Development of GMX V2 under the Arbitrum STIP plan: Liquidity rise and long-short imbalance

Recently, a derivatives trading protocol launched a short-term incentive plan (STIP) on the Arbitrum network, supported by 12 million ARB tokens. The protocol stated that it would use these funds to promote the joint development of its V2 version and the Arbitrum DeFi ecosystem. Since the planned launch on November 8, nearly 10 days have passed. Let's analyze the use of these funds and whether they have helped the protocol achieve its expected rise targets. At the same time, we will explore the effectiveness of the V2 version in adjusting the long-short balance.

ARB tokens are mainly used to incentivize liquidity and trading for version V2.

The 12 million ARB tokens allocated under the STIP plan will be distributed over 12 weeks, with a specific number of tokens allocated each week as a period. These funds are primarily used for the following aspects:

1. The incentive for V2 version perpetual contracts and spot liquidity providers, in addition to trading fees, can also receive additional ARB token rewards. 200,000 ARB will be allocated in the first week, 300,000 ARB in the second week, and the annualized yield for some trading pairs can reach 50%.

2. An incentive of 350,000 ARB has been established for transferring liquidity from the V1 version of the GLP pool to the V2 version of the GM pool. Users who exit GLP and purchase GM during the same period can receive a fee subsidy.

3. Subsidize trading fees, reducing the average trading fee to 0.02% to enhance competitiveness. Users can receive up to 75% of trading fee rebates in the form of ARB tokens when opening and closing positions on the V2 version. The first phase of incentives amounts to 300,000 ARB.

4. Projects that are developed on V2 version but have not received Arbitrum subsidies can be allocated up to 2 million ARB.

These measures aim to enhance the overall competitiveness of the protocol by lowering transaction costs to attract more users while increasing the earnings of liquidity providers, thereby creating a virtuous cycle.

The liquidity rise of the V2 version is significant, but the growth trend has slowed down.

As of November 17, the incentive program for the protocol has been running on Arbitrum for nearly 10 days, and the ARB rewards for the first week have also been distributed through airdrop. Let's see if the overall liquidity, open interest, and trading volume of the protocol have increased during this period.

Overall, the total liquidity of the V1 and V2 versions increased from $496 million on November 8 to $528 million on November 17, a rise of 6.45%. Among them, the liquidity of the V1 version decreased from $400 million to $364 million, a decrease of 9%. Meanwhile, the liquidity of the V2 version grew from $96.77 million to $164 million, a remarkable increase of 69.5%.

Although the overall liquidity rise is not significant, the substantial increase in liquidity of the V2 version is still of great importance to the protocol, as the V2 version has higher capital efficiency. However, it is worth noting that the rise in liquidity of the V2 version mainly occurred on the first day of incentives (November 8), after which the growth rate noticeably slowed down and even stagnated.

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

The trading volume has fluctuated significantly over the past few days, closely related to market volatility. It peaked at $555 million on November 9, followed by $365 million on November 16. Recently, the trading volume of version V1 is still higher than that of version V2.

In contrast, trading volume and open interest are more easily influenced by market conditions, while changes in liquidity better reflect the development direction of the protocol. Although liquidity shows an overall rise trend, the growth is mainly concentrated in the first two days after the incentives begin.

Some GM pools still have a serious long-short imbalance

One of the issues that has been criticized in the V1 version is the lack of measures to limit the disparity in long and short positions, which could pose a higher risk to GLP in trending markets. As of November 17, this issue still exists. The V1 version has long open positions amounting to $19.26 million, while short positions are only $687,000, a difference of nearly 30 times.

The V2 version aims to attract arbitrageurs to balance long and short positions through a series of fee adjustments, thereby reducing the risks for liquidity providers. However, it appears that this goal has not been fully achieved.

According to public data, the total long open interest for the V2 version is $51.66 million, while the short open interest is $28.67 million, indicating a significant gap. Since each asset in the V2 version corresponds to an independent liquidity pool, we need to analyze the situation of each asset separately.

For certain assets, such as SOL, DOGE, and XRP, long positions have reached their limit, and no further long orders can be opened, resulting in a significant imbalance in the long-short ratio. Taking XRP as an example, long positions are 4.42 times larger than short positions; the long positions for SOL are twice that of short positions.

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 at 39.42%) and a borrowing fee of 0.0037% per hour (annualized at 32.4%). The revenue available to short positions is a funding fee of 0.0199% per hour (annualized at 174%). Although there appears to be an arbitrage opportunity on the surface, which may attract some arbitrageurs to go short, the current low number of short positions means that if they increase, the funding fee yield for shorts will drop significantly. Furthermore, this data may change rapidly over time, and there might even be a need to pay funding fees and borrowing fees. Along with the costs of opening and closing positions, these factors could lead to the V2 version failing to achieve the expected long-short balance.

Although 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 market volatility is high.

Conclusion

About 10 days after the implementation of the incentive plan, the V2 version of the protocol has indeed achieved a 69.5% rise in liquidity, but the growth momentum seems to have slowed down. The open interest and trading volume are greatly affected by the market and have not shown significant growth.

At the same time, several GM pools in version V2 are still facing the issue of imbalance between long and short positions. Although some GM pools offer annualized returns of up to around 50%, and liquidity exists in the form of ETH and USDC, liquidity providers still face higher risks due to trading in some highly volatile small-cap tokens, such as DOGE, XRP, LTC, etc.