Written by @arthurstern

Introduction

GMX is a decentralized spot & perpetual exchange that supports low swap fees and zero-impact trades on Avalanche and Arbitrum. The platform allows traders to leverage long and short up to 30x on several assets (WBTC, ETH, LINK, and UNI).

Opportunity

The crypto derivatives market off-chain is ~40x larger on Binance and centralized parties vs. decentralized derivatives platform. There is a massive opportunity for a decentralized platform to conquer existing market share and win as the derivative market expands.
Additionally, there is a growing demand for decentralized protocols as continued regulations come to crypto exchanges, and users opt for decentralized solutions where there are fewer KYC and location issues.
Decentralized trading platforms’ most significant issue is attracting liquidity. GMX does so by offering lucrative staking incentives via their GLP token.

Value Proposition

Platform Users

– Real liquidity for leveraged trading
– Efficient swaps vs. other DEXs

Liquidity Providers

– Sustainable yield opportunities with the yield coming from traders and not incentivized by token emissions.

The GMX platform has a strong positive feedback loop:

More liquidity on the platform due to high GLP Yields
More trades due to large liquidity and strong product offerings
More fees due to higher trade volumes
More liquidity is attracted because higher trade volumes/fees translate to higher yields

Tokenomics

100% of fees from market making, swap fees, and leverage trading on the GMX platform are accrued to GMX stakers (30%) and GLP holders (70%).
GLP is a basket of currencies that you buy & provide liquidity. Traders then use your liquidity to execute trades.

Present GLP composition on Arbitrum: 30% ETH, 18% BTC, 48% Stables, and the rest in UNI, LINK

GMX is the utility & governance token of the platform. Allows stakers to receive 30% of the fees collected across the platform

Strategies

Basic

Invest purely in GMX and earn ‘real’ fees from traders utilizing the platform. Earn yield in AVAX or ETH depending on if you’re on Avalanche/Arbitrum. Staking GMX is the ideal strategy if you’re long the GMX platform. You can currently earn a 21% yield by staking GMX.
Invest in GLP, a diversified pool of assets similar to Tricrypto on Curve. Earn the majority of GMX trading fees while also longing a basket of assets you’re bullish on. Keep in mind you’re providing liquidity, and your principal can fluctuate if

Price of assets in the pool appreciate/depreciate
Traders win more than they lose, which will deplete the pool and lower your principal investment

Yield is paying ~24% for GLP holders

Advanced

Hedge your portfolio by borrowing BTC/ETH/AVAX and minting GLP

Short a volatile asset to long a volatility-muted asset while earning yield

Leverage other DeFi protocols utilizing GMX. Umami Finance and other protocols are building on top of GMX and offering lucrative yield opportunities (upwards of 20% on delta-neutral positions).
Leverage trade on GMX (wouldn’t recommend unless you’re an expert trader as historicals show that traders lose more on average).

Risks

Smart contract risk
Holding GLP means indirectly exposing yourself to the basket of assets held in GMX’s liquidity pool, so market downturns can decrease GLP’s price.
Holding GLP means being an LP on the trading platform, so if traders start winning on average, you will lose money. Historically, this is not the case.

On average, traders lose a lot more than they win
Source: GMX Analytics

Limited collateral options vs. FTX and other larger perp exchanges.
If we are in a prolonged bear market, leverage trading diminishes, which decreases fees and yield opportunities on GMX.

Future Catalysts [2022]

DOPEX Integration

Dopex is testing out Atlantic options, which function as liquidation insurance for levered GMX positions. Providing liquidation insurance on highly leveraged plays is an attractive offering to increase trading on GMX.

X4 AMM

GMX team is developing a new AMM that gives pool creators and projects more control over pool functions, including dynamic fees and more tokens. You’ll be able to trade yield-bearing tokens, and the swap will also function as an aggregator (similar to 1inch), allowing for more efficient trades.

PvP AMM

A new AMM model that pits traders against each other. Allows you to leverage trade with any token combining the GLP model and order book model. The new AMM will increase trading optionality and more efficient leverage options.

Final thoughts:

GMX is shining in the bear market, up 92% vs. ETH (32%) the last month. It’s one of the few protocols earning actual revenue and offering strong yield without diluting their token supply. Like other DeFi blue-chips such as Curve, GMX is slowly becoming a DeFi primitive where other DeFI protocols are building on top of it.

In the last 30 days, GMX revenues are within the top 16 of all crypto protocols
Source: Token Terminal

As we see increased demand for decentralized perpetual trading platforms, GMX remains a strong contender to grow its market share. Unlike DyDx, which doesn’t return trading fees to token holders, GMX distributes 100% of trading fees to token holders, creating a sustainable tokenomics model.

In addition to perpetual trading, GMX’s ability to facilitate efficient swap trading (via oracle pricing system and GLP routing) allows it to compete with some of DeFi’s most prominent DEX protocols.

We are seeing a rise in ‘smart money’ wallets holding GMX, and I don’t expect this to slow down as the protocol grows.

substack.com/redirect/4fe9302d-c657-4a4c-8fc1-2db766946228?u=5572196
Source: Nansen

Thanks for reading! If you enjoyed this post, follow me at @arthurstern on Twitter for more DeFi-related content.

Resources & Further Reading

– GMX Staking
– GMX Analytics Dashboard
– DOPEX / GMX Integrations
– Umami Finance / GMX Integrations