Chaos Labs supports listing gmBTC and gmETH on Radiant Capital’s Arbitrum market as part of a strategy to enhance its offering with a greater diversity of assets.
The pool value of gmBTC and gmETH has fallen since February 2024, currently at $107M and $91M, respectively. Note that “since tokens in a market are reserved based on the total open interest of the market, the liquidity available for redemption is capped at the tokens in the pool multiplied by the pool's reserve factor minus the tokens reserved. If this capacity is reached, liquidity providers would need to wait for positions to close before selling the GM token or for liquidity to be deposited by other providers.”
gmBTC
gmETH
Integrating gmBTC and gmETH as collateral assets on Radiant has the potential to create new demand for borrowable assets, such as BTC, ETH, and stablecoins. It is likely that a primary use case will be borrowing underlying assets (BTC and ETH) to hedge delta exposure associated with holding the gm tokens. Note that if the underlying debt asset scales in price while the collateral asset (gmToken) maintains a delta of approximately 0.5, liquidations can occur. This is due to the gmToken being comprising 50-50 BTC or ETH and USDC, assuming the distribution of OI is sufficiently balanced.
Another use case may be borrowing stables to increase delta exposure when supplying liquidity in gmPools. For example, supplying gmAsset as collateral, borrowing USDC, depositing single-sided USDC into gmAsset pool, and attempting to create a delta exposure of ~1. If the price of the gmToken, i.e., the underlying asset * ~0.5, liquidations can occur.
Unlike other assets listed on Radiant, the liquidating and withdrawing of gmTokens from the pool is non-atomic. Thus, flashloans cannot be utilized to liquidate positions. There also exists a scenario where liquidations may not occur if the collateral received by the liquidator is greater than the liquidity available to be withdrawn or redeemed, based on the pool’s reserve factor. Thus, we must provide a larger liquidation bonus to incentivize liquidators to theoretically take on additional delta risk if they choose to liquidate when redeeming is unavailable.
Note that other platforms may offer gmTokens as collateral with more aggressive Loan-to-Value (LTV) and Liquidation Thresholds (LTs). In a mass liquidation scenario, if the underlying gmToken or the asset it represents experiences rapid price fluctuations, these platforms effectively gain priority in liquidations, potentially consuming a significant portion of the gmPool reserve factor buffer before Radiant liquidations are processed.
Each GMX Market has a reserve factor that allows open interest to be capped to a percentage of pool size, reducing both the impact of profits of short positions and the risk that long positions cannot be fully paid out.
GMX has two separate parameters for reserve factor:
For gmBTC, Reserve Factor is 125% and OIFR is 120%; for gmETH, Reserve Factor is 140% and OIRF is 135%.
Thus, to quantify the supply cap, we first take the difference between the Reserve Factor and OIRF; 5% in both cases. Effectively, this means we assume the worst-case scenario concerning the gmToken’s ability to be liquidated and withdrawn based on the parameter values set. Put differently, in the scenario of a fully utilized pool encompassing both long and short positions and factoring in the OIRF, our methodology ensures that the protocol can manage the flow effectively. Even in a scenario in which all positions are liquidated and collateral is recovered, the protocol can still manage its operational needs. However, it’s important to recognize that not all borrowers are expected to employ identical strategies, contrary to this assumption.
Furthermore, the full utilization of the OIRF on both sides suggests a lack of significant market movement in the underlying asset. Typically, in the presence of strong market fluctuations, either short or long positions on GMX will be closed out. This observation is inversely correlated with the anticipated demand for gmBTC as collateral, implying that substantial market movements would be required for liquidation on Radiant, due to the 0.5 delta.