Latest Developments of GMX on Arbitrum: Liquidity rise and Long-Short Imbalance

Recently, a perpetual contract trading platform obtained a short-term incentive of 12 million ARB tokens on the Arbitrum network. This funding is mainly used to support the joint development of the platform's V2 version and the Arbitrum DeFi ecosystem. Since November 8th, this incentive program has been implemented for nearly 10 days. Let's analyze the usage of this funding and its impact on the platform's development.

Main Uses of the ARB Token Incentive Program

A total of 12 million ARB tokens will be distributed over 12 weeks, with one period each week. The funds will primarily be used for the following aspects:

1. Incentive V2 version perpetual contracts and spot liquidity
2. Encourage Liquidity to migrate from V1 version to V2 version
3. Subsidize transaction fees, lowering them to 0.02% to compete with centralized exchanges.
4. Sponsoring projects developed on the V2 version

Through these measures, the platform aims to enhance its competitiveness while maintaining the advantage of no slippage in trading.

Liquidity Change Analysis

As of November 17, the overall Liquidity of the platform increased from 496 million USD on November 8 to 528 million USD, a rise of 6.45%. Specifically:

• The liquidity of version V1 decreased from 400 million USD to 364 million USD, a decline of 9%.
• The liquidity of version V2 rose from 96.77 million USD to 164 million USD, an increase of 69.5%.

Although the overall liquidity rise is not significant, the notable growth of the V2 version still has positive implications for the platform's development. However, it is worth noting that the increase in V2 liquidity mainly occurred in the first two days after the incentives began, after which the growth tended to stagnate.

Changes in Open Interest and Trading Volume

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

Trading volume is greatly affected by market fluctuations, reaching as high as $555 million on November 9. Recently, the trading volume of version V1 is still higher than that of version V2.

Imbalance of Long and Short Ratios

The V1 version of the platform has long faced a serious imbalance in the long-short ratio. As of November 17, the long open positions for V1 amount to 19.26 million USD, while the short positions are only 687,000 USD, a difference of nearly 30 times.

The V2 version attempts to address this issue through a fee adjustment mechanism, but the effect is not significant. Currently, the total long open interest of V2 is 51.66 million USD, and the short is 28.67 million USD, showing a considerable gap.

For certain assets like SOL, DOGE, and XRP, long positions have reached their limits, and the long-short ratio is severely imbalanced. Taking XRP as an example, long positions are 4.42 times that of short positions; the long positions in SOL are twice that of short positions.

Although the fee mechanism attempts to introduce arbitrageurs to balance long and short positions, the actual effect is not ideal due to various influencing factors. This imbalance may pose higher risks for liquidity providers, especially during periods of significant market volatility.

Summary

After the implementation of the incentive program for nearly 10 days, the liquidity of the platform's V2 version has indeed achieved a 69.5% rise, but this increase was mainly concentrated in the first two days and has since stagnated. The open interest and trading volume have not seen significant growth.

At the same time, the imbalance in the long-short ratio of the V2 version still exists, especially for some small-cap tokens with high volatility. Although certain liquidity pools offer higher annualized returns, liquidity providers may face higher risks.