market-token-valuation.md

Market Token (GM) Valuation

GM tokens are SO4.market's liquidity-provider (LP) shares. Each GM token represents a proportional claim on the assets backing a specific market pool. This document explains how GM token prices are calculated, what drives them, and how minting and burning are priced.

---

NAV Formula

The price of a GM token at any moment is the pool's net asset value (NAV) divided by the total GM supply:

GM price = pool_value / GM supply

All values are denominated in USD at FLOAT_PRECISION (10^30). Token amounts use TOKEN_PRECISION (10^7, Stellar's 7-decimal convention).

---

Pool Value Components

get_pool_value in libs/market_utils/src/lib.rs sums four components:

pool_value = long_token_usd + short_token_usd + impact_pool_usd − net_pnl

Component	Description
long_token_usd	Long-token pool amount × long-token price
short_token_usd	Short-token pool amount × short-token price
impact_pool_usd	Price-impact pool (accrues from impact fees) × index-token price
net_pnl	Unrealized PnL of all open positions (positive means traders profit, which reduces LP value)

net_pnl = long_pnl + short_pnl, where:

long_pnl  = (oi_tokens_long  × index_price / TOKEN_PRECISION) − oi_usd_long
short_pnl = oi_usd_short − (oi_tokens_short × index_price / TOKEN_PRECISION)

A positive long_pnl (longs in profit) reduces pool_value. A positive short_pnl (shorts in profit) also reduces pool_value. LPs absorb unrealized trader gains.

---

Minting and Burning Price

get_market_token_price in libs/market_utils/src/lib.rs computes the per-token price:

// Returns price in FLOAT_PRECISION units ($1 = FLOAT_PRECISION)
pub fn get_market_token_price(..., maximize: bool) -> i128 {
    let supply = market_token.total_supply();
    if supply <= 0 { return FLOAT_PRECISION; }   // first deposit always at $1

    let info = get_pool_value(..., maximize, ...);
    mul_div_wide(env, info.pool_value, TOKEN_PRECISION, supply)
}

The maximize parameter is reserved for future min/max price selection (e.g., valuing long tokens at their highest bid for deposits, or their lowest ask for withdrawals). It has no effect in the current implementation — pool_value uses the oracle's primary price regardless of maximize. This conservative simplification avoids sandwich opportunities during the initial launch phase.

First deposit: When GM supply is zero the price is initialised to exactly FLOAT_PRECISION ($1) so the first LP sets the baseline NAV.

---

Worked Example

Setup

Parameter	Value
Long token	ETH, pool amount = 5 ETH
Short token	USDC, pool amount = 10,000 USDC
ETH price	$2,000
USDC price	$1
GM supply	10,000 GM tokens

Open position: 1 ETH long, entered when ETH was $1,500 (OI in USD = $1,500; OI in tokens = 1 ETH).

Step 1 — Pool token value

long_token_usd  = 5 ETH  × $2,000 = $10,000
short_token_usd = 10,000 × $1     = $10,000
impact_pool_usd = $0  (no accumulated price impact)

total backing   = $20,000

Step 2 — Unrealized PnL

long_pnl = (1 ETH × $2,000) − $1,500 = $2,000 − $1,500 = +$500
           (longs are $500 in profit)
short_pnl = $0  (no short positions)
net_pnl = +$500

Step 3 — Pool value

pool_value = $20,000 − $500 = $19,500

The $500 unrealized gain for the long trader reduces the LP pool by the same amount.

Step 4 — GM price

GM price = $19,500 / 10,000 GM = $1.95 per GM

This arithmetic matches the get_market_token_price formula:

price = pool_value × TOKEN_PRECISION / supply
      = ($19,500 × FP) × 10^7 / (10,000 × 10^7)
      = $1.95 × FP        (i.e. $1.95 in FLOAT_PRECISION units)

Arithmetic derived from get_pool_value and get_market_token_price in libs/market_utils/src/lib.rs; verified by inspection against the inline PnL formulas.

---

Key Relationships

• Deposits add liquidity symmetrically: depositing tokens at fair value mints GM at the current NAV price, leaving existing LPs unaffected.
• Traders in profit → GM price falls: open winning positions reduce pool_value, lowering the NAV every LP holds.
• Traders at a loss → GM price rises: unrealized losses increase pool_value, benefiting LPs.
• Impact pool appreciation: fees collected into the price-impact pool add to pool_value and slowly accrue to LPs.

---

Further Reading

• libs/market_utils/src/lib.rs — get_pool_value, get_market_token_price
• docs/price-impact.md — how price impact fees accumulate in the impact pool
• docs/borrowing-fees.md — borrowing fee accrual (simplified in current implementation)