serum markets to conduct the transfer of calls and puts every week. We’ve done over 2.7B notional worth of options trades via this method, generating full Serum fees. The auction process is fully on-chain. All swaps back into native token done by the protocol are done all on Serum as well.

We are planning on transitioning these weekly auctions to be fully permissionless once we work through operational pain points and increase the scale of the protocol while opening up more two way flow for the Solana defi community.

We also are planning on enabling lending markets and collateralizing the options tokens on Entropy, our perpetuals exchange. This will greatly increase composability and capital efficiency and will be another boon to the defi ecosystem.

It would be remiss to ignore the on-chain activity from our perpetuals exchange in Volts 3 as well as our basis strategy in Volts 4, which has been almost half of SOL OI on Mango.

Friktion’s partnership with Serum runs deep across all of our products. We’ve demonstrated a deep commitment and execution in growing the defi ecosystem hand in hand with Serum, driving retail activity in the protocol.

We think it’s important for Serum’s growth and mass adoption not just to appeal to the obvious use case for traders, but for ALL user profiles in the ecosystem as a central source of on-chain liquidity provision.

Friktion is very well suited at bridging that gap in automating complex yield generation strategies revolving around the on-chain order book for mass adoption.

2 Likes

Nice proposal by Friktion labs… would love to see the projectserum DAO grant the friktion community this proposal… the community has since longed to have a volt #3 capacity.

1 Like

I can understand both sides here.

The fundamental issue is that serum hasn’t developed a strategy for their grant program. Compared to the Ratio Finance grant, which was just $SRM emissions for their LP, this proposal certainly has more value-add. It actually mirrors other grants that were previously given out on merit (arguably), such as 01 (-> Entropy) & PSY (-> weekly onchain auctions)

@0xFriktion - any details on how the grant would be used?

1 Like

thanks for the feedback.

There are a ton of ways on how this grant would be used and we’re happy to dive deeper on them.

The key theme is to increase Serum adoption, trading activity, and comfortability from a wide range of users who typically don’t interact directly with on-chain orderbooks.

  1. Composability of Friktion’s existing options products using Serum infrastructure.
  • Improve the automation of serum option market creation for arbitrary vaults so that anyone can create an options market using Friktion’s infrastructure. This will allow anyone permissionlessly create options markets and provide much needed utility for long term holders of any token based asset including NFTs. This will unlock vibrant activity on Serum from a broad array of use cases.

  • Transition Friktion options auctions to permissionless markets where anyone can bid on the long options position.

  • Spin up weekly serum markets for existing options short positions and options long positions to allowing anyone to trade in and out of long/short options vaults positions, driving Serum activity for two way options trading.

  • Finish implementing the feature to close Serum markets and reclaim rent to increase scalability.

    https://github.com/project-serum/serum-dex/pull/191

    https://forum.projectserum.com/t/grant-for-adding-closeable-permissioned-markets-to-serum-v3/395

    We think that the feature to reclaim the ~2.79 SOL will be vital in scaling the widespread usage of Serum, as the cost to create a market for short term usage is prohibitively expensive right now.

  1. Volts #1, #2 Incentives

    Similar to previous grants like the PsyFi Proposal and the Zeta Proposal, Friktion aims to use part of the grant to incentivize further adoption of its options Volts (Volts #01 and Volts #02) that conduct weekly options auctions on Serum, especially the Serum covered call Volt. Friktion has amassed over 17k unique users in the past 9 months, engaging with many users who would not typically use on-chain order books.

    We’ve noticed that there is a trickle down effect in the complexity curve with user adoption. Many of the users who joined Friktion mainly for the options yield strategies gained trust and comfortability with the product became depositors in Volt #03 and Volt #04, which were more complex order book based yield generation strategies. Positive experiences with our options products plus with our educational content around power perpetuals and basis trading found here and here brought interest to many users who were unfamiliar with on-chain order books or perpetuals onto Serum.

  2. Volt #03 (Entropy, Volatility Perps) Incentives, R&D and developer resources.

    • Entropy will send 20% of its fee revenue to Serum if this proposal passes to further align incentives.
    • Increased features for Entropy, our volatility perpetuals exchange. This would include more spot perps and power perps, as well as more varieties of of implied volatility perpetuals.
    • Enable LP tokens as collateral to hedge IL with power perpetuals.
    • Incentives and trading competition rewards for the perpetuals exchange to spur activity, similar to the Mango Proposal
    • Incentivize the retail short vol structured product: Crab Volt on top of the Entropy exchange to drive further adoption.
    • Spin up new Crab Volts on top of other assets.
  3. Volt #04 Incentives (Basis Strategies) + R&D

    • Friktion will send 20% of its fee revenue from this Volt to Serum if this proposal passes to further align incentives.
    • Incentivize Volt #04 basis strategies
    • Expand basis strategies to other assets on Mango.
  4. New Volt products utilizing Serum infrastructure

    • Current Serum volume/liquidity makes developing these products uneconomical, but they would be quite beneficial for long term Serum on-chain order book adoption and activity. It would be good for the ecosystem to introduce more organic retail users to these strategies. Friktion has the user penetration + domain expertise to execute on these products.
    • Friktion would send 20% of any fee revenue generated from these new products to Serum.
    • Cross exchange perp funding arbitrage Volt
    • Cross exchange arbitrage strategy Volt
    • Market making volts on perpetuals and spot exchanges
    • TWAP/DCA strategy Volt
  5. Friktion Learn

    • Educational content around on-chain orderbooks, trading strategies on orderbooks, perpetuals, market making, and high frequency trading similar to the content we’ve created here: https://www.youtube.com/watch?v=FJNHk4Z6FNo&t=3s
    • All of these would help educate non-traditional order book users about Serum and generate retail interest and activity.
1 Like

Hey everyone Anas here from Investin,

Having closely worked with Friktion team and see them grow so fast makes me want to chime in support for this grant. And given the explanation on how they gonna use the grant I personally believe this team is in it for real innovation and help grow Serum’s eco.

p.s. I am new on the forum but not in the ecosystem, So far we’ve built and open sourced Solana’s first decentralized asset management protocol that composes over Jupiter, mango and friktion. And we were the first to compose on-chain over Mango, Jupiter and Friktion.

2 Likes

look I support this, but through no fault of friktions, we have a grant process that is unstructured and there is so much to consider, its naturally a mess unless you take the time to read line by line.

So let me suggest we tie the friktion request to some high enough level agreed upon deliverables? Yes it can be a 3M grant, but paced over time, and lets pick some things you MUST get done before the next tranche is unlocked.

What do you think?

1 Like

Thanks for your feedback!

The main items for the grant can be summarized as follows:

  1. Expand composability of Friktion’s options infrastructure using Serum.
  2. Incentives for options Volts
  3. R&D + Incentives for Crab Volt + Entropy, Friktion’s volatility perpetuals exchange
  4. R&D + Incentives for Basis Volt, Friktion’s basis trading strategy on Mango
  5. R&D of new products built on top of Serum.
  6. Educational content around Serum, decentralized orderbooks, and trading.

Though we would be open to tranching the grant, we believe the size is reasonable compared to the ambitious goals we’ve set out to strengthen many areas Serum ecosystem, especially when compared to the previously passed grants.

We get the overall worry from Serum holders about mercenary protocols, but we can assure you Friktion’s fate as a DeFi portfolio management protocol is quite intertwined with the success of on-chain order books on Solana. We are here to stay. Friktion’s existing Volt products demonstrate our ability to follow through on end-to-end execution, and can ensure that our goals will get done. If passed, we will be very communicative with progress updates.

1 Like