DeFi Dive — Decentralized trading with GMX
GMX dropped the beta version of GMX V2!
In today’s DeFi dive, we will explore GMX, V2’s new features and discuss its pros and cons. Let me tell you this: the updates it brings have the potential to take decentralized derivative trading to another level.
Key takeaways
GMX V1 is based on GLP, a multi-asset liquidity pool that acts as an OTC desk, allowing you to trade large size without any slippage. GLP takes the opposite side of each trade: when traders make a profit, GLP incurs a loss, but when traders lose money, GLP gains. In the longer term, GLP showed to be a profitable investment, as traders tend to lose money over a more extended period of time.
GMX V2 introduces GM pools, individual assets liquidity pools, creating new isolated markets from GLP. More assets can be traded, multiple types of collateral can be used for leveraged trading, fees get cheaper and liquidity providers can hedge their investments properly and earn risk-adjusted yields.
GMX V2 with GM liquidity pools brings some complexity and higher risk for regular DeFi users.
Before we dive into GMX V2, let's quickly recap what GMX is all about.
GMX V1
For many folks, GMX is the go-to platform for decentralized trading. It’s an oracle-priced decentralized exchange (DEX) currently deployed on Arbitrum and Avalanche, that has more than $485 million in TVL to date. GMX lets you trade spot and perpetual futures right on-chain, in a permissionless way and without KYC. And if you're DeFi degen, you can even leverage your trades up to 50x.
The big game-changer that GMX brought to DeFi is letting anyone be a market maker using a custom type of LP token, called GLP.
GLP stands for GMX’s Liquidity Provider token. It consists of an index of blue-chip crypto assets used for both spot swaps and leverage trading. Think of it as a single liquidity pool that includes multiple assets, not just two (the standard model). But GLP isn’t only used for swaps, it’s also used for leverage trading where traders can borrow assets from GLP to leverage their positions, up to 50 times their collateral.
Here's the intriguing part: GLP takes the opposite side of each trade. When traders make a profit, GLP incurs a loss and has to payout. But when traders lose money, GLP gains as it’s on the other side of the trader’s position. In essence, GLP automatically counter-trades every trader on GMX. This mechanism which may seem bad, has a bright side since most traders tend to lose money over time. Statistically speaking, traders end up with losses, making GLP the ultimate winner.
Alongside these profits, GLP also distributes real yield, currently at 18.46%. For every trade, traders incur opening and closing fees, as well as borrowing fees for the duration they leverage their positions. Among all fees on the specific chains, 70% goes to GLP liquidity providers and 30% to $GMX single-sided stakers. All fees are paid in $ETH.
The giant bucket of assets within GLP essentially acts as an over-the-counter (OTC) desk. This means that you can easily trade any asset in the GLP pool at a predefined price determined by the Chainlink oracle, without any price impact. For instance, you could trade $5-10 million long or short trade without any slippage. Therefore, within DeFi, GLP currently provides the most efficient way for traders to execute large trades, all while being also the most user-friendly way of providing liquidity.
GMX V2
GMX V2, currently in its beta phase, introduces some great features that could potentially reduce the gap between centralized and decentralized perpetual exchanges.
GMX V2 is changing up the GLP thing by bringing in individual liquidity pools called GM pools, where GM stands for GMX’s Markets.
This means you are now able to provide liquidity for specific pairs of assets instead of throwing it all into one pool like with GLP. These GM pools become separate trading markets inside GMX, and they're bringing many advantages:
For traders:
New assets available for trading ($SOL, $XRP, $LTC, $DOGE, $ARB) while making it easier to add new ones in the future.
Multiple collateral types can be used for leveraged trading.
Faster execution speed and lower fees.
For liquidity providers:
Isolated pools, which allow liquidity to expose themselves only to the assets they prefer, making it easier to hedge properly and earn risk-adjusted yields.
Increased long/short balancing incentives on Open Interest, which helps to automatically hedge liquidity providers against trader profits.
Increased swap incentives, to help keep the tokens in the pool balanced
GMX V2 is going to coexist with GMX V1. As V2 just went live, liquidity for V2 markets may initially be low. GLP with its big pool of liquidity is going to keep going strong and remains the top way in DeFi to handle big trades effectively.
Considerations
Now that we've got the scoop on what V2's bringing to the table, let’s make some further considerations. GMX V1 was a killer product because of being so easy to use. You just hop in and provide liquidity to GLP, making it easy-peasy for anyone to participate in “market making”.
GMX V2 with GM liquidity pools brings some complexity and higher risk for regular DeFi users. This is mainly because traders can have different trading performances with different assets. As mentioned earlier, GM pools, as well as GLP, will act as the counterparty to traders. So if traders make money, GLP loses and vice versa. Some GM pools might perform very well, with traders mainly losing, while other pools may incur heavy losses. This can happen especially in a strong trending market, where the majority of traders are entering the market just on one side (long or short). So, if one GM pool substantially loses against traders, the trading fees might not be enough to cover those losses, making liquidity providers lose money. An example could be everybody longing $DOGE because our friend Elon integrated it into X. This could be an obvious and strong trend, that would rekt liquidity providers that don’t hedge themselves.
While GM pools might be awesome for more experienced players, it kind of takes away the simple and mainstream approach that made GMX a hit.
As is the case, with any DeFi venture, it's essential to be mindful of all potential risks to ensure your decisions are well-informed.
Thanks for reading!
Disclosure: Authors may own crypto assets named in this newsletter. Stay on-chain is meant for informational and educational purposes only. It is not meant to serve as investment advice. Please consult your investment, tax, or legal advisor before making investment decisions.