GMX: A Brief Explanation
Discover The Next Crypto Derivatives Leader In This In-Depth Article
GMX is one of the few cryptocurrencies to have risen in value since the start of 2022. Today we’ll discover the next crypto derivatives leader in this in-depth article.
GMX is a decentralized spot and perpetual contract trading platform that supports low swap fees and zero price impact trades allowing users to leverage up to 30x on their trades.
This protocol first went live on Arbitrum in September 2021 before launching on Avalanche at the beginning of 2022.
Trading is supported via a unique multi-asset liquidity pool that generates rewards from market making, swap fees, leverage trading (spreads, funding fees & liquidations) and asset rebalancing which are channelled back to liquidity providers.
What Is GMX?
There are, ultimately, two things which help cryptocurrency to act in the way that it does:
- Decentralised Finance (DeFi): DeFi is the concept that people do not need to have banks to access financial services or simply store their money.
- Crypto Exchanges: Crypto exchanges allow the buying, selling and exchanging of cryptos. It is through this buying and selling that cryptocurrencies get value as the laws of supply and demand take effect, with investors discovering the values that they are able to either buy or sell a token or coin at.
While the basics of DeFi, such as having something other than traditional, fiat currency that serves as a store of value, are as old, if not older than the concept of the blockchain itself, there has been a growth in developments that take the concept a little further. For instance, there are plenty of places that allow you to take out a loan, either with collateral or without it, in cryptocurrency, as well as places, systems, and tokens which allow people to quickly and cheaply transfer money across international borders.
Some platforms take things to a new level of complexity, and one of them is GMX. This system aims to combine advanced decentralised finance with the concept of the crypto exchange.
GMX is a decentralized derivative exchange currently deployed on the Arbitrum One Layer 2 (L2) scaling solution and the Avalanche blockchain.
The protocol offers spot trading for a handful of top cryptocurrencies and stables, namely ETH, WBTC, LINK, UNI, DAI, USDC, USDT, and FRAX.
Its perpetual swap markets allow traders to long or short major tokens with up to 30x leverage. Rather than being done through an order book, this is done via a shared liquidity mechanism called GLP which functions as a pool of all tradable assets. Trades are made through the current oracle price (secured by Chainlink) with a theoretically indefinite depth.
The GMX system may be divided into two distinct functional tokens:
- GMX Token for governance.
- GLP Token for trading liquidity.
The project’s $260M+ total value locked (TVL) on Arbitrum makes it the largest dApp on the largest L2 as it stands today.
GMX Product Offerings
- Swaps can be executed at market price as determined by oracles Limit orders are available.
- Fees range from 0.2% to 0.8% depending on the asset composition of GLP.
- Utilizes a shared liquidity mechanism via GLP (more details below).
- Traders can go long or short on their preferred pair.
- Leverage ranges between 1.1x and 30.5x.
- Market, limit, take-profit, and stop-loss orders are available.
- 0.1% position opening/closing fee.
- Hourly borrowing fee calculated by:
— Assets Borrowed — Total Assets in Pool 0.01%
- Only assets in the GLP basket are tradable.
— Utilizes a shared liquidity mechanism via GLP.
- GLP is the liquidity provider (LP) token consisting of an index of assets with target component weights that change with net perp positioning.
- Can be minted with or burned to redeem any index component asset.
- Dynamic GLP swap fee pricing for the component assets is designed to bring actual component weights to target weights.
— For example, if GLP contains Ether (ETH) and ETH is above/below its target weight, trade directions that decrease/increase ETH in the pool will be incentivized with lower fees.
- GLP holders act as the single counterparty to all perp traders, and hence, will bear the P&L against perp traders’ net position.
— Stakers of GLP will accrue 70% of the platform fees as LP rewards.
— Rewards are paid out in escrowed GMX (esGMX) and ETH (for stakers on Arbitrum) or Avalanche (AVAX) (for stakers on Avalanche)
- GMX, the exchange’s governance token, can be staked to receive 30% of platform fees in:
— Multiplier Points
— ETH (for stakers on Arbitrum)
— AVAX (for stakers on Avalanche)
— Can be staked for rewards, just like GMX.
— Can be vested over a year to become GMX tokens.
- Multiplier Points
— Can be compounded to boost ETH or AVAX rewards.
— May have future bonus benefits.
What Is The GMX Token?
GMX is the utility and governance token of the platform which allows stakers to receive 30% of the fees collected from across the platform.
It is available on Arbitrum and Avalanche and can be bridged using Synapse Protocol.
Users can stake their GMX on either Arbitrum or Avalanche and earn 3 different types of rewards:
- Escrowed GMX (esGMX)
- Multiplier Points
- ETH fees (Arbitrum) and AVAX fees (Avalanche)
What Is GLP Token?
GLP Token is the protocol’s native liquidity provider token and is essentially an index of the large-cap assets supported by the GMX protocol (currently including ETH, BTC, LINK, UNI, USDC, USDT, DAI, MIM and FRAX) which auto-re-balances weekly.
The asset serves as an index of the assets that exist within the GMX multi-asset pool system, and it can also be staked to earn esGMX and ETH rewards over time. Notably, GLP stakers receive 70% of GMX’s accrued fees.
A perpetual swap is like a futures contract that has no expiry, meaning the instrument can be held indefinitely. In DeFi, perpetual are used to speculate on crypto price action and require little capital upfront to support very leveraged positions.
As for GMX specifically, the project provides non-custodial perpetual swap trading with an emphasis on friendly UX. On GMX, traders can make longs and shorts with rapid transactions and low swap and transaction fees, while liquidity providers (LP) can earn by providing assets to the protocol’s multi-asset pool system to support leverage trading and swaps.
There are multiple competitors within the DeFi space that also offer perpetual futures. At the same time, there is the looming threat of centralized exchanges that will always have a portion of the market share.
So what makes GMX special?
Due to their unique value proposition, GMX is positioning itself to be a leader in this derivatives product offering space because of two main points:
- Strong value accrual to token GMX holders and liquidity providers, denominated in ETH.
- A non-inflationary tokenomics model: GMX liquidity model (GLP) doesn’t require inflationary (farm and dump style) token incentives.
GMX is a popular decentralized exchange that specializes in perpetual futures trading. Launched on the Ethereum Layer 2 network Arbitrum in late 2021 and later deployed to Avalanche, the project has quickly gained traction by offering users leverage of up to 30 times their deposited collateral.
Leverage trading is the act of borrowing funds from financial platforms in order to increase one’s exposure to price movements. Leverage trading has become an essential part of the crypto ecosystem in recent years. Among other things, it allows market participants to profit from price downturns, reduce risk in uncertain conditions, and bet big on an asset when they have conviction.
There are several ways of taking on leverage in crypto. Binance, FTX, and other centralized exchanges offer customers the ability to borrow funds for trading purposes. Binance and FTX both let customers borrow a maximum of up to 20 times their initial deposit. DeFi protocols like Aave and MakerDAO issue loans against crypto collateral in a permissionless manner. More recently, traditional finance companies like GME Group and ProShares have started offering their institutional clients access to leveraged products such as options on Ethereum futures contracts and Bitcoin Short ETFs to their institutional investors.
GMX differs from such services in that it’s a decentralized exchange that offers leverage trading services. In that respect, it combines a similar experience to other DeFi exchanges like Uniswap with the leverage trading services offered by the likes of Binance. On GMX, users can take up to 30x leverage on BTC, ETH, AVAX, UNI, and LINK trades. In other words, if a trader deposited $1,000 worth of collateral to GMX, they’d be able to borrow up to $30,000 from its liquidity pool.
Trading On GMX
Trading on GMX is supported by a multi-asset GLP pool worth more than $254 million at press time. Unlike many other leveraged trading services, users borrow funds from a liquidity pool containing BTC, ETH, USDC, DAI, USDT, FRAX, UNI and LINK rather than a single entity.
Users can go “long” “short” or simply swap tokens on the exchange. Traders go long on an asset when they expect its value to increase, and they short in expectation of being able to buy an asset back at a lower price. On GMX, users can select a minimum leverage level of 1.1x their deposit and a maximum level of 30x on long and short trades.
GMX is powered by Chainlink Oracles. It uses an aggregate price feed from leading volume exchanges to reduce liquidation risk from temporary wicks. A liquidation occurs when a user’s collateral becomes insufficient to maintain a trade; the platform then forcefully closes the position and pockets the deposit to cover its losses.
When a user opens a trade or deposits collateral, GMX takes a snapshot of its dollar value. The value of the collateral does not change throughout the trade even if the price of the underlying asset does.
Trading fees to open or close a position come in at 0.1%. A variable borrow fee also gets deducted from the deposit every hour. Swap fees are 0.33%. As the protocol itself serves as the counterparty, there’s minimal price impact when entering and exiting trades. GMX claims it can execute large trades exactly at mark price depending on the depth of the liquidity in its trading pool.
When a user wants to go long, they can provide collateral in the token they’re betting on. Any profits they receive are paid in the same asset. For shorts, collateral is limited to GMX’s supported stablecoins — USDC, USDT, DAI, or FRAX. Profits on shorts are paid in the stablecoin used.
$GMX is the protocol’s utility and governance token. $GMX has a forecasted maximum supply of 13.25 million tokens, which can be increased if there are more products launching and liquidity mining is required. But that will be subjected to a governance vote before any changes.
Here is how the 13.25M of $GMX token will be distributed:
- 6 million GMX from the XVIX and Gambit migration.
- 2 million GMX paired with ETH for liquidity on Uniswap.
- 2 million GMX reserved for vesting from Escrowed GMX rewards.
- 2 million GMX tokens to be managed by the floor price fund.
- 1 million GMX tokens are reserved for marketing, partnerships and community developers.
- 250,000 GMX tokens were distributed to the team linearly over 2 years.
The largest share of the tokens (45.3%) was allocated for the migration of XVIX and GMT (Gambit) token holders. The migration process involved swapping the original assets (XVIX, XLGE, & GMT) for $GMX at a price of 1 $GMX = USD $2.
The $GMX token has a special feature, called the Floor Price Fund. This fund is denominated in $ETH and $GLP and grows in two ways:
- GMX/ETH liquidity is provided and owned by the protocol, the fees from this trading pair will be converted to GLP and deposited into the floor price fund.
- 50% of funds received through Olympus bonds are sent to the floor price fund, the other 50% is used for marketing.
The floor price fund helps to ensure liquidity in GLP and provides a reliable stream of $ETH rewards for those who staked $GMX.
As the floor price fund grows, it can be used to buy back and burn GMX if the (Floor Price Fund) / (Total Supply of GMX) is less than the market price of $GMX. This results in a minimum floor price for $GMX in terms of $ETH and $GLP.
GMX is a user-friendly exchange that offers thorough data on trading, fees and liquidity. The platform has detailed information on its assets under management, trading volumes, fees, and trader positions. It also provides a documentation section and information on how to bridge to Avalanche or Arbitrum or to acquire GMX and GLP tokens. The exchange offers a simple way to understand its mechanisms.
In this article, we went through a brief explanation of the next crypto derivatives leader, GMX. Continue reading to learn about the most recent blockchain stories.