The central theses
- GMX is a decentralized exchange built on Avalanche and Arbitrum.
- It allows DeFi users to trade with up to 30x leverage without permission.
- GMX offers a smooth user experience that is perfect for retail DeFi traders.
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GMX users can go “long” or “short” up to 30x their collateral by borrowing funds from a large liquidity pool.
Decentralized leverage
GMX is a popular decentralized exchange specializing in perpetual futures trading. Launched in late 2021 on the Ethereum Layer 2 network Arbitrum and later deployed at Avalanche, the project has quickly gained traction by offering users leverage of up to 30x their deposited collateral.
Leverage trading — the act of borrowing from financial platforms to increase risk of price movements — has become an essential part of the crypto ecosystem in recent years. Among other things, it allows market participants to profit from price declines, reduce risk in uncertain conditions and place large bets on an asset when they are confident.
There are several ways to leverage in crypto. Binance, FTX and other centralized exchanges offer clients the opportunity to borrow funds for trading purposes. Both Binance and FTX let customers borrow a maximum of 20x their initial deposit. DeFi protocols like Aave and MakerDAO issue permissionless loans against crypto collateral. More recently, traditional financial firms such as GME Group and ProShares have begun offering their institutional clients access to leveraged products such as Options on Ethereum Futures Contracts and Bitcoin Short ETFs to their institutional investors.
GMX differs from such services in that it is a decentralized exchange that offers leverage trading services. In this regard, it combines a similar experience to other DeFi exchanges like Uniswap with the leveraged trading services offered by Binance. On GMX, users can get up to 30x leverage on BTC, ETH, AVAX, UNI, and LINK trades. In other words, if a trader deposits $1,000 worth of collateral with GMX, they can borrow up to $30,000 from their liquidity pool. In this guide, we unpack GMX’s offering to see if it’s safe and if you should use it for your next high-conviction bet.
Trade on GMX
Trading on GMX is supported by a multi-asset GLP pool worth more than $254 million at press time. Unlike many other leveraged trading services, users borrow funds from a liquidity pool that includes BTC, ETH, USDC, DAI, USDT, FRAX, UNI, and LINK rather than a single entity.
Users can go long, short, or simply swap tokens on the exchange. Traders go long on an asset when they expect its value to increase and go short when they expect to be able to buy back an asset at a lower price. At GMX, users can select a minimum leverage level of 1.1x their deposit and a maximum level of 30x for both long and short trades.
Leverage options from GMX (Source: GMX)
GMX is powered by Chainlink Oracles. It uses an aggregated price feed from leading volume exchanges to reduce liquidation risk from temporary wicks. A liquidation occurs when a user’s collateral is no longer sufficient to sustain a trade; The platform then forcibly closes the position and pockets the deposit to cover their losses.
When a user opens a trade or posts collateral, GMX takes a snapshot of their dollar value. The value of the security does not change during the trade, even if the price of the underlying asset does.
Trading fees for opening or closing a position are 0.1%. In addition, a variable rental fee is deducted from the deposit every hour. Swap fees are 0.33%. Since the protocol itself serves as the counterparty, there is minimal price impact when entering and exiting trades. GMX claims that it can execute large trades at exactly the market price depending on the depth of liquidity in its trading pool.
If a user wants to go long, they can provide collateral in the token they are betting on. Any winnings they receive are paid into the same asset. With shorts, security is limited to the stablecoins supported by GMX – USDC, USDT, DAI or FRAX. Profits from shorts are paid in the stablecoin used.
Tokenomics and Liquidity
The protocol has two native tokens: GMX and GLP.
GMX is the utility and governance token. It can currently be staked at an interest rate of 22.95% on Arbitrum and 22.79% on Avalanche.
Stakers can earn three types of rewards for locking GMX: GMX escrow (esGMX), multiplier points, and ETH or AVAX rewards. esGMX is a derivative that can be wagered or redeemed for GMX over a period of time, while multiplier points reward long-term GMX players by increasing the interest rate on their holdings. Additionally, 30% of fees generated by swaps and leveraged trading are converted into ETH (at Arbitrum) or AVAX (at Avalanche) and distributed to staked GMX holders.
The GMX token also has a minimum prize fund. It is used to ensure the GLP pool has sufficient liquidity, provide a reliable stream of ETH rewards for staked GMX, and buy and burn GMX tokens to maintain a floor price of GMX versus ETH. The fund grows thanks to fees incurred by the liquidity pair GMX/ETH; It is also backed by OlympusDAO bonds.
At the time of writing, GMX’s total supply is 7,954,166 worth more than $328 million, 86% of which is staked. The total supply varies depending on the esGMX redemption, but the development team has forecast that the supply will not exceed 13.25 million. Beyond this threshold, the minting of new GMX tokens will be made dependent on DAO approval.
The second token, GLP, represents the index of assets used in the protocol’s trading pool. GLP coins can be minted with assets from the index, such as BTC or ETH, and burned to redeem those assets. GLP holders provide the liquidity traders need to leverage. This means they make a profit when traders make a loss and they make a loss when traders make a profit. Additionally, they receive esGMX rewards and 70% of the fees the protocol generates. Fees are paid in either ETH or AVAX. GLP tokens are automatically stocked and can only be redeemed, not sold. The current interest rate is 31.38% on Arbitrum and 25.85% on Avalanche.
GLP pool statistics. Source: GMX
The price of GLP depends on the price of the underlying assets as well as GMX users’ exposure to the market. GLP suffers especially when GMX traders short the market and the price of pooled assets also falls. However, GLP holders can benefit when GMX traders go short and prices rise, GMX traders go long and prices fall, and GMX traders go long and prices rise.
Final Thoughts
GMX is user friendly. The trading experience feels smooth and the system provides users with thorough data. When entering or closing a position, it is easy to find the collateral size, Leverage amount, entry price, liquidation price, fees, available liquidity, slippage, spread and PnL (profits and losses). The protocol’s interface provides a wealth of information related to assets under management, trading volumes, fees and trader positions. The website also lists the market caps of GMX and GLP and highlights the project’s partnerships, integrations and related community projects. It as well contains a documentation section that provides information on the various components of the exchange and suggests methods of bridging to Arbitrum or Avalanche or acquiring GMX and GLP tokens. Thanks to detailed dashboards, GMX gives a transparent impression. This makes the mechanisms of the protocol relatively easy to understand.
With its permissionless accessibility and leveraged trading offering, GMX combines the experience of decentralized and centralized exchanges and shows that DeFi protocols are still breaking new ground every day. The protocol’s trading volume has more than tripled over the past two months and now ranges between $290 million and $150 million daily, indicating growing interest among crypto-natives. Not yet handling billions of dollars in volume like its centralized counterparts, GMX is currently a product best suited for small retailers. Still, after rapid growth over the past few months, GMX could soon attract the institutional market as more and more big players start experimenting with DeFi. With more room for future growth, it’s worth keeping an eye on.
Disclosure: At the time of writing, the author of this article owned ETH and several other cryptocurrencies.
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