Taming GMX:GLP Volatility
How we got rid of the volatility and extracted returns from the industry’s largest on-chain perp, GMX.
Introduction to GMX and GLP
GMX is one of the largest on-chain decentralized exchanges in the space today. To this date, they have traded more than $70b in volume and consistently generate 100s of millions of volume per day. Their margin trading, which allows traders to use up to 50x leverage in particular has been at the center of their wild sustained success.
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Traders on GMX trade against a liquidity pool called GLP. This is a pool of assets, currently consisting of BTC, ETH, UNI, and LINK as well as an assortment of stablecoins(USDC, USDT, DAI, and FRAX). When a trader uses leverage to trade, they borrow funds from GLP to trade. If they win they take the winnings and if they lose, they pay the GLP pool. Since the launch of GMX in August 2021, traders generally tend to lose to the pool resulting in a gain in the value of the GLP. This can be seen by looking at the historical performance of ‘Trader Net PnL’ on GMX’s stats page and is also confluent with academic studies looking into the profitability of traders.
GLP also earns a portion of fees from swaps, lending fees from when traders borrow to trade, and liquidation fees. 70% of the fees generated on the platform are then directed towards GLP holders and 30% are directed towards GMX stakers.
Due to these favorable settings, GLP has been a popular place for longer-term investors to park their funds. GLP is one of the few services that have seen continued growth during the bear market.
Although GLP holds a good portion of stablecoins, it also consists of a basket of BTC, ETH, UNI and LINK, some of which have seen more than an 80% fall in prices. The fluctuations of these assets contributed to the general downward price movement of GLP(green line) over the past year. Thankfully, this was impressively counterbalanced by the large amount of fees generated by the platform and is ultimately looking relatively flat as we end the tumultuous year(blue line).
Delta-neutral GLP
At Flynt, we thought we could improve upon GLP by neutralizing the directional parts of GLP by shorting the fluctuating assets such as BTC, ETH, UNI and LINK. So we went ahead and backtested the strategy.
The GLP position is held in a public address and the short positions are maintained on Binance for optimal entry and exit pricing.
Performance Results
We tested a number of different rebalancing strategies and will be running the live strategy using the C settings. Average annual returns were 18.96% and the maximum drawdown was -3.5%. Although we plan to open up withdrawals weekly as the longest loss period lasted 51 days, we advise subscribers to approach this strategy with a longer time frame(+3 months).
Compared to the GLP+fees strategy ‘Setting C’ looks like it tamed the volatility quite nicely.
The strategy will go live on the 28th of December 2022.
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Disclaimers: The main results are from a backtest, ie a simulation based on historic data. We did however try to model it as conservatively as possible. This strategy may undergo changes in settings during its operation to further lower volatility and improve profitability. This post is not financial advice and please remember past performance does not guarantee future results.
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