Deep Dive into GMX: A Decentralized Perpetuals Exchange
In the wake of FTX's spectacular collapse, I look at this decentralized alternative that has generated $5 million of fees this past week alone
First off, I would like to disclose that I have a vested interest in the success of GMX (www.gmx.io) as I hold both the GMX and GLP token. However, I try to be as objective as possible in this post.
With the collapse of FTX and other CEXs in the space, I imagine that a lot of users are looking for better and trust less alternatives. FTX was widely adored by many traders in the space, and although I am far from one, I would like to share a decentralized alternative to trading on centralized exchanges. For 10% off trading fees on the platform, sign up to the platform on Arbitrum here.
GMX is a decentralized perpetual exchange running on both Avalanche and Arbitrum, an Ethereum layer 2. GMX has gotten a lot of attention recently as a "real yield" protocol, that is able to generate sustainable fees from its user base. GMX's target audience can be split into two general groups: traders and hedgers.
Traders are able to trade perpetuals on ETH/BTC/LINK/UNI/AVAX with up to 50x leverage in a fully permission-less manner on-chain. Unlike other protocols that use an automated market maker (AMM) model, traders on GMX are able to perform swaps for zero slippage due to the nature of how liquidity is provided to the protocol.
GMX has seen around $100M in volume per day on average and has a total cumulative volume of around $67B since its inception. However, due to the current high volatility, volume has spiked up to around $300-500M per day and even over $1B per day occasionally. During this time, it has also generated $88M in fees. GMX generates fees from users who swap on the platform, get liquidated, or margin trade. Fees also come from the burning and minting of GLP, the platform's counter party token, which is brought up later. All of these statistics can be tracked at https://stats.gmx.io/ .
Two main tokens exist within the GMX system: GMX (the native governance token) and GLP (the GMX liquidity token). The GMX token is a conventional governance token that can be staked to receive 30% of protocol fees. The GMX token was recently listed on FTX (lol) and Binance, allowing for more in-flow into the system. GLP is a rather unique token that allows users to be the counter party to traders using GMX. GLP is a token backed by a basket of other tokens that can be traded on GMX.
On Arbitrum, GLP is composed of 33% ETH, 20% WBTC, 45% Stables (USDC+USDT+DAI+FRAX), and 1% of UNI and LINK respectively. Users can buy GLP in exchange for any of these tokens to provide liquidity to traders and earn 70% of protocol fees. The balances mentioned above are target balances that GMX sets. These fluctuate subtly depending on which tokens are being traded the most. GMX rebalances this basket to its target rate by varying the swap fee for the tokens. For example, if the pool is low on ETH, swap fees from ETH to GLP will be lower than from USDC to GLP, to incentivize the rebalancing of the pool. Unlike AMM models, liquidity providers on GMX do not experience impermanent loss as liquidity is always provided in a one-sided manner.
GLP holders provide traders on GMX with a counter party. This means that GLP holders are in active bets against traders. The price of GLP depends on the current supply of the token, but also the PnL of traders using GMX. Historically, traders have always made net losses, meaning that GLP appreciates against these trader losses. However, it is important to keep in mind that if traders become hugely profitable, GLP will take a hit.
Currently, GMX and GLP have APRs of 27% and 50% respectively, paid almost entirely in real yield from the platform revenues. These insanely high APRs are due to the recent volatility and are won't last. However, even without much volatility, these APRs hovered around 15%-20%. These APRs are paid out in ETH (or AVAX on Avalanche) and esGMX (escrowed GMX token that vests over a year). Unlike many crypto projects out there, GMX launched with zero VC funding and was fully community funded. VCs that hold GMX or have an interest in the success of the platform all entered the project through the public market.
Despite the bear market, GMX continues to generate yield at an increasing pace. In the past five days, GMX has accrued over $5,000,000 in fees and has generated an average of $580,000 per day for the past week (as per www.cryptofees.com).
I hope that this deep dive was interesting and brings your attention to a rapidly growing protocol on Arbitrum and Avalanche. With the Arbitrum space heating up and a potential airdrop of the $ARBI token around the corner, it may be interesting to explore GMX and other protocols on the layer 2. Use the protocol on Arbitrum at https://app.gmx.io/#/trade/?ref=reddit for a 10% discount on fees.