This article is a simple basic introduction to GMX, suitable for beginners who want to understand GMX. GMX is a decentralized derivatives exchange, which uses a liquid trading pool composed of a basket of assets, and can trade spot and leveraged perpetual contracts. This article is compiled, organized and written by Blue Fox Notes, a column in the dynamic zone. (Recap:The GMX Ecological Landscape: Checking the DeFi Projects Derived from GLP and GMX ) (Background Supplement:GMX listed Binance soared 40%｜Analysis of 6 iterations: innovative shell, Ponzi core )
GMX mode
GMX’s current main business is perpetual contract and spot trading. Among them, the zero slippage of contract trading is its main attraction. The fee is 0.1%, the maximum leverage is 50 times, and there are no KYC and geographical restrictions. GMX is not an order book model. In the GMX market, one party is a liquidity provider and the other party is a trader. Liquidity providers and traders are counterparties.
Liquidity providers deposit their assets in liquidity pools and become counterparties to traders. There are currently 8 assets in the pool. At present, ETH and BTC are about 50%, stable coins are about 48%, and the remaining 2% are LINK and UNI. Overall, the mainstream assets in the encryption market are the main ones. Liquidity providers enter or exit the market by minting or burning GLP.
GMX uses oracle prices provided by Chainlink and prices from major exchanges in the aggregation market. It does not use an AMM model (xy=k), nor does it use an order book model (dydx or something). By adopting oracle prices, it is beneficial to achieve its goal of zero slippage.
GMX’s operating data
GMX was launched in September 2021. It has been on Arbitrum for more than a year now, and a version was also deployed on Avalanche later. As of writing, its current overall transaction volume exceeds US$95 billion, fees exceed US$130 million, overall user numbers exceed 200,000, and monthly unique users are around 30,000. In addition, its GLP pool exceeds US$400 million, of which more than US$389 million on Aribtrum and more than US$59 million on Avalanche.
How GMX Attracts Liquidity Providers
Since GMX does not use the order book model, who is the counterparty of the trader? The counterparty of GMX traders is the GLP pool. The GLP pool is the assets deposited by liquidity providers. So, what are the benefits for liquidity providers of depositing assets into GLP pools?
GMX’s liquidity providers provide liquidity to capture fees and transaction income. This is different from some DEX projects that mainly rely on token incentives, and it has completed a cold start. This is not uncommon in the entire DeFi space. At present, dydx is still in the stage of a large amount of incentives through tokens.
As mentioned above, the current GLP on GMX exceeds US$400 million, of which US$389 million on Arbitrum and US$59 million on Avalanche. Current liquidity providers can obtain the following benefits by providing liquidity on GMX:
Earn LP fees from traders’ contract transactions or token exchanges (get 70% of them, paid in ETH/AVAX) Earn profits from contract traders’ losses (of course, if traders make profits, they will also bear it) loss) Earn esGMX income (token incentive part)
In addition, the GLP held by liquidity providers is also an asset index with corresponding risk exposure.
When a liquidity provider deposits assets into the pool, a certain amount of GLP is obtained, which represents the liquidity provider’s share in the pool. This share does not represent the share of the asset (such as ETH) deposited in the pool at the beginning, but represents the index of various assets in the pool. Of course, when liquidity providers exit, they can also use any asset in the index (such as wBTC) to complete the exit.
The price of GLP = the total value of the asset index / the total quantity of GLP, where the total value of the asset index also includes the unrealized profit or loss of the open position. All in all, GLP includes a basket of encrypted assets and is an asset index, so it is essentially an asset portfolio. It changes based on changes in the value of assets in the pool, which also includes rebalancing of assets in the pool.
There is a fee to generate or burn GLP. The fee is high or low depending on whether the asset weight in the index is below or above its target weight. If the asset is lower than the target weight, it encourages liquidity providers to deposit the asset, so the GLP generation fee for depositing and minting the asset is lower, and vice versa, the fee is higher. Destruction follows the same pattern. Its goal is to achieve the current weight gradually moving towards the target weight.
For example, the current target weight of ETH is 35%, but the actual weight is only 30.78%, so the user deposits ETH at this time, and the cost of minting GLP is low. If the user withdraws to obtain ETH, the exit fee is higher; the goal of wBTC The weight is 15%, and the current actual weight is 19.66%, then the user’s deposit fee will be higher, and the withdrawal fee for wBTC will be lower).
The target weight is not fixed, it is adjusted according to the trader’s open interest. For example, if traders do a lot of long ETH, then GLP will set a higher ETH target weight; if a lot of short ETH, the target weight setting of stablecoins will tend to be higher. This change in target weight is essentially a rebalancing of assets in the GLP pool.
How GMX Attracts Traders
An exchange has no foundation without traders. Traders are the cornerstone of the continued development of any DEX. So, what are the attractions of GMX for traders?
For traders, the zero slippage of the contract is its main attraction. In addition, no KYC required, no geographical restrictions, and on-chain transparency also have their convenience and appeal. At present, GMX does not need to use token incentives to attract users to trade, but to attract users through the product itself. This shows that it has completed a cold start and has the opportunity to explore a model that does not rely on token economic mechanisms to attract traders. This is also an organic development. kind of.
In actual transactions, if a trader is long on an asset (such as ETH), the trader does not actually borrow ETH, but only rents the upside of ETH; if a trader is short on an asset (such as wBTC), the trader does not actually borrow Instead of borrowing the stablecoin, the upside of the stablecoin relative to wBTC is leased.
When closing a position, if the trader wins, the GLP pool will pay the user funds; if the trader loses, it will be deducted from the user’s margin and transferred to the GLP pool. The relationship between the two is the counterparty.
GMX’s Token Economic Mechanism
The platform token of GMX is GMX. Throughout its economic mechanism, the fees contributed by traders are the support behind the value of GMX.
After staking GMX, GMX holders can get 30% of platform fees, esGMX, and multiplier points. Among them, esGMX can obtain pledge rewards (similar to GMX), and can also be converted into GMX (if you want to withdraw within one year, you need to deduct a certain percentage). The multiplier points can be used to increase the rate of return of GMX staking, the increase rate=100*(staked multiplier points)/(staked GMX+staked esGMX).
The platform fees here include: transaction fees (0.1% of opening or closing positions), exchange fees (0.2-0.8% of collateral will be charged if exchange is required for closing positions), borrowing fees ((borrowed assets/GLP total assets)*0.01%, accumulative per hour), GLP generation or destruction fee (depending on whether the asset is lower than or higher than the target weight). Expenses are distributed every Wednesday.
It was just mentioned that GMX tokens can get 30% of the platform transaction fees, and the remaining 70% will be distributed to GLP (liquidity provider). Most of the platform benefits to GLP are mainly because liquidity providers bear delta risk and counterparty risk. Only sufficient income can motivate liquidity providers to provide liquidity. When there is enough liquidity, it will also bring a better user experience for traders. In addition to 70% of platform fees, GLP can also obtain profits from traders’ losses, esGMX.
Potential risks and possible limitations of GMX
GMX has decent numbers in a bear market. But that doesn’t mean it’s without potential risks. Among the possible risks are:
1. Counterparty risk
In order to achieve zero slippage for traders, GMX resists the risk of the counterparty through the GLP pool, which is also its potential risk. Its logical premise is that traders as a whole, generally speaking, cannot profit as a whole. This is an important prerequisite for GMX to achieve sustainability, and it is also a prerequisite for attracting GLP liquidity providers to provide liquidity. If this point is broken, there will be greater pressure on GMX.
For example, if the market crashes momentarily, short traders profit handsomely. The trader’s profit comes from the payment of the GLP pool. The value of assets in the GLP pool falls, and stablecoins are used to pay traders’ profits, so that the overall TVL of GLP decreases. At the same time, liquidity providers have also suffered losses, and their willingness to provide liquidity has declined, which will lead to a further decline in TVL. Although it is not easy to be short on the whole, a sudden sharp drop will cause greater losses.
In response to this sudden market crash, GMX will also set a dynamic upper limit on the real-time net exposure of all asset positions of both long and short sides to prevent extreme situations (the balance between long and short sides can be adjusted to a certain extent to achieve risk hedging). However, this affects the user experience of traders to a certain extent. In addition, GMX also needs to use part of its accumulated profits from the GLP pool to deal with unexpected possible situations.
2. It is more difficult to introduce more assets
So far, the main assets on GMX are ETH, BTC, and stablecoins. The model of using the oracle machine is not a big problem for large-scale liquid assets. If it is replaced by less liquid assets, it may cause GLP to cause large losses in extreme market conditions or when it is vulnerable to market manipulation. .
In order to control risks, it is difficult for GMX to introduce more low-liquidity assets, which causes some problems in its scalability.Of course, if you look at it from another perspective, since most of the trading volume is not from the trading volume of the Standing Committee assets, but from the trading volume of the main assets, the impact of not introducing more assets on its trading volume will not be very significant.
epilogue
The model of GMX is different from the traditional CEX model (including the model different from dydx). Through the transparency and openness of the blockchain, it promotes the development of a new model of contracts on the chain, a mutual interaction between liquidity providers and traders The opponent’s mode. The premise of the sustainability of its model is that it is difficult for traders as a whole to make very large profits in the market. Of course, the risk of being a liquidity provider is also largely hedged as traders have both long and short sides.
Unsiwap has created the era of encrypted native DEX by launching the AMM model, and no longer relies on the order book model of CEX; will the GLP pool launched by GMX as the counterparty model of the transaction also break the status of the contract transaction order book model? It is still unknown. However, what is very interesting is that the encryption-native DeFi model has indeed blazed its own path.
Risk warning: All the above analysis is only a one-sided observation of technology and market, not necessarily correct, please be sure to keep your own judgment and do a good job of risk control.
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