The Development of GMX V2 Under the Arbitrum Incentive Program: Liquidity rise and Long-Short Imbalance Issues

Recently, GMX received 12 million ARB tokens in the short-term incentive program (STIP) on Arbitrum, which is the highest allocation among all projects on Arbitrum. GMX stated that it will use these funds to support the joint development of the V2 version and the Arbitrum DeFi ecosystem. Almost 10 days have passed since the plan was launched on November 8. Let's analyze how these funds are being used and whether they have helped GMX achieve its expected rise targets. At the same time, we will also explore whether GMX V2 has achieved the main goal of balancing long and short positions through fee adjustments.

ARB tokens are primarily used to incentivize GMX V2's Liquidity and trading.

The 12 million ARB tokens allocated to GMX under the STIP plan will be distributed over 12 weeks, with a certain number of tokens allocated each week as a period. This funding is mainly used for the following aspects:

1. Incentivize GMX V2 perpetual contracts and spot liquidity: In addition to trading fees, liquidity providers of GMX V2 can now earn additional ARB token rewards. 200,000 ARB will be allocated in the first week, 300,000 ARB in the second week, and the annualized return for some trading pairs can reach up to 50%.

2. Encourage liquidity to move from the GLP pool of GMX V1 to the GM pool of GMX V2: An incentive of 350,000 ARB has been established, and users who exit GLP and purchase GM during the same period can receive a fee subsidy.

3. Subsidize GMX trading fees: the average trading fee has been reduced to 0.02% to enhance competitiveness with centralized exchanges. When opening and closing positions on GMX V2, users can receive up to 75% of trading fee rebates in the form of ARB. The first phase of incentives is 300,000 ARB.

4. Sponsorship for projects developed on GMX V2: Projects that have not received subsidies from Arbitrum can apply for GMX sponsorship, which allocates up to 2 million ARB.

These incentives are aimed at improving the overall competitiveness of GMX. By reducing trading costs and increasing the income of liquidity providers, GMX hopes to attract more traders and liquidity, thereby creating a virtuous cycle.

GMX V2 Liquidity significantly rises, but the growth trend slows down

As of November 17, the GMX Arbitrum incentive program has been running for nearly 10 days, and the ARB rewards for the first week have also been distributed through airdrop. Let's take a look at whether GMX's overall Liquidity, open interest, and trading volume have increased during this period.

• Overall Liquidity: Reached $528 million on November 17, an increase of 6.45% compared to $496 million on November 8.
• GMX V1 Liquidity: decreased from $400 million on November 8 to $364 million, a decline of 9%.
• GMX V2 Liquidity: rose from $96.77 million on November 8 to $164 million, a rise of 69.5%.

Although the overall liquidity of GMX V1+V2 has only risen by 6.45%, the liquidity growth of GMX V2 is significant. Considering that V2 has higher capital efficiency, this incentive remains important for GMX. However, it is worth noting that the growth in GMX V2 liquidity mainly occurred on the first day of the incentive (November 8), after which the growth rate noticeably slowed down, and even stagnated.

In terms of open interest, it rose from 152 million USD on November 8 to 182 million USD on November 13, but then decreased to 137 million USD by November 17, even falling below the level before the incentives began.

In terms of trading volume, there was significant fluctuation in the days following the start of the incentives. It peaked at $555 million on November 9, followed by $365 million on November 16. Recently, the trading volume of V1 is still higher than that of V2.

In contrast, trading volume and open interest are more easily affected by market conditions, while changes in liquidity reflect that GMX is moving in the right direction, although the rise is mainly concentrated in the first two days after the incentives began.

The issue of GM pool long and short ratio imbalance still exists

One of the long-standing criticisms of GMX V1 is the lack of measures to limit the disparity between long and short positions, which could expose GLP to higher risks during trending markets. As of November 17, this issue remains quite serious. The long open positions of GMX V1 amount to 19.26 million dollars, while the short positions are only 687 thousand dollars, a difference of nearly 30 times.

GMX V2 aims to attract arbitrageurs to balance the long and short ratio through a series of fee adjustments, in order to reduce the risk for liquidity providers. However, this goal does not seem to have been fully achieved.

According to the data released by GMX, the total long open interest in GMX V2 is $51.66 million, while the short open interest is $28.67 million, showing a significant gap. Since each asset's trading in GMX V2 corresponds to an independent Liquidity pool, it is necessary to analyze the situation of each asset separately.

For assets like SOL, DOGE, and XRP, long positions have reached their limit and cannot continue to open long orders, with a significant difference in the long-short ratio. For example, the long position of XRP is 4.42 times that of the short position; the long position of SOL is 2 times that of the short position.

Taking the XRP/USD trading pair as an example, the holding costs that long positions need to pay include a funding fee of 0.0045% per hour (annualized 39.42%) and a borrowing fee of 0.0037% per hour (annualized 32.4%). The profit that short positions can earn is a funding fee of 0.0199% per hour (annualized 174%). Although there seems to be an arbitrage opportunity, due to the currently low number of short positions, as the number of shorts increases, the funding fee yield may significantly decrease. Furthermore, these data may change rapidly over time, and there may even be a need to pay funding fees and borrowing fees. Considering that there are costs associated with opening and closing positions on centralized exchanges and GMX, these factors may lead to GMX V2 failing to achieve the expected long-short balance.

Despite the fact that the liquidity and trading collateral for trading pairs like XRP/USD are ETH/USDC, liquidity providers still face higher risks when the long-short ratio is imbalanced and the market is highly volatile.

Conclusion

Nearly 10 days after GMX launched the incentive program on Arbitrum, the program has indeed helped GMX V2's liquidity achieve a rise of 69.5%, but the growth momentum seems to have slowed down at present. Indicators like open interest and trading volume, which are more susceptible to market influences, have also not shown significant growth.

At the same time, various GM pools of GMX V2 still face the issue of imbalance in long and short positions. Although some GM pools offer an annualized return of about 50%, and the liquidity exists in the form of ETH and USDC, liquidity providers may face higher risks due to trading some highly volatile small-cap tokens, such as DOGE, XRP, LTC, etc. In the future, GMX needs to further optimize its mechanism to better balance the long and short ratio and reduce the risks for liquidity providers.