New Developments of GMX V2: Liquidity Changes and Long-Short Imbalance Issues under the Arbitrum Incentive Program

Recently, a certain DEX launched a Short-Term Incentive Program (STIP) on the Arbitrum network, receiving support of 12 million ARB tokens, which is the highest allocation among all projects on Arbitrum. The DEX stated that these funds will be used to support the joint development of its V2 version and the Arbitrum DeFi ecosystem. Nearly 10 days have passed since the plan started on November 8. Let's take a look at how these funds are being utilized and whether they have helped the DEX achieve the anticipated growth. At the same time, we will also explore the performance of the V2 version in terms of long-short balance.

Main Uses of Incentive Programs

A total of 12 million ARB tokens will be distributed over a period of 12 weeks, with a certain number of tokens allocated each week. The main uses include:

1. Incentivize liquidity providers for perpetual contracts and spot trading in the V2 version, who can earn additional ARB token rewards besides trading fees.
2. Establish incentives for transferring liquidity from the V1 version GLP pool to the V2 version GM pool.
3. Subsidize transaction fees, averaging down to 0.02%, to enhance competitiveness.
4. Sponsor projects developed on the V2 version.

These measures aim to enhance the overall competitiveness of the DEX while promoting an increase in trading volume and Liquidity.

Liquidity Change Analysis

As of November 17, the Arbitrum incentive program for this DEX has been implemented for nearly 10 days. Overall:

• The total liquidity of the V1+V2 versions increased from $496 million on November 8 to $528 million, a growth of 6.45%.
• The liquidity of V1 version decreased from 400 million USD to 364 million USD, a drop of 9%.
• The liquidity of version V2 increased from 96.77 million USD to 164 million USD, an increase of 69.5%.

Although the overall liquidity growth is not significant, the substantial increase in the V2 version is still positive for this DEX. However, it is worth noting that the liquidity growth of the V2 version mainly occurred on the first day of the incentives starting, after which the growth rate significantly slowed down.

Changes in Open Interest and Trading Volume

The open interest increased from $152 million on November 8 to $182 million on November 13, and then decreased again to $137 million on November 17, even falling below the level before the incentives started.

In terms of trading volume, it performs more prominently on days with significant market volatility. It peaked at $555 million on November 9; followed by $365 million on November 16. Recently, the trading volume of the V1 version is still higher than that of the V2 version.

Long-Short Imbalance Issue

The imbalance between long and short positions in version V1 remains serious. As of November 17th, the total open long positions amounted to 19.26 million dollars, while short positions were only 687 thousand dollars, a nearly 30-fold difference.

Although the V2 version attempts to balance long and short positions through fee adjustments, the effect is not ideal. Overall, the long open interest is $51.66 million, while the short is $28.67 million, indicating a significant gap.

Certain assets like SOL, DOGE, and XRP have reached their long position limits, with a serious imbalance in long and short ratios. Taking XRP as an example, the long position is 4.42 times that of the short; for SOL, the long is twice that of the short.

Although some trading pairs like XRP/USD seem to have arbitrage opportunities, in practice, there are many limitations that make it difficult for long and short positions to achieve the expected balance.

Summary

During the implementation of the Arbitrum incentive program over the past 10 days, the liquidity of the DEX's V2 version indeed achieved a 69.5% increase, but the growth momentum could not be sustained. The open interest and trading volume did not show significant growth, likely more affected by market fluctuations.

The various GM pools in the V2 version still face the issue of imbalance between long and short positions. Although some pools offer an APR of up to 50% and exist in the form of ETH and USDC, liquidity providers still face high risks due to the trading of highly volatile altcoins.