TL, DR#
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The GLP pool is the counterparty on GMX; LPs provide liquidity to GMX by depositing assets into the GLP pool, and GLP holders receive 70% of the fees generated by the GMX platform as a reward. If traders lose money, GLP holders will also earn additional income, otherwise they will need to pay a certain fee to the traders.
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Protocol revenue is distributed to liquidity providers and token holders through ETH/AVAX, rather than through token issuance (which is a big deal).
GMX Overview:#
GMX is a decentralized spot and perpetual contract exchange deployed on Arbitrum and Avalanche, supporting users to exchange spot and trade perpetual contracts with leverage of up to 50x. Currently, it supports four assets on Arbitrum: ETH, WBTC, LINK, UNI, and four assets on Avalanche: AVAX, WETH, WBT, USDC.
GMX provides zero slippage spot and leverage trading, but it is different from traditional Perp exchanges. GMX allows users to trade with the GLP pool, which is the counterparty for every transaction on GMX. GLP is the fund pool of GMX, with half of it being stablecoins and the other half being cryptocurrencies such as $BTC (15%) and $ETH (35%). LPs provide liquidity to GMX by depositing assets into the GLP pool. In return, GLP holders receive 70% of the fees generated by the GMX platform. If traders lose money, GLP holders will also earn additional income, otherwise they will need to pay a certain fee to the traders.
Since its launch in August 2021, GMX has emerged with an independent market trend in the bear market, with TVL steadily increasing in USD terms and a market value of nearly $300 million.
GMX Token Model#
Implementing perpetual contract trading in a decentralized manner is more complex than spot trading: the underlying assets of perpetual contracts have huge volatility in a very short period of time, and traders place orders frequently, so there are higher requirements for exchanges in terms of quoting, trade execution, and timely settlement. Similar to traditional financial markets, the market size of derivative trading in the crypto market is larger than spot trading. Currently, 15% of spot trading volume is realized through DEX, but only 2% of perpetual contracts traded through DEX, leaving a lot of room for improvement in the future.
For GMX, the project has the following advantages:#
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The derivative market is vast, with a potential market share reaching trillions.
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The protocol generates real income and distributes it to liquidity providers/token holders through ETH/AVAX, rather than through token issuance, bringing a real annualized return of 15-20%. The model of bottom price funds and lock-up brings more income and provides strong support for token prices.
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The design of local liquidity and oracle quotation is innovative, and GMX can provide 30x leverage and large zero slippage trades, which is a very attractive selling point for attracting traders (when dYdX and Perpetual have a depth of millions of dollars, slippage has exceeded 1%).
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LPs can embed multiple DeFi protocols like Lego blocks as crypto assets, and have cooperated with multiple yield aggregators, yield protocols, and derivative contracts.
Will GMX Die in a Bull Market?#
As mentioned earlier, GMX is not Perp, it only provides a trading experience similar to Perp. In a bear market, traders are evenly divided between long and short positions, and there is not much difference between a real Perp exchange and GMX. When a bull market comes and long and short positions are significantly mismatched, the shorts on GMX not only do not receive funding fees, but also have to pay borrowing fees, resulting in a market on GMX that is entirely long positions.
Traders on GMX will only go long in a bull market—limiting the utilization of GLP and reducing GLP rewards—funds gradually flow out of the GLP pool—smaller GLP pool, fewer traders, and fewer fees.
From a historical perspective, the proportion of long and short positions can also confirm the above conclusion.
But the good point is that when some funds are withdrawn from the GLP, the decrease in GLP AUM will lead to an increase in APR, attracting some funds to flow back, which is beneficial to stabilize the supply of GLP.
Conclusion#
The so-called GMX bull market death spiral is not valid. Even if all traders go long in a bull market, GMX/GLP is still an attractive money-making machine. The fees allocated by GMX to GLP holders are sufficient to compensate for the losses caused by traders.
However, the imbalance between long and short positions is a real problem. GMX can consider taking measures to mitigate this impact. For example, GMX can increase the borrowing fees for long positions and introduce funding fees for short positions to incentivize traders to open short positions. GMX can also reduce swap fees to incentivize users to exchange stablecoins for BTC/ETH in the GLP pool.
During a bull market, the decrease in GLP rewards will also have a widespread impact on projects that rely on GLP yields, such as Umami, Jones DAO, Rage Trade, GMD, etc.
The narrative on Twitter can influence market sentiment and prices. GMX benefits from the narrative of real yields, but it may also be harmed by other narratives. Success and failure are two sides of the same coin. The following scenarios are not impossible: in a bull market, GMX long liquidity tightens, traders cannot open new positions, GLP holders cannot redeem, FUD ferments on Twitter, and the market begins to believe in public opinion rather than facts. Black swans do not exist until adventurers discover them in Western Australia.