Inside Look of GMX V2 on Arbitrum: New Opportunities in DeFi

Solv Protocol Team
8 min readSep 3, 2023

Looking for the latest insights on the GMX V2? Last week, We hosted an enlightening Twitter Space you wouldn’t want to miss. The panel of experts, including GMX’s Jonezee, BlockFi Capital’s Ryan Ren, Offchain Labs’ Nick, and Solv Partner Jing Xiong. Our knowledgeable guests shared strategies to maximize opportunities upon GMX V2 while upholding robust risk management. Whether you’re a seasoned investor or just getting started in crypto, the discussion provided valuable perspectives to inform your decisions during this transitional period.

If you missed the forward-looking talk, this recap summarizes the key takeaways so you can stay up-to-date on the landscape ahead.

Q1. To start, could you please give an overview of GMX V2? How traders and LPs benefits more from GMX V2 compared to V1?

Jonezee:

When GMX first deployed our GLP liquidity system on Arbitrum, it quickly gained popularity. At the time, GLP was innovative — a multi-asset pool enabling perpetual trading on-chain without external market makers. It democratized liquidity provision, allowing users to easily contribute trading liquidity. With substantial liquidity pooled on-chain, GMX could offer seamless perpetual trading. GLP also presented an attractive yield opportunity, giving exposure to BTC and ETH. It attracted significant liquidity, powering billions in trading volume. It has attracted 400,500 million USD worth of liquidity on both our deployments, arbitrum and avalanche and facilitated billions in trading.

Over time though, GLP faced limitations. The unpredictable hedging of trader PnL meant excessive risk exposure for liquidity providers. GLP also constrained GMX from listing additional non-BTC/ETH markets that comprise much altcoin trading. Expanding markets was always an ambition to improve the on-chain experience.

GMX V2 addresses these issues. It enhances hedging and risk management for liquidity providers. V2 also enables listing new assets beyond BTC/ETH, a key step in building out perpetual trading. Further, V2 increases capacity to scale open interest and deepen liquidity as GMX grows. V2 complements V1 as an evolution, not replacement. LPs gain more customization, risk control, and yield opportunities. Traders access new assets, lower fees, and enhanced liquidity. Together, V2 advances GMX as a leading on-chain perpetual trading platform.

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Q2. Arbitrum has been a long time partner with GMX since V1, can you tell us more about the partnership between Arbitrum and GMX? What’s Arbitrum’s strategy in terms of partnership?

Nick:

Arbitrum’s success is partly due to the support and resources provided to projects building on the network. I still remember GLP had less than $1 million inside of it and arbitral was not as frothy as it certainly is today. But over time, Offchain Labs, the Arbitrum Foundation, and the Arbitrum Dao have fostered an ecosystem where projects big and small can thrive.

By taking an agnostic approach and supporting projects equally across marketing, tech, business development and more, arbitrum cultivates a level playing field. This allows smaller and larger projects to grow in concert, as evidenced by the synergistic rise of GMX and other protocols.

Arbitrum’s permissionless nature combined with the supportive ecosystem enables projects to rapidly gain traction. GMX’s growth from humble beginnings to billions in volume demonstrates the power of building on arbitrum with backing from the community.

Q3. What opportunities GMX V2 on Arbitrum will unlock for the DeFi space?

Ryan:

GMX V2 offers traders key advantages over V1 including lower fees and the ability to open larger positions. V2’s improvements to open interest mechanics allow traders to enter big trades without slippage or limitations. This superior trading experience is driving volume to rapidly shift to V2. Additionally, V2 provides 5x greater capital efficiency for liquidity providers. The enhanced liquidity and trading mechanics will enable GMX to capitalize on the accelerating trend toward on-chain trading amid crypto regulatory uncertainty.

Overall, V2 delivers a better trader experience through lower fees and flexible position sizing as well as stronger liquidity provider incentives. GMX is well positioned to ride the growing on-chain trading wave with its cutting edge V2 platform.

Jing:

I believe there are two key advantages of GMX V2: First, it enables much greater capital efficiency for liquidity providers. Funds will be used more efficiently compared to V1. Second, the isolated pools per trading pair improve stability and safety. With individual pools, risks are contained rather than propagated across pairs. This compartmentalization provides stability benefits and minimizes issues if problems occur. Overall, the efficiency gains and stability from isolated pools per pair are the two major improvements I see in GMX V2. These changes should make liquidity provision safer and more effective on GMX.

Nick:

I agree with the key advantages mentioned — efficiency and stability. GMX V2 enables more efficient use of capital for liquidity providers and compartmentalized risk per trading pair for greater stability. Additionally, V2 opens up more opportunities for advanced trading strategies that may not have been feasible on V1. I’m excited to see developers build structured products, protocols and other innovations on top of V2, just as we’ve seen on V1. The efficiency, stability and flexibility of V2 will allow new and likely unforeseen use cases to emerge, expanding the GMX ecosystem.

Jonezee:

GMX V2 on Arbitrum aims to build deep liquidity and capital efficiency to foster a diverse DeFi ecosystem. V2 enhances composability through auto-compounding rewards, enabling further innovation. In just two weeks, we’ve seen steady growth in liquidity and volume without incentives, indicating the protocol’s strength. As the pools grow, they will become foundational building blocks for DeFi on Arbitrum and Ethereum, fulfilling the promise of secure and usable defi. By balancing the needs of key stakeholders like traders and liquidity providers, V2 provides the liquidity and trading infrastructure to power the next generation of DeFi growth. With greater composability and capital efficiency, GMX is positioned to facilitate an expansive ecosystem of interconnected DeFi protocols.

Q4. How will Solv work together with market makers like Blockin and leverage GMX V2 to expand yield opportunities for investors?

Jing:

GMX V2 is still new and requires further testing before definitive strategies emerge. As partners invested in V2’s success, our priority now is ensuring the system’s stability and performance. So far, despite market volatility, V2 has proven resilient with no issues. We are encouraged by this initial period and will continue monitoring V2. Once fully confident in V2’s robustness after more testing, we can determine optimal ways to generate returns and alpha for users. For now, our focus remains on due diligence — verifying V2’s capabilities before advising large capital deployments. Overall, these initial weeks indicate V2’s promise. With more time, we will better understand how to leverage V2 to maximize benefits for users.

Q5. Finding yield optimization strategies for users need to balance with risk management, what measures do Solv take on risk control?

Jing:

We are closely evaluating V2 to understand the risks, opportunities, and potential issues. Our goal is to identify how to maximize upside while safeguarding user funds. So far, we have not found major concerns, and V2’s existing risk controls provide protection. On top of that, we are implementing additional measures on our protocol to further secure user assets. Through this diligent review process, we aim to offer users a safe and positive investment experience with V2. Our priority remains protecting and growing user capital.

Q6. Solv has already brought liquidity to GMX through funds products on GMX V1, and has plans for more funds on V2. How do you view the benefits of this ecosystem synergy with Solv?

Jonezee:

Composability is crucial for GMX’s ecosystem growth, but security remains the top priority. GMX emphasizes stability through audits and risk minimization to protect user funds. We maintain elaborate security measures to monitor the blockchain, pools, and open interest. When dealing with significant user capital, safeguarding those funds is paramount. Our partners are taking a careful approach to assessing V2, verifying stability and performance before deploying more capital. This guarded strategy allows us to build slowly, integrating protocols and functionality in a subtle, secure process. We are encouraged by steady organic growth so far on V2. By prioritizing diligence over speed, GMX and partners can leverage V2’s opportunities while ensuring user protections remain robust.

Q7. How do you ensure sufficient liquidity providing for your GMX V2 on Arbitrum strategy? What are the challenges?

Ryan:

GMX V2 is off to a good start in its first couple weeks since launch, but as expected with any new complex system, there are still optimizations to be made. The team continues tweaking risk parameters and fine-tuning the trading functionality and liquidity usage. One major upcoming integration is Chainlink oracles, which will mark an important milestone in decentralization for GMX. Relying on a reputable third party for price data builds confidence in the system. As partners and traders, we are taking a measured approach in testing out V2. We have cautiously moved some liquidity into V2 and are monitoring performance across different pools. More funds will certainly flow into V2 once we feel fully confident in its stability and security. Given GMX’s thoroughly audited codebase, we are optimistic, and there have been no major issues in the first few weeks. One particular factor we are examining closely is how trader behavior impacts pool skewness on V2 versus the dynamics we saw on V1. As providers of mostly delta-neutral liquidity, we want to optimize our hedging strategies so that large wins by traders do not significantly hurt our returns. There are nuances between the pool structures that affect risks to liquidity providers. We are still assessing how to best manage the trader activity in V2. Overall, the progress so far is encouraging, but we will remain patient. More features are still to come, and as more traders and partners migrate to V2, we want to prioritize diligent testing and stability. Once we have fully verified performance across different market conditions, we can commit larger amounts of capital. This gradual approach will lead to the best long-term growth for the ecosystem.

Q8. As a fund manager, what is your overall investment strategy? What factors will you look at to pursue maximum yields?

Ryan:

As a smaller team, we focus on major pools like GLP and UniSwap for sustainable yields, capital preservation, and risk management. The GLP strategy has performed well historically with solid returns and low drawdowns. Survival is key in this market, so we prioritize delta-neutral, simple strategies we can actively monitor and control. For client funds, maximizing yield is secondary to managing risks and drawdowns. We stick to proven pools we understand, rather than chasing exotic opportunities. Prudent risk management is paramount for sustainable yields in this uncertain environment.

Q9. What is Solv’s advantage to attract top fund managers like Blockin to use Solv’s platform?

Jing:

We view managers like BlockFi as long-term partners, not just managers. Our goal is to build strategic relationships, products, and mutual success together. As Ryan mentioned, we are already collaborating to test GMX V2 pools and optimize strategies. This process builds partnership and helps us determine what works well. The next phase will be launching new V2 pools once we have confidence, like BTC, ETH, and stablecoins. We have innovative ideas like migration pools too. The key is working together to help Blockin grow assets, while also attracting assets to GMX through strong due diligence, returns, and risk management. It’s about creating a win-win partnership — ensuring BlockFi’s assets are safe and perform well, while also advancing GMX’s ecosystem. By collaborating closely, we can achieve shared goals.

About Solv V3

Officially launched in 2023, Solv V3 has pioneered the construction of a trustless fund infrastructure based on ERC-3525. It also achieved decentralized collaboration between trusted institutions to offer transparent, non-custodial DeFi risk control. It allows global investors to access varied, trusted crypto investments on one transparent and secure platform, and empowers excellent fund managers to efficiently raise capital and build on-chain credibility.

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Solv Protocol Team

Decentralized Asset Management. Diverse Assets. Savvy Strategies. Optimal Risk Management.