What is GMX
GMX is a decentralized perpetual exchange created by an anonymous team. GMX launched on Arbitrum on September 1, 2021, and went live on Avalanche on January 5, 2022. GMX currently supports spot swap and perpetual contract trading up to 50x leverage. Supporting orders include market orders, limit orders, and trigger orders (take profit/stop loss orders).
GMX has two native tokens. One of them is $GMX. $GMX is the utility and governance token of GMX. Holders of $GMX can participate in governance voting and stake tokens for rewards. Another token is $GLP. $GLP is GMX's liquidity provider token. Holders of $GLP, known as LP, can receive a certain percentage of the platform's trading fees as a reward for their provision of liquidity.
What is the mechanism of GMX?
Compared to dYdX, GMX is more decentralized. Instead of using dYdX's orderbook model, GMX has innovated a GLP mechanism. The GLP liquidity pool provides liquidity for trading and it consists of a variety of assets, including wBTC, wETH, stablecoins, etc. Under this mechanism, the platform divides its users into two categories: traders and liquidity providers.
With regard to traders, to make a leveraged trade, they need to first deposit collateral into the GLP pool. According to the rules of the exchange, the collateral for shorts and longs is different.
For instance, when a trader is long ETH, it can be described as the trader "renting out" ETH from the GLP pool, while when a trader is shorting ETH, he is "renting out" the stablecoins versus ETH from the GLP pool, thus corresponding to two different collateral. The assets in the pool are not actually lent. When a long position is closed, if the trader makes a profit, the long asset (in this case ETH) is withdrawn from the GLP pool and given to the trader as profits, while in case of a loss, the asset initially deposited is deducted and put into the GLP pool, i.e. the token of the profit and loss corresponds to the token of the collateral. The GLP pool is therefore equivalent to the trader's counterparty.
As for liquidity providers, $GLPs can be minted/burned by depositing/withdrawing a specific asset into the GLP pool, with a fee charged for both minting and burning. Each type of asset in the pool has a corresponding target weight, which is adjusted based on market conditions. If the current weight of an asset is higher than the target weight, a higher fee will be charged for depositing that asset, and as an incentive, the fee for withdrawing the asset will be reduced, and vice versa.
GLP pools are priced by an oracle provided by Chainlink, which is based on some centralized exchanges such as Binance and Bitfinex. This makes GLP extremely capital efficient. Trades can be executed with zero slippage, as GMX pulls prices in real time from CEXs to give traders the best execution, and LP’s are protected from suffering impermanent loss, as GLP LPs need not incur the cost of price discovery.
If you want to know more about oracle, please read this term: "What is Oracle".
What is the fee structure and allocation of GMX?
Compared with dYdX, GMX has more sources of transaction fees. There are two main parts: one is the fees incurred when minting/burning $GLP. As mentioned above, 0-80bps fees are charged according to the current weight; the other part comes from margin trading, where the transaction fee is 0.1% of the total position. At the same time, in margin trading, a "renting fee" is charged to the GLP pool. The calculation formula is Assets Borrowed / Total Assets in GLP* 0.01%, and it will be charged every hour. 70% of the fees charged by the platform will be distributed to $GLP holders, and the remaining 30% will be distributed to stakers of $GMX.
100% of GMX revenue is distributed to $GMX and $GLP holders. The total reward for $GMX holders is 30% of the transaction fee (in the form of ETH or AVAX) plus $esGMX tokens and multiplier points obtained from staking. $esGMX can also be re-staked like $GMX to get the same benefits, or exchanged for ordinary $GMX tokens after a one-year lock-up period.
$GMX/$esGMX stakers can also receive multiplier points with 100% APR per second, which can also be staked again, aiming to incentivize the holder to keep staking $GMX. And once the user withdraws the staked $GMX, the corresponding proportion of multiplier points will be burned. Similarly, $GLP holders earn 70% of transaction fees (in the form of ETH or AVAX) plus $GMX obtained by staking.
What makes GMX unique?
Apart from its innovative GLP mechanism, another characteristic of GMX is its successful integration of many DeFi protocols, with strong composability. As of February 2023, 28 projects have been built on top of GMX, which can be divided into five categories: vaults, lending, social trading, options, and others.
Specifically, Vaults are the biggest category with 13 projects. As we learned earlier, GLP holders continuously earn profits, which can also be reinvested into the GLP pool for further profits. However, many people often forget this, missing out on some easy money. Vaults were created to solve this problem - by simply depositing your GLP into the protocol, it will automatically reinvest the generated profits back into the GLP pool, increasing your profits.
In addition, some protocols (such as Rage Trade, Neutra Finance, and Umami) have designed more complex GLP strategies based on this. The most common one is Delta Neutral, which aims to help GLP holders hedge risk exposure in bear markets. Each protocol may have subtle differences in implementing this strategy, but the overall goal is to maximize returns while ensuring safety, thereby attracting more users and competing for more GLP shares.
Behind vault products, lending is the second biggest category building on GMX, enabling degens to borrow against their GLP holdings and add leverage to their yield farming. The major players in this field include Vesta, Sentiment, and Tender.fi, etc. The remaining categories currently have few players, but this also means there is great room for growth.
You might also be interested in the following research on GMX:
In summary, as two of the top perpetuals trading exchanges in the current crypto market, the influence of dYdX and GMX is evident. In 2022, the market share of these two exchanges has been constantly changing, with GMX showing significant growth momentum that surpasses dYdX. However, what the future holds remains to be seen. Will dYdX maintain its leading position, or will GMX overtake it, or will other dark horses emerge? Let's wait and see.
If you want to learn more about the perpetual trading market, you can read this article: Crypto Decentralized Derivatives Exchange 2022 Q3 Report.
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