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.
DEXs have already captured a portion of the market from CEXs (as shown in the chart below). This trend is expected to continue and gain momentum due to the enhancement of DEX products, reduced slippage, and a transition towards self-custody.
FTX, a cryptocurrency exchange, was one of the largest derivative exchanges until its collapse, which forced traders to reconsider trading on centralized exchanges (CEXs). Furthermore, the ongoing scrutiny of Binance, the largest (derivative) exchange, is causing further reconsideration.
Growth of the derivatives market
Derivative DEXs are positioned for substantial growth due to their potential to tap into the larger derivative markets, which often see higher trading volumes than spot markets. Additionally, as they are still in their early stages, derivative DEXs currently hold a 1.7% market share compared to centralized exchanges, presenting significant room for expansion.
Revenue generating
The protocol generates revenue from various sources, including swap fees, trading fees, and execution fees, which are allocated to the treasury to support its long-term development.
The revenue generated by GMX in the last 30 days is $3.11 million, and the annualized revenue is $37.81 million. Since the start of 2022, GMX has been averaging a protocol revenue of $2 million per month.
Superior product
Perps are derivative instruments that allow traders to speculate on the price movement of an asset without owning the underlying asset. Perps are native to crypto and have no maturity date, making them a perpetual futures contract.
Liquidity providers contribute assets to the GLP basket / GM pool in exchange for earning 70% of the trading fees the GMX protocol generates. There is a risk to being a liquidity provider as they are the counterparty to each trader. A trader's loss is a gain for GLP liquidity providers and vice versa.
GMX design offers five key advantages:
No counterparty risk (as trader): GMX's GLP (v1) basket / GM (v2) pools sets aside the maximum amount of capital denominated in the correct asset that the trader could make on each trade, guaranteeing payment without counterparty risk.
50x leverage: GMX provides up to 50x leverage by isolating the required asset upfront to fund the traders' gains.
Market based pricing: Trades are executed at the market price determined by Chainlink oracles, ensuring accurate pricing.
Zero-slippage: GMX eliminates slippage by clearing entire trades at the market price, making trading more efficient and cheaper.
Minimal fees and ease of use: GMX offers similar trading execution fees and user functionality compared to centralized exchanges, with trading fees of 10 bps of the position size to open and close swaps and leverage trades. This is even lower on V2 with 5-7 bps.
V2 is designed to address existing issues in the derivative sector and enhance GMX's position in the decentralized perpetual trading industry. It aims to emulate Uniswap's approach of continuous version innovation but in the decentralized perp industry.
The update includes a reshaped fee structure, practical trade examples, and innovative trading strategies like delta neutral farming and pair trading. Additionally, V2 introduces new features such as enhancements for traders, faster execution speed, and lower slippage, with the goal of creating a more robust DeFi ecosystem.
Attractive tokenomics
The protocol has three tokens:
GMX is the utility and governance token. Accrues 30% and 27% of V1 and V2 markets generated fees, respectively.
GLP is the liquidity provider token for GMX V1 markets. Accrues 70% of the V1 markets generated fees.
GM is the liquidity provider token for GMX V2 markets. Accrues 63%* of the V2 markets generated fees.
*Provided on the GMX site, however, I think this needs to be 73% (versus GMX’s token fee of 27%).
The GLP/GM price reflects the value of all GMX assets, which are listed for trading with leverage and swaps. In other words, GLP/GM is an index of all assets on the exchange. The GMX token is the utility and governance token of the protocol, offering various benefits such as staking, earning protocol fees, voting rights, and participating in the governance of the GMX protocol. Only 5% of GMX tokens are locked. There is no major sell pressure coming.
GMX also offers a variety of security features and uses price oracles such as Chainlink to empower trades and provide accurate price data for assets in the pool.
Furthermore, GMX has better tokenomics than other decentralized trading platforms (e.g., dYdX), and the token serves a dual purpose as both a utility and governance token.
Risks
GLP/GM downward spiral
GLP (V1) and GM (v2) is the liquidity provider token for GMX markets and accrues the majority of the generated fees. The GLP basket / GM pool, which is a mix of assets, is put together by liquidity providers for traders to trade against. If GLP/GM providers get wiped out from losses to traders, the liquidity pool dries up, and the protocol becomes useless, which means that the GMX token has no value.
The new model of GMX V2 introduces isolated liquidity pools for each pair, making it harder to bootstrap liquidity compared to using a general basket of assets like GLP due to fragmentation. This design aims to improve capital efficiency but presents a challenge in attracting and retaining liquidity.
The importance of liquidity has been highlighted in the past year, especially in the context of on-chain liquidity for perpetuals, which is still relatively low compared to centralized exchange (CEX) liquidity. As a result, big traders have limited venues with sufficient liquidity, and the demand for decentralized exchanges (DEXs) for perpetuals is growing, provided the user experience (UX) is satisfactory.
Competition
Derivative trading on decentralized exchanges (DEXs) is experiencing significant competition due to the emergence of open-source protocols such as dYdX, Vertex protocol, Gains network. These protocols allow anyone to duplicate, adapt, and modify their code, resulting in low barriers to entry for new market participants.
The protocol's capacity to accommodate net open interest is constrained by the assets in the liquidity pool. As a result, the size and scale are restricted by the liquidity pool's magnitude. This gives large players like GMX an advantage over new entrants but a disadvantage versus large centralized exchanges.
However, every derivative DEX are likely to gain significantly as CEX volumes shift to DEXs, accompanied by the migration of spot volumes into derivatives. The market is poised for substantial growth before competitors fight each other for market share.
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Disclaimer: The information provided here is for educational purposes only and should not be financial decisions. Any actions taken based on the information presented are at your own risk. considered as financial advice. The content is intended to provide general information and should not be relied upon as the basis for any financial decisions.