Traders’ new darling GMX – DEX knows no crypto winter

Since its appearance in late 2019, the ecosystem of decentralized finance (DeFi) experienced a considerable boom. Indeed, it has seen the birth of a multitude of protocols through various application domains. Initially, this craze was initiated by the creation of decentralized exchange platforms. Today we will explore GMXone of The fastest growing decentralized exchange since the beginning of 2022.

GMX: Decentralized Derivatives Exchange

GMX is a decentralized financial project, belonging to the category of decentralized trading platforms.

First introduced around August 2021, the project was placed on the Arbitrum mainnet in September 2021. GMX will be next also located on the Avalanche blockchain.

So far, the platform is developed by an anonymous team. Something relatively common in the DeFi ecosystem, but not to be underestimated in terms of the risks it can bring.

The GMX logo.

On his site, the protocol is present as follows:

“GMX is a decentralized and permanent exchange that supports low exchange fees and price-neutral trading. »

This clear and concise description presents all the main functionalities offered by GMX. However, when we look at the details, the platform offers a host of services, which we know are highly valued by traders.

Swaps, perpetual contracts and leveraged trading

In its simplest form, GMX is an exchange platform for exchanging cryptocurrencies among themselves. The platform supports 8 cryptocurrencies namely ETH, WBTC, LINK, UNI, USDC, USDT, DAI and FRAX.

The exchanges offered by GMX are low-fee and have no impact on the price of the underlying assets. In other words, no reason to worry about slipping.

In addition, GMX offers a derivatives trading service. In other words, it is possible to extend or shorten all assets supported by the protocol.

Finally, the platform allows its traders to perform leveraged trades. Thus, it is possible to trade with a leverage of up to x30.5.

GMX a protocol that aims to be “True Performance”

In a few months, GMX has become the most widely used Arbitrum second layer protocol. Thus, GMX merges a TVL of $422 million in Arbitrum and $67 million in Avalanche.

Evolution of GMX TVL in Arbitrum and Avalanche.
Evolution of GMX TVL in Arbitrum and Avalanche – Source: DefiLlama.

After the success of this DEX, we find the phenomenon of True yield. In short, many protocols have started calling themselves “Real Yield” protocols, because the returns generated by shareholders and liquidity providers come from the activity of the protocol itself.

Real Return thus contrasts with the more common model, where returns are generated primarily by issuing new tokens. Unfortunately, this return mechanism based on monetary emission has in many cases proven ineffective in the long term.

In contrast, the performance provided by GMX is based on protocol activity. In effect, all fees collected by the protocol are returned to shareholders and liquidity providers in GMX.

And there are costs. Since its launch, the platform has registered a volume of 73 billion dollars.

Volume recorded by GMX in Arbitrum and Avalanche
Volume recorded by GMX in Arbitrum and Avalanche – Source: Dune Analytics.

In this volume, $124 million in fees were collected and redistributed to counterparties and liquidity providers. Of these rewards, $113 million went to GMX users on Arbitrum and $11 million to users on Avalanche.

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GMX: sign of governance

Like most DeFi protocols, the protocol has its own the symbol of governance titled GMX. Launched in parallel with the platform, the GMX token allows its holders to participate in decisions regarding protocol developments.

Tokenomics

Protocol actually matters 8.1 million GMX tokens in circulation. Eventually, it is expected that there will be a total of 13.25 million GMX tokens. These will be distributed as follows:

  • 6 million GMX from migrating XVIX and Gambit.
  • 2 million GMX are paired with ETH to add liquidity to Uniswap.
  • 2 million GMX reserved for purchase of GMX rewards locked (esGMX cost).
  • 1 million GMX tokens reserved for marketing, partnerships and community developers.
  • 2 million GMX tokens to be managed by the “price floor fund”.
  • 250,000 GMX tokens distributed to contributors on a linear basis over 2 years.

Meanwhile, the release of new GMX tokens depends on the number of tokens deposited in the condition.

GMX Staking

However, its usefulness does not end there. In effect, GMX holders also have the option to stake their tokens to get a return on them.

In this way, 30% of fees generated by swaps and margin trading are distributed to shareholders from GMX.

In practice, participants receive three types of rewards, namely:

  • “crashed GMX” esGMX;
  • Multiplier points, which apply a multiplier to the user’s performance;
  • ETH or AVAX, depending on the blockchain.

Thus, the more a user stays loyal to the protocol and keeps his GMX at risk, the bigger his multiplier will be and his returns as well.

“Multiplier points can be set for fee rewards by pressing the “Compound” button on the Profit page, each multiplier point will increase the ETH/AVAX APR at the same rate as a regular GMX token. »

esGMX: what is it?

As we have just seen, placing GMX generates rewards in the form of esGMX or storage GMX.

In practice, each esGMX represents a GMX token which is subject to a the conditioning period, also known as the lock-in period. It is possible to unlock GMX tokens by converting their esGMX.

To do this, the user will have to lock their esGMX tokens for a period of one year. During this period, every second, a portion of esGMX will be converted to GMX. As explained in RECORDS from GMX:

“After the start of conditioning, esGMX tokens will be converted to GMX every second and will be fully vested in 365 days. esGMX tokens that have been converted to GMX can be claimed at any time. »

This method makes it possible to control the monetary issue and favors users with a long-term vision for the project.

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GLP: liquidity providers token

In addition to GMX, the protocol has a second token: the GLP. However, before discussing the GLP token, it is worth going back to how GMX works.

A single group with many assets

GMX differs from most decentralized exchanges in its architecture.

Indeed, most DEXs are based on the concept of MA. Without going into details, Automated Market Maker (AMM) offer multiple pools, each of which has at least 2 tokens. Each group will then represent a trading partner. This is specifically how Uniswap works.

On his side, GMX is based on a single multi-asset pool. This group consists of all cryptocurrencies supported by the protocol.

GLP: the heart of GMX

On his side, GLP represents an index of cryptocurrencies that can be traded on GMX.

In practice, GLP is the token that represents the liquidity deposited by liquidity providers in the protocol.

“GLP is a basket of assets used for swaps and leveraged trading. It can be issued using any index asset and burned to redeem any index asset. »

The asset creation price is based on the following calculation:

(la valeur totale des actifs de l'indice, y compris les profits et les pertes des positions ouvertes) / (l'offre de GLP en circulation)

GLP staking

Like its GMX cousin, GLP can also be placed in the appropriate GMX module. GLP token staking rewards also derive from using the protocol. In effect, 70% of fees collected by the protocol are distributed to GLP holders.

GLP token staking generates two types of token rewards:

  • esGMX;
  • ETH or AVAX, depending on the blockchain.

Rebalancing and liquidity management

To ensure healthy operation, the GMX protocol must constantly ensure that the liquidity present in the basket of assets is in the right proportions.

To do this, the protocol has established a rebalancing or rebalancing mechanism.

First, the protocol will adjust fees based on the needs of the pool. For example, if the GLP index has a lot of ETH but little USDC, shares in the protocol that include ETH will have higher fees than shares in USDC.

Second, the exposure to each token is adjusted to allow GLP holders to hedge against open positions in the futures market.

“For example, if many traders are long ETH, then ETH will have a higher token weight, if many traders are short, then a higher token weight will be given to stablecoins. »

However, these mechanics cause some delays in rebalancing. Indeed, on the GMX dashboard, we can see that each asset has a weight in the group, as well as a target weight towards which the group tries to tend.

Various assets backed by GMX and their weight in GLP
Various assets supported by GMX and their weight in GLP – Source: GMX.

For example, at the time of writing, ETH is 33.65% of the pool, with a target weight of 33%. Therefore, ETH is above the target weight, which means that exchanges from ETH to other cryptos have minimal fees.

Risks and audits

Of course, like any decentralized financial protocol, GMX is not without risk. Indeed, the protocol is based on a set of smart contracts, which do not exclude the possible presence of errors in the code.

However, the protocol has been subject to ia the first in-depth audit of the code at the time of its release. This audit was carried out by the company ABDK Consulting and its result is available at GMX GitHub.

Finally, on October 17, the GMX teams published the result a new audit, carried out in September 2022 by the company Quantstamp. This audit shed light on 23 low risk issues and 1 medium risk issue. Some could be resolved after the audit, while others take more time.

However, passing an audit does not exclude the presence of risks when using the protocol.

Conclusion

GMX is a decentralized exchange platform that can handle the biggest names in the ecosystem.
Located in Arbitrum and Avalanche, it is intended to be accessible by favoring ecosystems with a low transaction cost.
Through the various services offered, GMX can become the preferred DEX for traders, especially those who are used to margin trading.
However, the anonymity of the team behind the project as well as the few problems observed during the audits cannot be overlooked.

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