As the cryptocurrency market matures, decentralized derivatives exchanges such as GMX v2, Vertex Protocol, Hyperliquid, and Apex Protocol are gradually emerging as prominent players. These platforms are not only challenging the leadership position of GMX but also signaling a significant transformation in the decentralized finance (DeFi) sector. This research article by Bing Ventures will take GMX v2 as a starting point and discuss the evolution of the competitive landscape in the decentralized derivatives market, focusing on GMX and its key competitors, while also exploring future trends.

The Size of the Decentralized Derivatives Market

Source: Coingecko

The table above displays the average daily trading volume data for spot and derivatives markets on decentralized and centralized exchanges in 2023. It shows that the spot trading volume on decentralized exchanges is $1.84 billion, slightly higher than the $1.44 billion for derivatives trading. However, on centralized exchanges, the derivatives trading volume is significantly higher at $64.74 billion compared to $19.18 billion for spot trading.

From this data, we can observe that centralized exchanges dominate both spot and derivatives trading volumes compared to decentralized exchanges, with derivatives trading particularly prominent. Despite incidents like the FTX event and previous collapses of centralized institutions, centralized exchanges still appear to be the preferred choice for the majority. Furthermore, the disproportionately high ratio of derivatives trading volume to spot trading volume on centralized exchanges indicates a much more active derivatives market compared to the spot market on these exchanges.

Source: DefiLlama

Gmx V2 And Its Competitors

GMX v2: The Disruptive Market Newcomer

We analyzed the market changes since the official launch of GMX v2. In the early stages, the market was still dominated by GMX v1 and dYdX, with Mux Protocol and Apex Protocol trailing far behind in terms of Total Value Locked (TVL), while GMX v2 was just starting out, with a negligible TVL. However, as of November 5, 2023, in less than four months, GMX v2 has evolved to be comparable to Mux Protocol and Apex Protocol, and even surpassed the TVL of both (GMX v2: $89.27m; Mux Protocol: $57.71m; Apex Protocol: $45.51m). Along with the growth of GMX v2, the TVL of GMX v1 has also declined over time. We believe this is due to users migrating from v1 to v2, as v2 has indeed addressed many of v1’s shortcomings, thus leading to the current situation.

Source: Dune Analytics @gmx-io

GMX v2’s dramatic growth in average daily trading volumes since its launch signals the positive market response to its new features and improvements. The TVL growth of v2 version relative to v1 version reflects the effectiveness of its optimization strategy, especially in terms of improving transaction efficiency and reducing user costs. GMX v2’s TVL growth not only shows an inflow of funds, but also hints at a deeper shift: the migration of users from older versions of the protocol and the onboarding of new users. This growth also comes with challenges, especially in how to sustain the momentum and appeal of this growth. The future of GMX v2 depends on its ability to sustain this growth trend while maintaining the stability and security of the platform.

Source: Dune Analytics @gmx-io

From the chart above it can be seen that the daily user volume of v2 has caught up with v1. However, for GMX v2, user growth comes from a more diverse range of sources, including migrating users from the v1 version and entirely new DeFi participants. The growth in users reflects recognition of GMX v2’s optimized trading experience and higher capital efficiency, attracting a broad user base. In terms of fees, the fee revenue of v1 still exceeds that of v2, reflecting differences in their fee structures. The influx of users reflects the success of GMX v2 in market promotion and user education. However, the rapid growth of new users also brings challenges, and how to convert these new users into long-term loyal users is a challenge GMX v2 needs to address. We believe that GMX v2’s future strategy should focus on continuous improvement of user experience and deep community engagement to consolidate its position in the market.

Meanwhile, to promote a balance between long and short positions and improve capital utilization efficiency, GMX V2’s fee structure has been adjusted. Specific adjustments include:

Reducing opening/closing costs: The original 0.1% fee rate has been reduced to 0.05% or 0.07%. This fee rate depends on whether the opening helps balance the long and short positions in the market. If it helps balance, a lower fee will be charged.

Introducing funding fees: In the balance of long and short positions, the stronger side needs to pay funding fees to the weaker side. This fee rate is not fixed but adjusted in segments based on the position ratio. For example, if the total long position is greater than the short position, the funding fee that long positions need to pay to short positions will gradually increase until the difference between the two reaches a specific threshold or reaches a certain upper limit. After reaching the upper limit, the funding fee will remain unchanged. The dynamic segmented fee mechanism can increase arbitrage opportunities, attract arbitrage funds, and promote the balance of long and short positions in the market.

In conclusion, one of the biggest challenges facing GMX v2 is how to maintain platform security and stability while experiencing rapid growth. In the DeFi field, security incidents occur frequently, and GMX v2 must ensure that its platform is not affected by such risks. Another challenge is how to continue to maintain its advantage in fierce market competition, especially when facing competition from other emerging protocols. GMX v2 also needs to focus on continuous innovation to maintain the attractiveness of its products and services. Ultimately, the success of GMX v2 will depend on how it balances growth with stability, innovation with security.

Source: DefiLlama

Meanwhile, we compared the monthly TVL change rates of the top 15 derivative protocols as of November 6, 2023. The increases in TVL for dYdX and GMX were not particularly outstanding. Instead, the dark horses emerged as Vertex Protocol, Hyperliquid, and Apex Protocol, with TVL increases of 63.22%, 30.69%, and 25.49%, respectively, in the past month. Therefore, we will discuss the above three protocols one by one in the following text, analyzing the narratives or main driving forces behind their increases.

Vertex Protocol: Competitiveness in Low-Cost Operations

Vertex Protocol is a decentralized exchange that combines spot trading, perpetual contracts, and money markets into one platform. The protocol uniquely combines centralized limit order books (CLOB) and automated market makers (AMM) to enhance liquidity, thereby transforming the user trading experience.

Built on Arbitrum’s Layer 2 (L2), the protocol aims to reduce gas fees and combat miner extractable value (MEV), promoting efficient and cost-effective trading in the decentralized space. Vertex Protocol has three pillars: an off-chain sorter, an on-chain AMM, and a robust on-chain risk engine. The order book and AMM accumulate liquidity not only from API market makers but also from on-chain contributors. Its risk engine ensures rapid liquidation, while the dual liquidity sources enable traders to obtain better prices. The growing trading volume on Vertex demonstrates the success of this unique model.

The cross-margin system of Vertex Protocol makes it easy for both skilled and novice traders to use, significantly reducing margin requirements. For example, if a trader has a long position on spot leveraged ETH and a short position on ETH perpetual contracts, the combined margin requirement may be lower than the margin required to independently open two positions in separate accounts. By introducing the concept of portfolio margin, this system allows traders to adjust the leverage levels of different positions to meet their personalized risk preferences. If the value of the long ETH spot leveraged position decreases, excess margin (unrealized profits) from short-term ETH perpetual contracts can be used to maintain the required margin level, preventing the long ETH spot leveraged position from being forcibly liquidated. It is evident that Vertex’s approach maximizes capital efficiency.

Project Performance

Since the project’s inception, it can be seen from the chart that Vertex Protocol’s TVL and derivatives trading volume have shown a steady upward trend.

Total Value Locked (TVL)

Despite providing an innovative trading experience, Vertex Protocol’s TVL still falls short compared to GMX. This is mainly because its lending products are not yet fully developed, currently supporting only a limited number of mainstream assets such as wBTC, wETH, USDC, etc., totaling five. This limits its ability to attract more TVL. Additionally, as of the time of writing, its native token VRTX has not been officially launched, thus lacking the functionality to allow users to earn interest through staking, which is another reason for the current lower TVL.

Derivatives Trading Volume

In the fiercely competitive decentralized exchange market, Vertex Protocol spectacularly captures 15–30% of the daily trading volume, showing superior performance even when compared to industry giants such as GMX, Gains, and Kwenta. Especially compared to GMX, Vertex has a clear lead in transaction volume. For an emerging project to be able to surpass the transaction volume of other leaders in a short period of time, this fully proves that its unique project design has successfully attracted users in the industry.

Transaction Fees and Revenue

GMX’s Fees; Source: DefiLlama

Vertex Protocol’s Fees; Source: DefiLlama

Compared to Vertex Protocol, GMX charges higher trading fees. Vertex Protocol implements a zero-fee policy for makers and provides extremely low fees for takers on major trading pairs (2 basis points for stablecoin pairs, 2-3 basis points for core markets, and 4 basis points for non-core markets). In contrast, GMX v1 charges a fee of 0.1% for opening and closing positions (reduced to 0.05% or 0.07% in v2), and additional fees ranging from 0.2% to 0.8% if exchanges are involved. This fee structure advantage makes Vertex Protocol more attractive in the market, although its lower trading fees may result in revenue growth not as significant as trading volume growth.

We believe that Vertex Protocol has quickly established its position in the market by offering a highly competitive low fee structure. This low fee strategy attracts a large number of traders seeking cost efficiency, especially as users increasingly value trading costs in current market conditions. However, in the long run, this strategy will face challenges in profitability, particularly in maintaining high-quality services and platform operations.

Therefore, Vertex Protocol needs to explore other value-added services and revenue models while attracting users at low cost to ensure long-term sustainability. Although GMX’s daily trading fee income was once high, it has recently decreased to a level similar to that of Vertex Protocol (about $100K). Combined with Vertex Protocol’s growing trading volume, its future revenue has the potential to surpass GMX.

Hyperliquid: On-Chain Order Book DEX on Its Own L1

Hyperliquid is a decentralized exchange (DEX) for perpetual futures based on an order book. This DEX operates on the Hyperliquid chain, which is a layer-one blockchain built on Tendermint. One key reason for Hyperliquid’s rapid development is its ownership of its own layer-one network. This enables the Hyperliquid team to flexibly adjust gas fees, MEV (miner extractable value), slippage, etc., to achieve the fastest and most efficient trading experience. Its performance is robust enough to support up to 20,000 transactions per second.

Having its own layer-one network also allows them to develop an on-chain order book that ensures complete transparency for every executed transaction, which is deemed essential in the market following the exposure of the FTX incident. Hyperliquid’s L1 enables them to build the platform as much on-chain, decentralized, trustless, and permissionless as possible.

On Hyperliquid, the treasury provides liquidity for on-chain trading strategies. The treasury can be automated or managed by individual traders. Anyone who deposits coins into the treasury can receive a share of the profits, whether they are DAOs, protocols, institutions, or individuals. The treasury owner can receive 10% of the total profits. Hyperliquid is also the first exchange to list index perpetual contracts on friend.tech. Initially, this was based on TVL (Total Value Locked), but considering the potential manipulation of TVL definitions, and with the continuous growth of open interest contracts, it has been changed to be based on the median price of 20 mainstream accounts.

Project Performance

The TVL of the project has also been steadily increasing, much like Vertex Protocol, with the monthly trading volume of derivatives reaching close to 1.5 billion since its launch, peaking at 8 billion. However, on average, Vertex Protocol still remains relatively superior.

Total Value Locked (TVL)

While the Total Value Locked (TVL) of Hyperliquid may not rival that of GMX, it falls slightly short compared to Vertex Protocol, except for September. The lower TVL of Hyperliquid is primarily due to limitations in its coin staking functionality. The project mainly locks funds through Vaults, where users deposit coins into the treasury to receive a share of the treasury’s profits. However, this mimicking of trading involves certain risks, as the profitability of trades depends entirely on the trading skills of the Vault Leader. Therefore, this does not offer investors much security and is less attractive.

For example, the chart illustrates the performance of the Hyperliquidity Provider (HLP), which is the protocol’s own treasury engaged primarily in providing liquidity, settlement, and earning a portion of trading fees. We can observe a negative return on investment (-2.41%) and a continuous decline in the profit-loss ratio, indicating that depositing funds into the Vault may not be a wise choice for users.

Derivatives Trading Volume

Source: Dune Analytic @shogun, as of Nov 5, 2023

While not reaching the significant market share proportion of Vertex Protocol, having approximately a 6% market share is still commendable for an emerging protocol. However, there has been a slight decline in trading volume over the past month, failing to sustain previous levels of liquidity.

Transaction Fees and Revenue

Hyperliquid’s transaction fee structure is as follows:

Takers pay a fixed fee of 2.5 basis points, while makers receive a rebate of 0.2 basis points. Referrers earn 10% (0.25 basis points) from the trading fees of their referred takers. The remaining fees flow to the insurance fund and HLP (approximately 2.05 basis points).

In comparison to Vertex, where the team or token holders benefit primarily from fees, in Hyperliquid, fees are directly allocated to the community: 40% goes to the insurance fund, and 60% goes to HLP.

Hyperliquid’s fee structure notably emphasizes allocating more returns to the community. In contrast, Vertex Protocol offers zero fees for makers and provides extremely low fees for takers on major trading pairs, with a portion of the trading fees supporting its Vaults and liquidity providers. This difference demonstrates Hyperliquid’s inclination towards rewarding community members who directly support network operations and risk management through fee distribution.

ApeX Protocol: A multi-chain exchange powered by ZK Rollup

ApeX Pro utilizes StarkWare’s Layer2 scaling engine StarkEx to provide perpetual contract trading with cross-margining using an order book model, achieving a secure, efficient, and user-friendly trading experience. Additionally, it is non-custodial, meaning that traders’ assets are entirely on-chain, with traders controlling their private keys. The use of ZK Rollup scalability solutions helps to enhance transaction security and user privacy protection. Compared to similar products like dYdX and GMX, ApeX offers more favorable trading fees. Its staking rewards, token buyback rewards, and referral reward mechanisms also enhance its attractiveness.

The main attractive points of ApeX’s staking mechanism for users include:

No fixed term or schedule: Users can start or cancel staking at any time. The longer the staking period, the greater the rewards.

Staking rewards consider not only staked assets but also users’ trading activity, increasing their earnings. The staking rewards formula takes into account the score of “T2E” activities, providing additional income for staking users.

Project Performance

The Total Value Locked (TVL) of Apex Protocol has similarly been steadily increasing since the project’s launch. Its monthly derivative trading volume has also remained stable at around 1.7 billion, similar to the previous two protocols.

Total Locked Value

Apex Protocol’s TVL is significantly higher than the previous two, with its two main revenue-generating features, the Smart Liquidity Pool and the Apex Staking Pool, playing a significant role in accumulating TVL, with enthusiastic participation in the past. The platform’s staking offers an annualized yield of up to 56.31%, while the Smart Liquidity Pool also provides decent returns for users providing liquidity for its market-making strategies, with a 7-day annualized yield of 13.03%.

Derivative Trading Volume

Source: DefiLlama

Compared to the other two protocols, the trading volume data of Apex Protocol demonstrates a more stable growth trend, indicating a steady increase in its user base and engagement.

Transaction Fees and Revenue

Apex shows a similar growth trend in fee revenue compared to Vertex. We believe that Hyperliquid and Apex Protocol have established their market positions by focusing on specific market segments and user groups. This strategy of focusing on specific niche markets allows them to more effectively meet the unique needs of these markets. Hyperliquid’s innovation in providing an on-chain order book has earned it a reputation among specific user groups. Apex Protocol, on the other hand, has gained recognition among users through its cross-chain functionality and efficient transaction execution.

Comprehensive Comparison

Based on the available data, we have evaluated four protocols (GMX v2, Vertex Protocol, Hyperliquid, and ApeX Protocol) across five aspects: Total Value Locked (TVL), trading volume, user growth trend, fee structure, and market distribution. Partial evaluation results are shown in the following graph.

Source: Bing Ventures

As the current market leader, GMX v2 performs well across most metrics, especially in TVL and trading volume. Its innovation, user experience, and community engagement are also strong, although regulatory compliance may be an area for improvement in the future.

Vertex Protocol stands out in its fee structure, reflecting its competitive advantage in the market. While slightly behind GMX v2 in TVL and trading volume, it shows potential in user growth and community engagement.

As a relatively new platform, Hyperliquid scores lower across all dimensions, reflecting the challenges faced by emerging platforms. We believe it has potential to catch up in terms of security and user experience.

ApeX Protocol performs similarly to Vertex Protocol across most metrics, but slightly edges ahead in community engagement and user experience.

The Future Trends Of The Decentralized Derivatives Market.

In summary, we believe that GMX is indeed facing challenges to its position in the decentralized derivatives exchange market, particularly from emerging protocols like Vertex Protocol. Due to its advantages in fee structure, it has already begun to capture more market share. This competitive landscape indicates that even in this relatively mature market, innovation and user-friendly pricing strategies are still effective means of attracting users and increasing market share.

From the perspective of Total Value Locked (TVL), the performance of these three emerging projects is currently not comparable to GMX. This reflects a practical issue: users are still cautious about staking large amounts of assets on these new platforms. This is due to factors such as insufficient trust in new platforms, immature product features, or lack of market awareness. Therefore, for these emerging protocols, attracting user funds and increasing TVL will be a major challenge.

In addition to market competition, the future development of these protocols will also be influenced by various factors such as market demand, technological advancements, and regulatory environment. We believe that the following ten trends will shape the future of the decentralized derivatives market. Understanding and responding to these trends will be crucial for existing and new platforms.

1. Market Undergoing Restructuring

The decentralized derivatives market is undergoing unprecedented restructuring. Emerging platforms such as GMX v2 and Vertex Protocol represent not only technological iterations but also fundamental shifts in market demand and user expectations. This transformation involves not only functional enhancements but also comprehensive innovations in user trading experience, capital efficiency, and market transparency. We anticipate that this will lead to significant reshaping of the market landscape, with old leaders potentially being replaced by new, more flexible, and market-demand-driven platforms.

1. Acceleration of Technological Innovation

Technological innovation is at the core of driving the development of new platforms. We expect to see more innovative trading mechanisms in the future, such as more efficient liquidity pools and improved risk management tools, all aimed at addressing the unique challenges of the crypto market, including high volatility and liquidity issues. Smart contracts will also undergo further optimization, not only in terms of security but also in how they enable more complex and efficient financial strategies. This ongoing technological innovation will be key for platforms to maintain their competitiveness.

1. Rise of Cross-Chain Operations

As the crypto market matures, users increasingly need to seamlessly transact across different blockchains. The development of cross-chain functionality not only enhances asset liquidity but also provides users with a broader range of trading opportunities. We anticipate that platforms supporting multi-chain operations will gain a competitive advantage due to their enhanced interoperability.

1. Increased Regulatory Adaptability Requirements

With the evolving global regulatory environment, platforms that can adapt flexibly and operate compliantly while maintaining decentralization will have a competitive edge. This means that platforms need to not only focus on technological developments but also closely monitor international regulatory developments and adjust their operations to comply with legal requirements in different regions. This regulatory adaptability will be an important criterion for distinguishing between platforms in the future.

1. Comprehensive Revolution in User Experience

User experience will be a key differentiating factor among platforms. As the user base of decentralized finance expands, simplifying user interfaces and trading processes and lowering technical barriers will be crucial for attracting a wide range of users. This is not just a matter of interface design but also a rethinking of the entire trading process. How to provide a user experience comparable to or even better than centralized exchanges while maintaining decentralization will be a primary concern for all platforms.

1. Continued Importance of Smart Contract Security

Smart contracts are the cornerstone of decentralized finance, and their security directly affects the reputation and asset security of the entire platform. Therefore, strengthening smart contract security measures, such as conducting more rigorous code audits and establishing bug bounty programs, will be an important means of enhancing platform credibility. This is not only to prevent fund losses but also to build trust among users.

1. Innovation in Financial Instruments to Enhance Capital Efficiency

Decentralized platforms face significant challenges in capital utilization. While traditional financial markets have mature tools and strategies to improve capital efficiency, there is still considerable room for development in this area in the crypto market. Innovative financial instruments and complex trading strategies will be a focus of future decentralized platforms. This will test market participants’ understanding of the market and their ability to innovate in finance.

1. Deepening of Decentralized Governance

Decentralized governance is one of the core features of blockchain technology. Effective community participation and transparent decision-making processes will enhance platform credibility and user engagement. We expect future platforms to pay more attention to community opinions and incorporate community participation as an integral part of the decision-making process. This will not only increase user loyalty but also be a key step in achieving true decentralization.

1. Increasing Variety of Synthetic Assets and Derivatives

As the market develops, there is growing demand from users for diversified investment tools. Synthetic assets and various types of derivatives will be key to meeting this demand. We anticipate that future decentralized platforms will offer a wider range of derivatives, including options, futures, and various types of composite financial products. Diversified products will attract a broader investor base and significantly enhance market depth and liquidity

1. Liquidity Mining and Incentive Mechanisms

To attract and retain users, new liquidity mining and incentive mechanisms may be created and implemented. These mechanisms should not only attract user participation but also maintain user activity over the long term. We expect future incentive mechanisms to be more diverse and sustainable, including long-term rewards for user loyalty and engagement, rather than simple token rewards.

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