[NIP-23] - List GMX on Arbitrum as a Collateral Option on Notional V3

[NIP] Notional Improvement Proposal
1

Title: List GMX on Arbitrum as a Collateral Option on Notional V3
Author(s): Anthias.xyz Team
Submission Date: 12 October 2023

Summary

The following is a proposal by the Anthias.xyz team to onboard GMX as a collateral currency option on Notional V3. The Anthias team thinks this could prove valuable for the Notional community and thus would like the community to consider & discuss onboarding GMX as a collateral type.

Resources

Minimum requirements for consideration checklist

Application

  1. Provide a brief overview of the proposed asset and its underlying project.
  • $GMX is GMX’s utility and governance token. GMX is a decentralized perpetual swap and spot and exchange. GMX is currently on Arbitrum and Avalanche and first launched in September of 2021. GMX aims to provide a better trading experience by offering traders lower swap fees and zero price impact trades. Zero price impact trades are trades that are executed exactly at the marked price, even for large trades.
  1. How is the asset currently used (staking, collateral on other lending protocols, etc.)? Provide relevant activity KPIs.
  • GMX can currently be staked directly on GMX’s platform to earn rewards.
  1. Detail why you believe the project should be added to Notional either as a collateral asset or as a tradable asset and the potential benefits of doing so. Explain why you think the demand for this asset is sufficient to list it on Notional.
  • Since its launch, GMX has seen impressive growth and adoption from traders. The project continues to excel as a leading decentralized perpetuals exchange. Allowing GMX to be onboarded as a collateral asset would open another avenue for Notional to lead the path for lending and borrowing on Arbitrum. GMX succeeds in meeting the necessary criteria of the collateral asset onboarding process as outlined by the Notional community.
  1. Provide information regarding the organization behind the project.
  • GMX is a decentralized, permissionless perpetual swap and spot exchange. GMX is founded by anonymous founders. The project started as a merger between XVIV and Gambit. Speculation continues to circle around who the founders of the protocol are.
  1. Provide information regarding past hacks or major bugs and how the team addressed them.
  • On September 18, 2022, GMX suffered a price manipulation attack for the amount of $565,000 on the AVAX/USD pair. To prevent the exchange from such exploitation, the team later capped the short and long open interest for AVAX.

Provide an overview of the token’s market data.

  1. Market Cap: $327,381,260
  2. 24H Volume: $7,951,243
  3. GMX Volatility (GMX price compared to ETH over past 12 months): GMX has a volatility of 13.69% over the past 90 days, according to CoinCodex.

Chart via Coin Codex

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  1. GMX DEX Liquidity (DEX Guru): GMX has over $11M of DEX liquidity at the time of posting this proposal according to DexGuru

  2. GMX DEX Slippage: GMX slippage for a 1M USDC swap is currently about 2.3%. Liquidity is sufficient to support the asset with a relatively high supply cap over time based on demand.

Provide an overview of the token emission schedule and major holders.

The increase in circulating supply of GMX will vary depending on the number of tokens that get vested, and the amount of tokens used for marketing / partnerships. The forecasted max supply is 13.25 million GMX tokens. The largest ownership percentages of GMX are held by contracts and exchanges. The largest individual holder of GMX on Arbitrum holds approximately 0.66% of circulating supply at the time of posting this proposal.

Conclusion

The Anthias team would like to gauge sentiment and hear thoughts from the Notional community with regards to onboarding GMX as a collateral type to Notional V3. Please share thoughts/questions in the comments of this forum post, and feel free to reach out to 0xBroze (@0xBroze on Discord or @OxBroze on Telegram) with any questions.

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About Anthias

Anthias is a risk management organization that also builds tools for easily monitoring liquidation risk for DeFi borrowing/lending markets. The Anthias team has shipped multiple grants for Euler, Aave, Compound, and more. We also recently posted the collateral asset onboarding proposal for cbETH on Notional V3.

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Date: 2023-10-13

Summary

Following up on the @Anthias.xyz proposal, we assessed the risk implications of listing a Prime GMX market on Notional’s Arbitrum deployment. If the DAO is in favor of listing GMX then we suggest listing the asset with an initial supply cap of $500K (~14,000 GMX), a liquidation discount of 8%, and an implied minimum collateral ratio of 170% vs stablecoins. Our asset onboarding review highlighted no significant technical issues to list the asset. We welcome community feedback before this proposal is formalized into a Notional Improvement Proposal (NIP) and goes to a formal governance vote.

Asset Overview

  • Asset symbol: GMX
  • Underlying Protocol Name: GMX
  • Historical daily volume (avg. last 30 days): $12.4M (CEX and DEX)
  • DEX liquidity: $21.9M
  • Market cap: $338,000,000
  • Total supply: 9,562,753 GMX Tokens

Economic Risk Assessment

Asset ownership & DeFi presence

GMX is currently held by 296,400 wallets on Arbitrum. The top 100 wallets own 96.5% of the supply. 67% of the token supply is staked in the GMX staking contract. The second largest contract holding GMX is the Synapse Bridge. A bridge hack could result in the GMX price decreasing rapidly over a short period of time. 3.65% of the GMX supply is currently in the ETH/GMX uniswap pool.

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GMX is listed as a collateral asset on Compound’s V3 Arbitrum deployment.

Underlying protocol KPIs

The GMX protocol has facilitated $144B in perp trading volume historically. More than 336K wallets interacted with the protocol. Open interest currently sits at $111M. GMX is the most popular perpetual trading protocol on Arbitrum and has been live since September 2021.

Token utility

GMX is the utility and governance token of the GMX protocol. GMX token holders can stake their GMX in the protocol’s staking module to accrue ARB incentives and 30% of fees generated by the platform.

Historical volatility

GMX historical price vs ETH

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Historical volatility analysis

GMX

Time period Volatility (last 90 days) Annualized Volatility (last year) Annualized vol. (last year) Source
1h 0.65% 61.02% 0.66% 61.56% Chainlink
1d 3.36% 64.16% 4.40% 84.09% Chainlink

ETH

Time period Volatility (last 90 days) Annualized Volatility (last year) Annualized vol. (last year) Source
1h 0.37% 34.53% 0.56% 52.18% Chainlink
1d 1.72% 32.87% 2.43% 46.41% Chainlink

Historical maximum drawdown analysis

GMX

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -11.53% -11.53% 5.21% 5.21%
1 day -14.76% -14.76% 6.75% 18.19%

ETH

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -5.38% -7.20% 4.96% 7.36%
1 day -10.44% -24.99% 7.07% 7.70%

GMX has historically been more volatile than ETH. It also had more pronounced drawdowns than ETH historically making the asset more risky. GMX is also subject to smart contract and governance risks.

Therefore, we propose a 170% minimum GMX/USDC collateral ratio. This would protect the protocol against the worst historical maximum drawdown over a 1 day period. This implies that the protocol would have still been overcollateralized if risky accounts had not been liquidated for a period of 24 hours historically.

Asset liquidity

GMX to USDC slippage analysis (Arb):

Expected slippage Trade size
0.5% $150,000
1.0% $265,000
2.0% $490,000
3.0% $775,000
4.0% $1,020,000
5.0% $1,300,000
6.0% $1,600,000

GMX is listed on Uniswap V3. Based on on-chain liquidity a $500K GMX to USDC trade would result in approximately 2% slippage.

On-chain liquidity breakdown (on Arbitrum):

DEX GMX liquidity (Arb) Non GMX liquidity (Arb)
Uniswap V3 $13,212,500 $8,670,500
Total $13,212,500 $8,670,500

GMX’s liquidity on Arbitrum allows to potentially list GMX with a high supply cap. We propose setting the GMX supply cap at $500K a figure way below what would be implied by on-chain liquidity. We propose setting GMX’s supply cap at $500K in order to gauge demand from GMX suppliers. If there is high demand for GMX on Notional the DAO could increase the supply cap at a later date.

Other notable risks

GMX is also subject to smart contract risks. A potential vulnerability in the protocol’s contracts could lead to a rapid price decline in the value of GMX. Similarly, a hack of the Synapse Bridge could also impact the price substantially. These idiosyncratic risks can be somewhat mitigated by a lower exchange rate haircut (higher minimum collateral ratio).

Security Assessment

As mentioned by @anthias in the initial post, GMX underwent multiple security audits from auditors like ABDK and quantstamp.

Implementation Review

No specific integration challenges have been identified.

Proposed Risk Parameters

Based on the different analyses presented above, we propose listing GMX with the parameters presented in this spreadsheet. Based on GMX’s historical volatility profile, we propose to list the asset with exchange rate haircut and buffer parameters that imply a minimum collateral ratio of 170% for USDC borrowers. Based on current on-chain liquidity we propose to list the asset with a 8% liquidation discount. We think a 8% discount is sufficient to allow liquidators to liquidate GMX profitably under historical market conditions. Finally, we propose to list the asset with an initial supply cap of $500K (14,000 GMX).

We propose the following listing Prime GMX interest rate curve. The proposed interest rate models imply a 2.26% borrow interest rate and 1.23% supply interest rate at the target utilization rate.

Risk Parameters Benchmarking

Parameter Compound V3 Notional
Liquidation Discount 7% 8%
Minimum Collateral Ratio (vs USDC) 222% 170%
Supply Cap (USD) $1,900,000 $500,000

The proposed liquidation discount is in line with the discount used by Compound V3. We propose a more aggressive minimum collateral ratio than Compound but with a substantially lower supply cap.

The proposed parameters should be reviewed by DAO voters before moving to the governance vote.

Resources

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