What Is GMX?

What is GMX, and why are so many Crypto Twitter influencers championing GMX recently? You may have also seen tweets of BitMEX’s co-founder Arthur Hayes accumulating $3M of the token.

To understand the buzz around GMX, we must first wrap our heads around the protocol and why many fervent supporters believe in it.

In short, GMX is a decentralized exchange on Arbitrum and Avalanche that provides perpetual futures trading with low fees and zero price impact. At present, the vast majority of the platform’s margin trading volume takes place on Arbitrum, generating ~85% of the protocol’s overall revenue.

GMX came about as a merger of the XVIX and Gambit communities. With significant overlap in their community and contributors, they decided to form a DAO that brought together the best of both, combining the simplicity and elegance of XVIX approach to liquidity with the innovations and trading platform developed in Gambit.

Thereafter, Gambit relaunched on the Arbitrum network in July 2021. Since its inception on Arbitrum, GMX has been growing steadily, amassing over 61.8K new users with a daily trading volume of $100M on Arbitrum as of 23 July 2022.

Today, there are 5 markets available on GMX (BTC, ETH, LINK, UNI on both Arbitrum and Avalanche with an additional AVAX market on Avalanche), with the majority of its volume coming from BTC and ETH trades. In addition, GMX offers leveraged trading with a maximum leverage of 30x. On such leveraged trades, users incur a one-time 0.1% Taker Fee on their notional position as well as a Borrow Fee paid hourly. To date, GMX has collected a total of $49M in fees!

What Makes GMX Unique?

GMX is differentiated from its competitors through its liquidity pool mechanism, GLP, which acts as the central clearing house for leveraged traders. GLP is a multi-asset pool containing all the tradable assets on the platform, similar to a crypto index ETF with target weights for each constituent asset. The platform’s target weights are adjusted dynamically as a function of net open interests among perp traders – for example, if more long ETH perp positions are opened, GLP’s ETH target weight will simultaneously increase.

Liquidity providers (LPs) are incentivized to add liquidity by swapping their assets for GLP tokens (“minting”). A swap fee is algorithmically determined to incentivize trades in the direction of bringing the actual weight closer to the pool’s target weight – for example, if ETH’s actual weight is lower than the target weight, users are incentivized to sell (swap) ETH to mint GLP with lower swap fees. This pool of assets serves as liquidity for perp traders whilst LPs are rewarded through swap fees. As of 23 July 2022, the GLP pool on Arbitrum has a total notional value of $187M comprising assets such as ETH, BTC, UNI, LINK, USDT, and more.

LPs Being The ‘House’

Perp traders on GMX trade against the GLP asset pool rather than against another trader in the order book, hence drawing similarity to a central clearing house. Since LPs act as the counterparty to perp traders, they earn both trading fees and mark-to-market P&L as position takers. The risk taken by GLP LPs is a combination of the GLP index weight design and perp traders’ net open interest. If perp traders’ net positions lose money, LPs would benefit from the distribution of wealth effects.

Token and Tokenomics

GMX has two native tokens – GMX and GLP.

It is evident that GMX has arguably the best tokenomics due to it having the highest initial float and also the lowest token inflation rates. A token with a tiny float and high inflation rates creates huge potential for short-term euphoria but brings long-term issues. To elaborate further, a small initial float often results in an overly inflated FDV in a bull market. When high inflation occurs in the form of team/investor unlocks or farming rewards, these participants recognize the out-of-whack FDV, thus creating heavy selling pressure and declining token price.

Because of the clear value accrual back to token holders, they are also more likely to HODL their GMX tokens for the long term. While dYdX boasts one of the highest volumes and revenue, none of it goes back to its token holders yet – at least until dYdX V4 is out. Apart from dYdX, one could argue that PERP is superior to GMX as a higher percentage of its revenue goes to PERP token holders. However, PERP generates significantly lower revenue as compared to GMX. As a result, both PERP and dYdX holders are not as monetarily incentivized to HODL their tokens.

GMX

GMX is the platform’s native token that has both utility and governance functions.

Staked GMX earns 30% of fees generated from the platform’s trading activity on both Arbitrum and Avalanche, in contrast to GLP, which accrues 70% of fees from just its own single chain. Staked GMX also earns 2 other types of rewards, which will be elaborated below.

Through vesting, esGMX are converted into GMX tokens. Vesting is a linear process over one year, and vested GMX tokens can be sold immediately.

In order to start vesting, the average number of GMX or GLP tokens that were used to earn the esGMX rewards must be reserved. For instance, if you staked 1,000 GMX and earned 100 esGMX, then to vest 100 esGMX, 1,000 GMX must be reserved in a vault.

In addition, once esGMX tokens are deposited for vesting, they cease to accrue any staking rewards, but the staked GMX tokens that are reserved in a vault will still accrue rewards.

This is designed to prevent GMX from becoming a typical ‘farm-and-dump’ token as it incentivizes holders to continue staking their rewards and original tokens. It also allows the protocol to continue growing without constant selling pressure, leaving more esGMX locked up.