Read more about GMX’s staking data on Staking Rewards.
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Project Rating
GMX is a decentralized perps exchange supporting both spot and margin trading with low fees and zero slippage on Arbitrum and Avalanche, with a high staking ratio. Currently, the majority of the platform’s margin trading volume takes place on Arbitrum, generating ~78% of all-time trading volumes and ~79% of trading fees.
Research Memo Summary
Market Overview
What is a crypto perpetual future?
Introduced by BitMEX in 2016, crypto perpetual futures contracts, or perps, are cash-settled derivative futures that allow users to buy or sell the value of crypto tokens without an expiry date. This allows for deeper liquidity as traders utilize perps to take leverage on their long or short exposure. Major CEXs offer up to 100x to 125x leverage while GMX allows up to 30x leverage, which is the maximum leverage offered by existing decentralized derivatives exchanges.
Market opportunity of decentralized perps exchanges
As it stands right now, crypto derivatives are in their early boom period. Just like equities, we expect the total addressable market (TAM) size of crypto derivatives to be well above that of crypto spot trading over the years. Further, today perps have become the most popular derivative to trade cryptocurrencies.
From the perspective of crypto exchanges, DEXs will continue to gain market share relative to centralized exchanges (CEXs) due to decentralized protocols’ improving UI/UX, increasing security alongside transparency, less friction for users, more upcoming assets to be integrated, and monetary incentives upon both bootstrapping and maturity.
Investment Highlights
Market opportunity
GMX is riding into a tailwind of capturing a share of the growing demand for decentralized derivatives. GMX focuses on two products. First, it offers a smooth trading experience for the growing perps space. Second, it is going to launch synthetic trading next year, which is another growing sector relative to CEXs, while the latter players appear to be losing their attractiveness due to extra KYC burdens.
Unique value proposition targeting at traders
GMX is a highly demanded decentralized exchange with unique value propositions, including zero slippage for swaps and minimal fees for opening and closing positions with up to 30x leverage. No other DeFi protocol allows a trader to leverage 300 BTC without impacting the order book prices.
Token design that disincentivizes unstaking
On the demand side, GMX applies 100% fee pass-through and esGMX token emission to both GMX and GLP tokens, which results in a high staking ratio of ~80%. On the supply side, GMX token supply is capped at 13.5 million. Converting staking rewards (i.e., esGMX) to GMX tokens not only requires 365 days to be fully vested, but also reserves the average amount of GMX and GLP tokens used to earn these esGMX rewards. To unreserve the tokens one would need to pause vesting. Hence, the design of vesting and withdrawing staked tokens not only eases the sell pressure once unstaking takes place, but also discourages such behavior.
Project Catalysts
We reached out to core GMX contributors and confirmed the current roadmap focuses on synthetic assets (Synths) trading which has already gone out for audit. Other rollouts include possible chain expansions and overall protocol automation. Further, the evaluation of PvP AMM stated in the X4 will commence early next year. X4 integrates more digital assets not yet supported on other CEXs for trading. We expect it to attract and onboard more users.
Despite not a near-term priority, GMX X4 development also includes a new AMM design that is customizable for pool creators and projects. In addition, X4 incorporates a DEX aggregator that will route trades through GMX swaps and other AMMs to generate deeper liquidity for all tokens.
Competitive Advantages
Competitor Comparison
Chain-agnostic vision
Arbitrum, the main chain GMX runs on, ranks as the top Layer2 chain by TVL. Alongside Arbitrum and Avalanche, GMX’s ambition to expand to more chains will further broaden its user coverage and create less friction than its bluechip alternative, dYdX. DYdX has chosen to build an app-chain via Cosmos SDK which has less potential reach than a multi-chain protocol.
More sustainable staking rewards backed by fees
Although dYdX all-time trading volume is $728 billion, 10x of GMX’s $71.8 billion, the latter has generated $91.5 million in all-time fees that are distributed to GMX stakers and GLP holders. Conversely, dYdX has taken all the $392mn of fees and left token holders nearly nothing. Additionally, GMX generates one of the highest 7-day average fees among all DEXs as of writing.
Better incentive model
GMX’s 180-day trading volume was just behind dYdX among perps DEXs. While dYdX’s trading volume is the strongest, it uses its native token DYDX, to incentivize trading volume. On the contrary, GMX incentivizes users by providing staking rewards that accrue trading fees, which helps maintain the security and stability of the protocol.
GMX ranks second in decentralized derivative exchanges by last 180-day trading volumes
GMX is trading at below-average valuation
As shown in the graphs below, GMX is trading at a lower price/fee and circulating market cap/TVL relative to its derivatives DEX peers. Note that dYdX does not pass through any trading fees to token holders, which is likely the reason why it is trading at an even lower P/F ratio.
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GMX Overview
Team history
The team is pseudonymous and has demonstrated its track record by running GMX’s V1 (XVIX) and V2 (Gambit) back in 2020 and 2021 respectively. The Gambit protocol was launched with the original GLP model but under the guise of an over-collateralized and interest-bearing stablecoin, USDG. Following the success of the revenue generating model, the team decided to launch GMX on Arbitrum to solve a few issues they faced. This includes the difficulty of maintaining the USDG’s dollar peg and high gas fees on ETH mainnet. Around 45% or 6 million of GMX tokens were distributed to investors of XVIX and Gambit for migrating to GMX at launch in Jun 2021.
GMX Products & Stakeholders
Summary of GMX Product Mechanisms
Demand-side (GMX traders)
Current GMX open interest is $87.9 million. 89% of all-time trading volumes ($71.8 billion) on GMX is margin trading, which is 13x of swaps volume. Three reasons explain the success of GMX despite the fact that it currently only supports trading for five non-stable crypto assets (ETH, AVAX, BTC, UNI, and LINK), and four stablecoins (USDC, USDT, FRAX, and DAI):
- GMX offers up to 30x maximum leverage and a mere 0.1% fee for opening and closing positions. The borrowing fee is calculated as (assets borrowed) / (total assets in pool) * 0.01% per hour.
- Swapping on GMX causes zero price impact, which is powered by the implementation of Chainlink oracles and price feeds from large CEXs, instead of relying on orderbook pricing. Any price deviations will be absorbed by GLP holders. This solves a pain point of many large traders because high slippage severely impacts PnLs. The swapping fee is dynamic with a 0.3% target when the GLP pool is perfectly balanced (we will cover this in detail later).
- GMX offers customizable order types including stop-loss and take-profit.
Moving forward we expect more assets to be supported as GMX introduces synthetics trading in 2023. Synthetics, or synthetic assets, are digital assets that derive their value from the underlying asset. This underlying asset may be on or off the blockchain, which opens up the door to trading more crypto assets and real-world assets.
Regarding margin trading, the collateral of long positions is the token being longed while the collateral of short positions is any of the supported stablecoins. A liquidation is automatically triggered when the collateral value minus losses and borrow fees falls under 1% of the position size. Any collateral remaining will be returned to the trader’s account. It is essential to monitor the liquidation threshold as PnL and borrow fees change over time.
Supplier-side (GLP holders)
Currently, total liquidity locked in the GLP pool across Arbitrum and Avalanche is $445.7mn. To provide liquidity, users can deposit supported assets into the GLP pool to mint GLP tokens or swap out assets by burning GLP tokens.
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As mentioned above, the swapping fee, aka the fee of minting and burning GLP tokens is 0.3% when the GLP pool is perfectly balanced. In reality, a dynamic fee is implemented based on the discrepancy between an asset’s actual weighting and its target level. For instance, when ETH is overweight and BTC is underweight relative to their respective target weightings, fees relating to actions that would reduce ETH’s weighting will be lower than fees that would incentivize the reduction of BTC’s weighting.
The biggest distinction of GLP holders compared to those on other AMMs is the former does not bear any impermanent loss. Instead, GLP holders act as the counterparty against traders on the GMX exchange. If traders make a profit, GLP holders take a loss and vice versa. To mitigate the counterparty risk for GLP holders, GLP rebalances target weights once a week based on traders’ open interests and new asset prices. For example, if the majority of positions are long ETH, then the protocol will raise the target weight for ETH so as to increase GLP’s ETH exposure. Historically speaking, GMX trader PnL is deep in the red and GLP holders have since been profitable from their trades.
Token Utilities, Staking Rewards & Tokenomics
GMX has delivered an excellent product with fluid UI/UX experience, high-demanding trading features and multi-chain deployment. Furthermore, its growth in the past 12 months is in part attributed to its dual-token design with attractive fee distribution and staking incentives.
Staking GMX tokens
As the governance token, GMX recently listed on several CEXs such as Binance, BitMart, and Kucoin. Apart from the governance function, GMX can be staked to unlock rewards in three ways:
- Fees paid in ETH or AVAX: 30% of platform fees (incl. swap fees, fees of opening and closing positions, and borrowing fees).
- Escrowed GMX (esGMX): esGMX tokens can be converted into GMX over a 12-month period or be re-staked to earn rewards in a way similar to GMX. the emission of esGMX has no maximum limit but is always backed by the max GMX supply.
- Multiplier Points (MP): MP boosts your fee rewards which is released to GMX stakers every second linearly at a fixed 100% APR. MP can also be re-staked via compounding.
Staking GLP tokens
GLP token is the liquidity providing token which we covered in the supplier-side section above. Minting GLP tokens stakes them automatically and provides the following staking rewards:
- ETH or AVAX rewards: 70% of platform fees.
- Escrowed GMX (esGMX): Other than what’s described above, for GLP holders, esGMX will be distributed to them to reach a 20% total target APR, subject to the monthly esGMX emission cap.
Staking Strategies
*Rewards are updated every Wednesday on Twitter.
Based on the current GMX and GLP prices, staked values and esGMX emission schedules, here are some strategies for staking capital allocation:
1. GMX vs GLP staking:
Staking on GLP currently generates a higher overall APR thanks to the 20% target APR for GLP holders and a higher 70% fee share. However, GLP stakers are bearing the counterparty risk against traders. Monitoring the open interests and market movements is crucial if you are staking a large amount of GLP tokens.
2. Arbitrum vs Avalanche staking:
GMX staking is chain-agnostic. But GLP stakers on Avalanche are potentially earning a higher APR than those staking on Arbitrum right now. This is because the esGMX emission schedule imposes a monthly cap of 25,000 esGMX distribution to GLP holders on each chain. With a higher staked value on Arbitrum, the esGMX token emission is more likely to reach its cap there. Hence, the following staking table shows a below-target APR (15.52%) for GLP stakers on Arbitrum. Token price movement is another consideration but that is a standalone risk.
3. Boost your rewards:
Compound rewards as frequently as you can on the Earn page to maximize staking rewards paid in both fees and esGMX.
Breakdown of Staking Rewards on GMX and GLP Tokens
GMX Token Supply & Distribution
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What’s notable from GMX distribution is 2 million of GMX tokens were initially distributed to the floor price fund, which acts as a mini treasury that can be used to buy back and burn GMX when needed, or used to pay for bug bounty submissions. The food price fund can grow in two ways: 1) trading fees from GMX/ETH liquidity pools will be converted to GLP and stored in this fund; 2) GMX has partnered with Olympus Pro to gain liquidity by selling GMX WETH bonds. 50% of the proceeds in WETH will be reserved in the floor price fund (the remaining 50% will be used for marketing). The floor price fund has reserved 79,485 GMX tokens as of writing.
GMX Valuations
We have arrived at the following valuations for GMX using Intrinsic Valuation and Multiples Approach. Please note the process of valuation here refers to GMX token only and any cashflows generated for GLP holders are not included for calculations.
1. Intrinsic Valuation
We take 30% of platform fees net of keeper costs as the cashflow and forecast the next 5-year cashflows based on growth rates estimated with a top-down approach. The 15% discount rate is computed based on the average of current GMX inflation rate and both tokens’ return of fees (30D annualized), and the 10% perpetual growth rate is estimated by summing up 5% inflation, 3% GDP growth and 2% crypto premium.
2. Multiples Approach
We have compared GMX’s last 180-day average P/S and P/F ratios to several other spot and derivative DEXs, among which the valuation derived from circulating P/F ratio is more valuable for comparing given its larger size of comparables and the denominator refers to cashflows generated by the GMX protocol as a whole. In general, GMX’s price multiples are well below the market-weighted averages.
Major Protocol-specific Risks
Smart contract risks
Operating on Arbitrum exposes GMX to smart contract risks, such as contract bugs or hacks. On the bright side, GMX has had an audit from ABDK Consulting and the upcoming synthetics contract has also gone out for auditing. The Avalanche-based DeFi insurance protocol Degis recently announced to incorporate GMX in its Protocol Protection product to offer insurance to GMX users, which could provide a layer of protection as well.
Risk of GLP loss during a bearish market
A bear market is more likely to see short positions profiting from the GLP pool which pays out stablecoins and the value of assets in the pool will also decrease. This kind of loss could disincentivize LPs to provide liquidity. It’s noticeable that recent short positions on GMX have been exceedingly high. We expect the introduction of PvP AMM and synthetics to GMX V4 in 2023 to deepen the liquidity and mitigate such risk.
Risk of price manipulation
The zero price impact is a double-edged sword which on the downside could be exploited by attackers who manipulate the price of smaller-cap digital assets. In the most recent example, an exploiter took advantage of low spread and zero slippage to open large long positions on AVAX/USD and then sell the tokens on CEXs at a higher price. The attacker made around $565,000 off of GLP holders. Following this incident, GMX has set up a $2 million and $1 million cap on AVAX long and short positions respectively. To mitigate the risk further, GMX has capped open interests on both long and short positions based on the asset value in the pool. Historically speaking, there are far more long positions on GMX (refer to the graph above).
Risk of bad actor keepers deceiving GMX
Third parties like KeeperDAO are expected to maintain price feeds under a 0.12% deviation from the Chainlink prices. However, there’s no way of regulating price keepers to get the most accurate price and that 0.12% discrepancy could still impact traders, or LPprofits while going unnoticed.