A Bullish Case for GMX, the Largest Decentralized Derivatives Exchange That You Can Own And Pays You Dividends in Ethereum. [DEEP DIVE]

GMX main page advertising its presence on Arbitrum and Avax

A brief overview

Many traders have been looking for better trading alternatives since the fall of multiple centralized exchanges and trading platforms in 2022. Decentralized exchanges operate on chain with transparent proof of reserves. Swaps and trades on decentralized exchanges are easily done by simply connecting any type of hardware or software wallet without KYC or the annoyance of creating an account and waiting for fiat deposits. This provides an improved user experience, and GMX fits into this category.

GMX is a decentralized derivatives exchange on Arbitrum, meaning that you can long and short leverage crypto as well as do simple token swaps on this platform. A trader can hold their shorts and longs for a certain amount of time and pays a small fee for keeping his position. These fees and fees from token swaps are collected and saved up every week after which they are distributed to liquidity providers and GMX token holders. The platform currently rakes in $3-4 million in ETH weekly, and has over 1 billion USD in assets under management (AUM).

If you have been keeping an eye on cryptofees.com you might have noticed GMX already, and this is where it gets interesting: GMX has been consistently scoring as a top 5 platform in terms of fee earned, especially during volatile weekdays. Considering daily fees generated, GMX has been frequently scoring higher than Bitcoin! “But isn’t this a bad thing?” No! This is very promising because it indicates that many users want to use the platform, and as many more fees are generated, so will earnings increase for GMX and GLP holders.

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GMX fee income compared to other cryptocurrencies

The two token system

GMX has a two token system in place: You can own GMX and GLP. Every week starting on Wednesday, 30% of the total fees are distributed to GMX holders, and 70% to GLP holders.

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GMX price as of April 18th. The supply indicates current available GMX tokens. max supply is 13,25 million.

GMX is the governance token which you can stake to earn fees from users. So not only can GMX itself appreciate in price over time, but you also get bonus value on top of that in form of Ethereum! These staking rewards are distributed continuously. The GMX token is also the governance token for the platform. When you stake GMX, you get sbfGMX (staked-bonus-fee-GMX) in return which are tokens that act as proof that you own staked GMX. You can unstake GMX any time (no unstaking period is in place) on the platform by returning your sbfGMX.

Another benefit of staking GMX is that you earn bonus points the longer you stake. 1 bonus point has the same effect as 1 GMX (they both accrue fees!). Bonus points are lost when you unstake GMX: if you unstake half your GMX, you lose half your bonus points. This is to incentivize staking GMX for long periods. There is a maximum supply of 13,25 million GMX tokens.

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current GLP composition. GLP can be bought with ETH, BTC, USDC, DAI, FRAX, UNI, LINK, and USDT.

GLP on the other hand is the token for liquidity providers. By buying GLP with either Bitcoin, Ethereum, USDC or others you will mint GLP which is automatically staked to provide liquidity for traders (you will get sfGLP in your wallet: staked-fee-GLP).

GLP is designed to be backed 50% by stablecoins, and 50% crypto like ETH and BTC, and by owning GLP you gain exposure to the fluctuations of both which are minimized by the added stablecoin exposure. You can view GLP as a crypto ETF: you own a basket of a multitude of cryptocurrencies and therefore minimize volatility.

Buying GLP comes with a small fee fluctuating from 0.1% to 0.3% depending on what the GLP basket requires: if the GLP pool is short on ETH, the fees for buying GLP with ETH will be low (and vice versa!)

There is risk to owning GLP because money won by successful long and short traders will have to come from the GLP pool. If traders win, the price of GLP will deprecate because value is extracted from the GLP pool (see images below). But... if traders lose, the value of GLP increases because a trader’s position is liquidated and added to the GLP pool. Since owning GLP is inherently risky, this is also the reason why liquidity providers earn the largest share of the fees.

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Traders profits and losses (PnL) since the birth of GMX. you can see that traders are currently working their way up from heavy losses. GLP holders are still in profit.

GLP performance compared to LP pools. As you can see, holding GLP is outperforming holding an equal asset in an LP.

Earning fees

On average, the GMX platform earns 3-4 million USD weekly from its users and this translates to a 5% APY for GMX holders and a 25% APY for GLP holders. You might think: “25% APY sounds fishy and unsustainable”. While I understand that this might be your first response this is not the case. Remember that GMX operates entirely on-chain. Also: the APYs change every week because the fees gained by the platform are not constant. I have witnessed APYs as low as a few percent and as high as almost 60%. Again: these are variable APYs and change weekly depending on trading volume.

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This snapshot was taken on April 18th. Almost 3 million in USD had been collected within a week.

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What is next for GMX?

GMX will add Synthetix contracts in the near future. Synthetix allows the creation of any asset, and therefore extending GMX’s portfolio of available trading options. The current release date is not known but code audits are currently ongoing.

Conclusion

So there you have it. a fully decentralized perpetual exchange purely running on code and distributing its rewards to participants of the exchange. Out of all decentralized exchanges I've investigated, the ease of use of GMX, as well as its simplistic UI intrigued me. I hope you liked this deep dive! Please let me know if you did!

TL;DR: GMX is a decentralized trading platform that distributes its earned fees to GMX holders and liquidity providers.

DISCLAIMER:

This post is purely academic and not financial advice. I own both GMX and GLP tokens.