Summary

We support listing single token pool markets for BTC and ETH on GMX V2 on Arbitrum, with relatively conservative reserve factor and funding rate parameters.

Analysis

Given the skew behavior on GMX pools since the introduction of the velocity-based funding rate, and according to analyzing worst-case scenarios, We support listing single token pool markets for BTC and ETH on GMX V2 on Arbitrum.

However, compared to the two-sided pool used so far on GMX, the pools’ configurations would have to be more conservative - reserve factor, open interest reserve factor, and funding rate parameters.

We can assess the pool's risk by analyzing a few worst-case scenarios with different OI reserve factors, price trajectories, and under a 10% to 50% skew. Given the actual distribution of OI, a 25-50% skew is conservative. Here, "skew" denotes the discrepancy in OI between opposing sides, calculated by dividing the abs of difference between long and short pool values by the pool value and multiplying by RF. For instance, a skew of 50% suggests full utilization on one side and zero OI on the other. It's important to note that a 50% skew is deemed highly conservative, given the actual distribution.

Price increase (Long) scenarios are irrelevant for that case, as over-collateralization is not recommended.

In the following heatmaps, the value represents the traders’ PnL to pool size ratio - 0 means no profits by traders, and 1 means their profit consumed the entire pool.

Under a 0.5 OI reserve factor and 25% imbalance towards shorts, an 80% drop in price will lead to pending traders PnL accounting for 50% of pool value; a 90% drop is already past bad debt.

Under a 0.75 OI reserve factor and 25% imbalance towards shorts, an 80% drop in price will lead to pending traders PnL accounting for 75% of pool value; a 90% drop is already past bad debt.

Under a 0.85 OI reserve factor and 25% imbalance towards shorts, an 80% drop in price will lead to pending traders’ PnL accounting for 85% of pool value, and a 90% would lead to bad debt.

As both 25% and 50% skew are rare, and even if reached, not expected to last long due to high funding rates that will accrue, we would recommend starting with a setup of up to 0.5 open interest reserve factor, which could later on the be increased up to 0.75. We also recommend more conservative funding rate parameters to reduce the chance of high imbalance.

However, it's important to note that this approach introduces much greater risk to LPs, as in case of a large price decrease aligned with OI skew, their losses due to holding the token will be amplified significantly.

Recommendation