As the FTX Door Closes, Another One Opens.

Published in

Magnus Capital

7 min readDec 13, 2022

The infamous FTX crash sent a shockwave of fear and distrust throughout the crypto market. More specifically, centralized exchanges have lost the trust of the public with most of the largest exchanges since the event being questioned of their solvency. Until much regulatory action is taken to prevent exchange insolvency; investors are more likely to hold large amounts of capital in a wallet rather than on exchange. This presents an opportunity in DeFi as capital gets dispersed elsewhere in the market. It would make a lot of sense that as traders look for safer alternatives to centralized exchanges they would find themselves moving their funds to decentralized derivatives exchanges where they can have access to all the trading tools and liquidity that attracted customers to CeFi in the first place. More importantly, it is near impossible for exchanges to secretly move funds with every transaction documented on the blockchain.

Today we will highlight some projects that one could expect to reap the benefits of this decentralized derivatives narrative.

GMX

The largest decentralized derivatives exchange, GMX, is an Arbitrum/Avax based perpetual futures exchange. Users must only connect their wallet using Coinbase Wallet, MetaMask, or WalletConnect to obtain access to ETH, BTC, LINK, and UNI perpetual trading with up to 50x leverage.

Trader activity reached an all time high in November with the FTX collapse happening early in the month. As a result, the platform is earning more on fees which is being distributed to GLP stakers (70%) and GMX stakers (30%). This 30% is what we consider holder revenue, this can be used to perform a fair value calculation.

Fair Valuation

A revenue to fair valuation study is common amongst tech sectors in TradFi. It consists of applying a growth coefficient to a company’s annual revenue to retrieve a fair market cap value, then divide by total shares to obtain a fair price.

From https://microcap.co/startup-valuation-revenue-multiple/#:~:text=Based%20on%20this%20research%2C%20the,%2D400%25%20per%20year) we obtain that the growth coefficient of GMX, with a 317% increase in revenue over the last year, is 15. Now we can annualize this past November’s revenue and speculate that GMX’s yearly revenue should now equate to $61.08m. Finally, GMX’s total supply is 8,288,420…

This would dictate that GMX is trading at under 50% of its fair price. With cryptocurrency being such a speculative asset class there is not yet much revenue being produced in the space; it is rare to see currencies trade under revenue-calculated value by TradFi’s standards.

We don’t rush to take a position at ATH resistance but are watching for a breakout and retest to consider loading up.

DYDX

At a market cap of $247m this is the second largest decentralized derivatives exchange. DYDX excels by offering the most CEX-like experience in the DeFi space without the transparency compromise that comes with CEXs. Users are able to deposit funds to their protocol in one transaction and proceed to trade without interacting with the chain each time. DYDX also offers a greater variety of assets and order options compared to competitors such as GMX. Users can place any of the following orders on 37 different assets: market, limit, stop market, stop limit, take profit, and are able to toggle reduce-only, post-only and expiry time functions.

A drawback of this growth is that the supply of their token is rapidly increasing to fuel these incentives. Currently the supply is inflating at a rate of 25%/year. This has proven to be worth it so far with the platform’s user base doubling over the past year.

DYDX was clearly the first to capture users moving away from CEXs as it saw a 129% rally in the week following the collapse. After that massive move in volume it is now coming back into a RLZ that could make for a good buy.

HXRO

The Hxro Network is an open primitive for market-based applications on Solana. They believe that Solana is the best place to host derivatives, betting, etcetera, due to their high speed and low cost transactions. The HXRO token has an ever-growing list of revenue streams with their launch of Hxro Network. Hxro provides the infrastructure for derivative and parimutuel exchanges and front end applications to build with far more vast exchanging mechanisms and capital-efficient liquidity. In layman’s terms: thousands of user facing competitors in the derivatives space could create apps with far more trading selection (options and futures spreads for example) than that of a GMX or DYDX. The created apps leverage global aggregated liquidity for an enhanced user experience on day 1, and saving them the struggle of incentivizing liquidity providers. Thus creating opportunities for many strong alternatives to centralized trading, with as much or more optionality and liquidity. These liquidity solutions are made possible by the order flow from all applications and front-ends residing in the same global order books and global liquidity pools.

In addition there will be a native market maker, THEO for standard options. SAMM, their other native market maker, produces the same effect for parimutuel protocol. This permits binary-outcome betting markets, serving builders of gaming, gambling, sports betting, and other prediction markets.

Already there are promising projects building on the Hxro network that will generate volume and ultimately revenue for the network. Iconic Markets soft launched on December 5th, with their first prediction game, Moon-Rekt. Convergence, an RFQ (Request For Quote) service that permits transactions that require more liquidity than held by a protocol. That can easily be integrated with dapps on numerous other chains which will then feed volume/revenue to the Hxro Network.

The HXRO Flywheel of Value Accrual

The Hxro Network receives a 0.05% fee of all transaction volume that takes place on any of the futures applications built on their network, collected in USDC. A 3% fee is earned on all transaction volume that takes place on any parimutuel based application, reduced to 1.5% if paid in HXRO.

50% of that fee revenue is paid to HXRO stakers, in USDC predominantly. Fees paid in HXRO will be distributed as esHXRO to stakers, converted to unlocked HXRO over 1 year should the holder choose to claim rather than stake it. Right now, traders on the futures front end, OpenHxro, as well as other platform operators on the Hxro Network are rewarded esHXRO proportionate to the amount of volume they’ve transacted on the network.

The longer holders choose to stake their HXRO, the quicker their rewards will unlock.

This unlock mechanism incentivizes long-term staking of esHXRO, likely converting builders and users to long term stakers. As more apps and platforms integrate with Hxro Network, more transaction fees are collected, and more USDC fees are shared with stakers. Stakers realize the benefit of promoting more apps and users to migrate/integrate with the Hxro Network. With that, the network sees a positive feedback cycle that brings in more users, and generates more volume/fees and liquidity.

Now let’s speculate where this growth in volume could take the HXRO token…

Let’s assume that one day the entire Hxro derivatives network sees the same daily volume as the solo protocol; DYDX. DYDX boasts about $500m in daily trading volume over the past month (remember this is also a bear market where trading volume is much lower than usual). For HXRO, $500m/day in derivatives volume produces $250k/day in fee revenue. with 50% of network fees being paid to stakers, that equates to $125k/day. Out of the other 50% of the fees collected, approximately 20% will accumulate in the treasury (50k/day). With 70% of fees adding direct value to the network the daily revenue of $175k ($125k + $50k) annualized comes out to a yearly revenue of about $63.9m. Now let’s perform our cost analysis using the same growth coefficient as GMX, and let’s pessimistically assume that by the time Hxro reaches this volume; all 1,000,000,000 HXRO tokens are in circulation.

Now remember this accounts only for volume passing through the derivatives protocol. The chains value extraction on a per-volume basis is much higher in the parimutuel protocol. Below we’ve visualized the drastic effect that parimutuel volume has on the tokens fair price.

Every $10m in volume produces $180k in fees (assuming 80% is paid in HXRO as large fee contributors will very likely take advantage of a 50% fee discount).

Approaching $10m in daily volume gives us a fair price valuation of >$1.50. Not to mention the direct effect on the tokens market price as a result of $144k worth of HXRO that would have to be purchased and temporarily removed from circulation to pay those fees (again assuming 80% of fees are paid in HXRO).

Of course we have no idea how long it will take for the Hxro network to accrue this much daily volume. This has just been a mathematical method of expressing that sentiment that at <$0.10 it could be a fantastic value purchase.

We have witnessed panic and forced selling due to the collapse of the HXRO tokens most liquid exchange (FTX). After speaking to the team we are not worried about future contagion from FTX, Alameda or SBF. We are taking this opportunity to add to our HXRO position.

This commentary is provided as general information only and is in no way intended as investment advice. Any decision to invest or take any other action with respect to the digital assets and/or securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this article. Past performance is not indicative of future results.

GMX Links

Website: https://gmx.io/#/

Twitter: https://twitter.com/GMX_IO

Discord: https://discord.com/invite/cxjZYR4gQK

Telegram: https://t.me/GMX_IO

Github: https://github.com/xvi10

DYDX Links

Website: https://dydx.exchange/

Twitter: https://twitter.com/Magnus_fund

Reddit: https://www.reddit.com/r/dydxprotocol

Github: https://github.com/dydxprotocol

HXRO Links