From its inception at the end of 2019, the ecosystem of the decentralized finance (DeFi) experienced a significant boom. In fact, it has seen the birth of a multitude of protocols across various fields of application. Originally, this craze was initiated by the creation of decentralized trading platforms. Today we will explore GMXone of fastest growing decentralized exchanges since early 2022.
GMX: the decentralized exchange of derivatives
GMX is a decentralized finance project, belonging to the category of decentralized trading platforms.
Presented for the first time around August 2021, the project was deployed on the main Arbitrum network in September 2021. GMX will be later also implemented 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 entail.
On its website, the protocol looks like this:
“GMX is a decentralized spot and perpetual exchange that supports low swap fees and price neutral trading. “
This clear and concise description introduces all the main features offered by GMX. However, when we look in detail, the platform offers a multitude 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 between them. The platform supports 8 cryptocurrencies, namely ETH, WBTC, LINK, UNI, USDC, USDT, DAI and FRAX.
The exchanges offered by GMX are low cost and have no impact on the price of the underlying assets. In other words, no reason to worry about slippage.
In addition to this, GMX offers a derivatives trading service. In other words, it is possible to long or short on all assets supported by the protocol.
Finally, the platform allows its traders to trade with leverage. Therefore, it is possible to trade with leverage of up to x30.5.
GMX a protocol that wants to be “Real Yield”
In a few months, GMX has become the most used protocol of the second Arbitrum level. Therefore, GMX brings together a TVL of $ 422 million on Arbitrum and $ 67 million on Avalanche.
Behind the success of this DEX, we find the phenomenon of Real yield. In short, many protocols have started to call themselves “Real Yield” protocols, because the the returns generated by stakers and liquidity providers derive from the activity of the protocol itself.
Therefore, Real Yield contrasts with the more common model, where the returns are generated mainly by the issuance of new tokens. Unfortunately, this return mechanism based on monetary issuance has repeatedly proven its ineffectiveness in the long run.
On the contrary, the performance offered by GMX is based on the activity of the protocol. Indeed, all fees collected by the protocol are returned to the stakers and liquidity providers on GMX.
And there are costs. Since its launch, the platform has recorded a total volume of $ 73 billion.
In this volume, $ 124 million in fees was raised and redistributed to stakers and liquidity providers. Of these awards, $ 113 million went to GMX users on Arbitrum and $ 11 million to users on Avalanche.
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GMX: the governance token
Like most DeFi protocols, the protocol has its own governance token titled GMX. Launched in parallel with the platform, the GMX token allows its holders to take part in the decisions related to the development of the protocol.
Protocol currently 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 the migration of XVIX and Gambit.
- 2 million GMX combined with ETH to add liquidity on Uniswap.
- 2 million GMX reserved for the acquisition of blocked GMX rewards (the vesting of esGMX).
- 1 million GMX tokens reserved for marketing, partnership and community developers.
- 2 million GMX tokens that will be managed by the “minimum price fund”.
- 250,000 GMX tokens distributed to contributors on a linear basis over 2 years.
Meanwhile, the issuance of new GMX tokens depends on the number of tokens deposited in vesting.
However, its usefulness does not end there. Indeed, GMX holders also have the option of staking their tokens to get a return on them.
Thereby, 30% of the commissions generated by swaps and margin trading are distributed to the stakers by GMX.
In practice, stakers receive three types of rewards, namely:
- “GMX bound” esGMX;
- Multiplier points, which apply a multiplier to the user’s performance;
- ETH or AVAX, depending on the blockchain.
Therefore, the more a user sticks to the protocol and keeps his GMX in play, the higher his multiplier and also his returns.
“You can accumulate multiplier points for paid rewards by pressing the” Compound “button on the Earnings page, each multiplier point will increase ETH / AVAX APR at the same rate as a normal GMX token.”
esGMX: what is it?
As we have just seen, GMX staking generates the generation of rewards in the form by esGMX or Escrowed GMX.
In practice, each esGMX represents a GMX token which is subject to a ripening period, also known as the blocking period. GMX tokens can be unlocked 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 part of esGMX will be converted to GMX. As explained in the GMX documentation:
“After the launch of the vesting, esGMX tokens will be converted to GMX every second and will be fully acquired in 365 days. EsGMX tokens that have been converted to GMX can be requested at any time. “
This method allows you to control the monetary issue and favors users with a long-term view of the project.
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GLP – the liquidity provider token
In addition to the GMX, the protocol has a second token: the GLP. However, before we discuss the GLP token, it’s worth going back to how GMX works.
A single multi-asset pool
GMX differs from most decentralized exchanges in its architecture.
In fact, most DEXs are based on the concept of Alzheimer’s. Without going into detail, the Automated Market Maker (AMM) they offer a multitude of pools, each with at least 2 tokens. Each pool will therefore represent a trading pair. This is specifically how Uniswap works.
On his side, GMX is based on a single multi-asset pool. This pool consists of all the cryptocurrencies supported by the protocol.
GLP: the heart of GMX
On his side, the GLP represents an index of cryptocurrencies that can be traded on GMX.
In practice, the GLP is the token that represents the liquidity deposited by the liquidity providers on 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 creation price of the asset 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)
Like its GMX cousin, the GLP can also be staked on the appropriate GMX module. The rewards for staking GLP tokens also come from using the protocol. Indeed, 70% of the fees collected by the protocol are distributed to GLP holders.
GLP Token Staking generates two types of Token Rewards:
- ETH or AVAX, depending on the blockchain.
Cash rebalancing and management
To ensure healthy functioning, the GMX protocol must constantly ensure that the cash in the asset basket is in the right proportions.
To do this, the protocol has set a rebalancing or rebalancing mechanism.
First, the protocol will adjust the fees based on the needs of the pool. For example, if the GLP index has a lot of ETH but few USDC, then stocks on the protocol involving ETH will have higher fees than stocks on USDC.
Second, the exposure to each token is adjusted to allow GLP holders to hedge open positions in the futures market.
“For example, if many traders are long on ETH, then ETH will have a higher token weight, if many traders are short, a higher token weight will be assigned to stablecoins.”
However, these mechanics cause some rebalancing delays. In fact, on the GMX dashboard, we can see that each asset has a weight in the pool and a target weight towards which the pool tries to aim.
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 implies that exchanges from ETH to other cryptocurrencies have minimal fees.
Risks and audits
Of course, like any decentralized finance protocol, GMX is not without risk. The protocol, in fact, is based on a series of smart contracts, which does not exclude the potential presence of flaws in the code.
However, the protocol was the subject of a first in-depth audit of the code at the time of its launch. This verification was carried out by the company ABDK consulting and its result is available on GMX GitHub.
Most recently, on October 17th, the GMX teams released the result a new audit, carried out in September 2022 by the company Quantstamp. The audit revealed 23 aspects with a low degree of risk and 1 problem with a medium degree of risk. Some were resolved after the audit, while others take longer.
However, passing an audit does not rule out the presence of risks when using the protocol.
GMX is a decentralized exchange platform that could very well stand up to the biggest names in the ecosystem.
Distributed on Arbitrum and Avalanche, it is designed to be accessible by favoring ecosystems with a low transaction cost.
Through the various services offered, GMX could become the DEX of choice for traders, especially those used to margin trading.
However, the anonymity of the team behind the project, as well as the few problems found during the audits, cannot be ignored.
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