Unlocking the Secrets of GMX: A diamond in the rough?

GMX is a decentralized exchange (DEX) to trade spot and perpetual futures contracts (or perps) on Arbitrum and Avalanche. GMX is a valuable alternative to centralized exchanges, providing unique token incentives, increased security, and lower fees for optimized trading experience.

Users can leverage the GMX application to take long or short positions on various cryptocurrencies directly from their wallet. The protocol currently has over $600 million in total value locked (TVL), over $164 billion in volume traded, and more than 460k users. However, even with these metrics, the token performance of GMX has been relatively underwhelming compared to other altcoins.

Is GMX a good addition to your cryptocurrency portfolio?

This article will examine specific aspects of the token in the form of investment hypotheses and risks, aiding you in the token assessment of GMX.

Investment hypotheses and risks

The following investment hypotheses summarizes the token assessment as follows:

• GMX benefits from the shift from centralized exchanges (CEXs) to decentralized exchanges (DEXs)

• The decentralized derivative market has ample opportunities of growth

• GMX continues to be revenue generating

• GMX offers a superior product (V2)

• GMX offers attractive tokenomics

However, there are two idiosyncratic risks that apply to GMX:

• The GMX platform depends on GLP (v1) / GM (v2) providers

• Increasing competition in the derivative DEX space

Shift from centralized exchanges (CEXs) to decentralized exchanges (DEXs)

Cryptocurrency trading takes place on two main types of platforms: centralized exchanges (CEXs) and decentralized exchanges (DEXs).

• CEXs operate similarly to traditional finance (TradFi) exchanges by facilitating the matching of buyers and sellers for a fee, while also holding custody of client assets.

• On the other hand, DEXs do not directly match buyers and sellers; instead, traders engage in trading through a liquidity pool, which consists of assets provided by their owners in exchange for a fee. In DEXs, traders exchange their assets for one of the assets available in the liquidity pool.

CEXs currently dominate spot and derivative traded volumes due to their primary role in onboarding fiat into crypto, the longevity of their presence in the market, and CEXs have historically offered faster and cheaper execution for large trades.

DEXs are gaining traction as an alternative to CEXs due to several factors:

• No custody: Unlike CEXs, DEXs do not hold customers' assets, making them more secure and decentralized.

• Improving tech: DEXs are catching up to CEXs in terms of technology and user experience.

• Onboarding: Emerging applications, such as Stripe's fiat to crypto onramp, enable direct fiat onboarding onto DEXs, making them more accessible.

• Slippage: DEXs face higher slippage costs due to lower liquidity compared to CEXs, but innovation has reduced these costs, making DEXs more competitive.

• Competitive fees: As slippage costs decline, DEXs are becoming more cost-effective compared to CEXs, eroding the price advantage of centralized exchanges.