Introduction

GMX is a decentralized derivative cryptocurrency exchange that allows users to enjoy low fees and zero-slip transactions through an innovative GLP multi-asset liquidity pool and aggregated prophecy machine quotes. Users can stake GMX or GLP to gain the network’s native tokens.

GMX is built on the Arbitrum, and Avalanche GMX provides trading services for spot and perpetual contracts on the chain. GMX supports up to 30x leverage, and users can enjoy low transaction fees and near-zero spreads. Since its launch in 2021, its trading volume and Total Value Locked (TVL) have grown steadily, making it one of the fastest-emerging protocols in the market.

GMX has improved the traditional Automated Market Maker (AMM) model by adopting a unique multi-asset liquidity pool model. This model allows users to deposit specified cryptocurrency assets into the liquidity pool and thus become liquidity providers. The multi-asset liquidity pool model is an innovative mechanism. How does GMX achieve zero spread trading, no impermanent losses, and a diverse source of income for liquidity providers? The following is a detailed description.

What is GMX?

GMX is a decentralized exchange that supports spot and perpetual contract trading. It encourages users to deposit cryptocurrency assets into a liquidity pool to become market makers and earn transaction fees. The cryptocurrencies currently available to GMX users on Arbitrum are ETH, WETH, BTC, LINK, UNI, USDC, USDT, DAI, and FRAX. In contrast, the tokens available on Avalanche are AVAX, WAVAX, ETH, BTC, and USDC, and users can trade them with up to 30x leverage.

Users do not exchange assets and trade on GMX as they do on centralized exchanges, where many users submit limited buy and sell orders in the order book. Trading with GMX is done by depositing and withdrawing assets from a liquidity pool called GLP, which is the counterparty to all traders. As long as there is liquidity in the pool, the exchange will complete the transaction without the risk of not finding a counterparty to match and being unable to trade.

A GLP liquidity pool is a multi-asset liquidity pool consisting of many different types of cryptocurrencies with varying weighting ratios. There are eight cryptocurrencies in the GLP liquidity pool on Arbitrum - ETH, BTC, LINK, UNI, USDC, USDT, DAI, and FRAX - half of which are stable coins anchored to the US dollar. Avalanche’s GLP pool comprises AVAX, ETH, BTC, and USDC. The GLP pools on different chains are not connected, but the share of stablecoins is close to about 50%, equivalent to the asset index portfolio of a basket of cryptocurrencies.

Source: GMX’s official website

Users can deposit their crypto into the GLP pool to become liquidity providers and receive credentials for GLP tokens. Users staking GLP tokens can receive transition fees, funding fees, and liquidation fees, which fees will directly convert to the native assets of that blockchain network. Liquidity providers on Arbitrum will receive ETH, liquidity providers on Arbitrum will receive ETH, and liquidity providers on Avalanche will receive AVAX.

GLP liquidity pools employ Chainlink’s dynamic aggregation prediction machine to receive pricing information from Binance, FTX, and Coinbase exchanges and filter out extreme values that lack actual liquidity. Liquidity providers can deposit single crypto to obtain GLP tokens or redeem previously deposited crypto with GLP tokens. GLP liquidity pools are immune to impermanent loss problems because the quantitative rule constraints of algorithmic quotes do not constrain them.

Since the GMX protocol is an aggregated quote from multiple exchanges, there is no slippage when trading on GMX, making it ideal for handling large orders. The issue of impermanent losses is also addressed by aggregated quotations, as the assets of liquidity providers placed into the GLP liquidity pool are not converted to other cryptocurrencies with reduced value due to price changes. Total staking value has topped $400 million and cumulative trading volume has surpassed $55 billion in the year since the GMX protocol was developed, making it the third-largest decentralized exchange on Arbitrum after Uniswap and Curve.

Source: DefiLlama

GMX’s History

Although the GMX exchange went live on the Arbitrum blockchain network in September 2021, its prototype was completed as early as November 2020. Because GMX overcame many of the difficulties encountered when using decentralized exchange services, it was well received shortly after its launch and has been running on the Avalanche blockchain network since January 2022, with further expansion to other blockchains planned for the future.

The development team of the GMX protocol is also very much in the style of Web 3, and the members are all anonymous, so no one knows who they are yet, but the only thing for sure is that they have made a great product. According to the list of members of the social software Telegram, the GMX team consists of the following members (all names are displayed in Telegram)

• Founder: xdev_10, who calls himself X in public conversations
• Program Developers: xdev_10, gdev8317, xhiroz, vipineth
• UI/UX design: xhiroz
• Marketing and Business Development: Coinflipcanada, puroscohiba, bagggDad
• Community Manager: y4cards, supersonicsines

From XVIX, Gambit, the beginning of the GMX project, to the many following updates, such as aggregator protocol access, Olympus Pro integration, Avalanche cross-chain, and the GMX Blueberry Club’s NFT project, X can be found almost everywhere. Even though the development members of GMX remain a mystery.

From the social media and the GitHub public codebase, it is clear that this anonymous team is working hard on its development. While it’s impossible to rule out the possibility that the team disbanded and the project was abandoned, their ability to deliver products and introduce new features is evident to everyone and has earned them the trust of the cryptocurrency community and other projects. For example, the Congruent DAO protocol invested $5 million in GLP liquidity, and other projects such as Reimagined Finance, Thorus, and Vesta Finance have become part of GMX’s liquidity providers. GMX is an example of a grassroots, community-based agreement.

Source: Twitter

How Does GMX Work?

The most important thing for an exchange is liquidity, which is needed to create a deep enough trading market to attract many people to use and generate revenue.

All cryptocurrency holders contribute to the total liquidity, whereas speculative traders and users with a net demand for buying and selling are responsible for most of the trading activity. However, there is often friction between the wants and demands of those who offer liquidity and those who buy and sell transactions. Trading fees and bid-ask spreads are liquidity providers’ primary income sources. However, those who buy and sell frequently and in big quantities prefer lower costs, tighter bid/ask spreads, and greater market depth.

Because of this interdependent relationship between liquidity providers and traders, there needs to be an incentive for users to provide liquidity. There needs to be a reduction in transaction costs to get more people willing to trade, which creates a positive cycle where more fees and revenues attract more liquidity.

GLP tokens and liquidity pools

The GMX protocol meets the needs of both liquidity providers and traders through GLP liquidity pools and GLP tokens. The GLP liquidity pool is a multi-asset liquidity pool consisting of many different cryptocurrencies. Users can pay AVAX, BTC, ETH, LINK, UNI, USDC, USDT, DAI, and FRAX to purchase GLP tokens and become liquidity providers for the GLP liquidity pool and receive 70% of the liquidity pool’s transaction fees, funding rates, and liquidation fees, which will be directly converted to ETH or AVAX.

Traders or users who exchange assets use the GLP liquidity pool to buy and sell. Regarding spot trading, the GLP liquidity pool is not very different from other automated market maker agreements in that it charges 0.3% of the total value of the transaction as a fee. In general, if you buy 25 GLPs with 1 ETH, you can use those 25 GLPs to redeem 1 ETH in the future so that you can think of the GLP token as a certificate of deposit in the GLP liquidity pool.

Perpetual Contracts for GLP Streaming Pools

In terms of perpetual contracts, the GLP liquidity pool works interestingly, a bit like an AAVE type of lending agreement, where the trader deposits a portion of the assets in the GLP liquidity pool as margin, then lends a higher value asset from the GLP liquidity pool to bet against the GLP liquidity pool, paying a percentage of interest every hour before the margin is liquidated or the asset is returned. The profit from the closed position is taken out of the GLP liquidity pool. The profit from closing the position will be removed from the GLP liquidity pool, while the loss will be deducted from the margin.

For example, the current market price of ETH is $1,000, and a trader determines that the price of ETH will rise next, so he pledges 0.1 ETH (worth $100) in the GLP liquidity pool and then lends 1 ETH (worth $1,000), which is equivalent to 10 times leverage.

Shortly afterward, the price of ETH rises to $1250, and the trader chooses to close the position at this point, having previously lent $1000 worth of ETH. Since the price of ETH has risen, only 1000/1250 = 0.8 ETH from the GLP liquidity pool needs to be returned to get back the pledged 0.1 ETH margin, which, ignoring the interest during the borrowing period, gives a profit of 0.2 ETH.

But what happens if the ETH price drops? Again, using the example above, the margin is worth $100, so when the ETH price drops from $1000 to $900, the 0.1 ETH pledged by the trader is liquidated, and the GLP liquidity pool forfeits the trader’s margin.

LP vs. Trader Betting

As you can see, the GLP liquidity provider is in a betting relationship with the trader, and when the trader wins, the GLP liquidity pool shrinks. Conversely, when a trader loses money, the GLP liquidity pool grows.

Thus, a GLP liquidity pool is more appropriately described as a casino rather than a bank that provides deposits and loans. The cryptocurrency assets deposited into the GLP liquidity pool are chips placed on the gambling table, the holder of the GLP token is the dealer, and the trader is the gambler. Each time a trade is made, the gambler puts his margin chips on the table to guess the ups and downs, and the dealer charges an opening fee to play with him.

As a trader, his target is all the assets in the GLP liquidity pool, which successive successful predictions can loot. The GLP’s liquidity provider, the source of revenue, is all the traders who open positions at the door. The dealer always hopes that a gambler’s error in judgment will result in a margin forfeit, even if the opening desk fee and hourly interest income mitigate the occasional lucky win.

But are the traders winning, or are the liquidity providers at GLP making money? Long-term performance data gives us the answer. In the case of Arbitrum, the most heavily traded market, as of October 2022, users of GMX for perpetual contract trading had accumulated losses of over $45 million. This result is not surprising; a simple search on the Internet shows that more than 90% of traders are losing money. Even with a 50% chance of being right and a 50% chance of being wrong, the expectation of profit for traders on GMX is still negative, as each trade is burdened with fees for opening and closing positions and capital costs for maintaining them.

Source: stats.gmx.io

It is easy to see that the GMX protocol is very tempting for liquidity providers. They only need to deposit their cryptocurrency holdings to earn a return, and there are no infrequent losses. Depositing money in a bank account is no different, although the return mechanism is not the same as a simple lending agreement.

So why would traders still want to use the GMX protocol for trading? Because the market depth of GMX is excellent, and there are no slippage problems. Because the profit of trading is from the spread trading, using the order book trading or AMM liquidity pool trading will be due to a large amount of buying or selling to increase costs or reduce profits, but through the GLP liquidity pool to open. Close positions, regardless of the amount of most of the price deviation, will not occur because there is no actual buying and selling, so there will be no problem of market price eating orders; professional traders can take advantage of This feature can be used by professional traders to do a better control of funds.

Regarding protocol development, the GMX exchange has also issued GMX tokens. GMX tokens can be used for the protocol’s governance and staking, to adjust the rate structure and the weight of different cryptocurrency assets that affect the GLP liquidity pool, and to receive 30% of the transaction fees, funding rates, and clearing fees in the GLP liquidity pool. The proceeds are directly converted to ETH or AVAX.

The maximum supply of GMX tokens is 13.25 million. Nearly 8 million GMX tokens have been issued to date, and according to official information, GMX tokens will be allocated for the following purposes:

1. old protocol tokens from XVIX and Gambit migration into 6 million GMX.

2. 2 million GMX to be invested in the GMX/ETH flow pool on the Uniswap exchange.

3. 2 million GMX are used for esGMX rewards.

4. 2 million GMX are managed by the Floor Price Fund.

5. 1 million GMX tokens for marketing, partners, and community contributors.

6. 250,000 GMX tokens are unlocked linearly over two years as rewards for the development team.

The esGMX reward can be linearly unlocked into GMX tokens after one year by pledging GMX tokens or GLP tokens to encourage long-term pledging and provide liquidity. This reduces the price volatility of GMX and provides a stable source of income for pledgers. Users who stake GMX tokens also receive Multiplier Points, which boost the user’s share of GLP liquidity pool proceeds by a certain percentage.

The Floor Price Fund follows the protocol-owned liquidity proposed by Olympus DAO, backing the minimum price of GMX tokens and ensuring the liquidity of GLPs. When the ratio of the Floor Price Fund to the total amount of GMX in circulation is lower than the market price of GMX, it will buy back and destroy the GMX in circulation so that the price cannot fall further.

Advantages and disadvantages of GMX

Because the GMX protocol improves the traditional liquidity pool model, users of the GMX exchange may benefit or be at risk depending on what decentralized financial services they use and what role they play in the GMX exchange. We briefly discuss below the advantages and disadvantages of the GMX protocol for three types of users: users of exchange assets, liquidity providers, and speculative traders. What are the advantages and disadvantages?

Users of exchange assets

The advantages of the GMX protocol model for users of exchange assets are apparent. Regarding transaction fee rates, GMX is the same as most other decentralized exchanges, around 0.3% of the total transaction amount. Still, regarding exchange rate stability, GMX outperforms almost all of its competitors in the market. GMX does not use an order book to create a trading market or AMM to make quotes, so theoretically, there is no slippage. As long as liquidity is in the liquidity pool, orders of any size can be absorbed instantly without impacting the market price.

For example, if, for some reason, a bitcoin crashes and the price drops 40% from $20,000 to $12,000 within an hour, an institution needs to liquidate 100,000 bitcoins in one spot to hedge their bets. Still, no exchange in the market has an order book with so many pending orders that can handle such a large selling volume, and even if they do sell, the price must be the more you sell, the cheaper it gets. For example, suppose a financial institution discovers over $1.8 billion worth of USDC in the GLP liquidity pool at $18,000 bitcoin. In that case, it can immediately sell 100,000 bitcoin spots into the GLP liquidity pool for USDC at a fixed price of $18,000 without waiting for pending orders in the order book to close or incurring the high cost of converting the AMM liquidity pool.

The fast completion and zero price shock nature of GMX exchange assets make it ideal for high-volume OTC transactions. Still, the downside is that the GLP liquidity pool has a small selection of assets, which limits its potential for non-popular, long-tail assets.

Liquidity Providers

The goal of a liquidity provider is to passively deposit assets to earn income without the need for complex operations, which GMX does very well because GLP liquidity pools are used in a way that is not much different from depositing in a bank account. Liquidity providers are wary of erratic losses, which GMX also addresses, as GLP liquidity pools are single-asset deposits and withdrawals that do not convert the deposited assets into other assets due to price fluctuations. Liquidity providers want high returns, and GMX opens the way to make this possible. As long as the market traders lose money, returns will increase. Liquidity providers do not want to take the risk of loss, GMX uses statistics to show that short-term losses will occur, but long-term profits are the inevitable result.

On the surface, the GMX protocol fulfills the wishes of almost all liquidity providers: long-term, stable, low-risk, high-yielding gold flows. But the truth is less rosy than it seems because GLP liquidity pools are more than just deposits and lending like banks. Their excess returns well above the general market interest come from traders’ forfeited margin, and the increased risk taken is traders’ profit. But is a trader bound to lose money? What if the opponent is from a top quantitative trading team or a famous hedge fund trader? Is Soros confident that he can win and not lose when he sits across from you? Although the rate rules favor liquidity providers, there is no guarantee that extreme cases of huge liquidity losses will not occur.

The speculative trader

In many ways, the GMX exchange is a better trading platform from a trader’s point of view. Open and close positions at GMX are not bought and sold with an order book or AMM liquidity pool, so there are no slippage issues. In addition, the GMX protocol uses Chainlink’s dynamic aggregation prognostic machine to aggregate quotes from multiple exchanges, which filters out illiquid and abnormal extreme value prices, thus reducing the risk of liquidation. Traders also benefit from a GLP liquidity pool that allows them to quickly exchange large amounts of assets without price volatility, more accurately predicting losses and profits for each trade and managing their money accordingly.

The most apparent drawback for traders is the small selection of assets in the GLP liquidity pool, as they can only trade with a few cryptocurrencies. There is a potential additional risk of sudden spikes in funding rates, which dynamically adjust to asset utilization in the GLP liquidity pool. For example, suppose you choose to go long on LINK tokens in the contract market of the GMX platform, and soon after, you open a position. In that case, suddenly, a large number of users in the market using USDC stablecoins to buy LINK tokens in stock, the number of LINK tokens in the GLP liquidity pool will decrease dramatically, and the increased utilization of funds will prompt the contract to go long. The funding rate of LINK will rise rapidly. In other words, the price impact of large transactions on the liquidity pool is still there, but the cost is passed on to traders as funding rates.

The GMX Ecosystem

Vesta Finance is one of the many lending agreements that accept GMX and GLP as collateral. It is built on the Arbitrum network and allows users to stake GMX and GLP to lend stablecoin VST. The current collateralization rate needs to be maintained at 150% and 120% or more, respectively. The number of VSTs minted through GMX, and GLP is currently close to 5 million, and the ETH rate returned to GLP pledgers under the Vesta agreement is around 11.5% per annum.

Source: Vesta Finance

Many decentralized exchange aggregation protocols also favor the zero transaction spread of the GMX protocol. Yield YAK, a revenue aggregation protocol on the Avalanche blockchain network, has more than 35% of its trading volume done through the GLP liquidity pool. This advantage is even more pronounced when large transactions are needed and decentralized exchanges such as 1inch have integrated GLP. Other decentralized exchanges, such as 1inch, also integrate liquidity from GLP liquidity pools. Yield YAK offers income products supporting GLP and GMX, and the profits earned are automatically reinvested.

Source: Yield Yak

GMX Blueberry Club is a series of 10,000 NFT personal avatar images on the Arbitrum network, containing over 130+ hand-drawn features. This NFT project was created for the community of the decentralized exchange GMX.io and was released on December 4, 2021. Each GMX user who pledges GMX tokens for bonus points is entitled to 1 free GBC series NFT. The remaining GBCs are sold publicly at 0.03 ETH each, with the proceeds from the sale becoming a community development fund that currently holds over $750,000 worth of GMX and GLP. The project has many active contributors from the community, again demonstrating the grassroots nature of the GMX development team, which is based on the community and for the community.

Source: GMX Blueberry Club

GMX Version Upgrade

GMX V1

GMX launched its first version, V1, on Arbitrum in September 2021. V1 employed a unique exchange model that allowed users to trade without the need to provide liquidity. Users could earn trading fees and token rewards by staking GMX and GLP tokens. Shortly after its launch, GMX V1 achieved significant success, with the Total Value Locked (TVL) quickly growing to several hundred million dollars.

GMX V2

As the GMX ecosystem developed, the team decided to release GMX V2 to further enhance performance and functionality. GMX V2 was launched on Arbitrum and Avalanche in November 2022. The key improvements in V2 include:

1. A new trading engine that improves trading speed and efficiency.
2. Addition of new trading pairs and assets.
3. Improved user interface and trading experience.
4. New risk management features.
5. Optimized token distribution and reward mechanisms.

The launch of GMX V2 further solidified GMX’s position in the decentralized exchange sector, attracting more users and liquidity.

GMX V1’s Flaws and V2’s Updates

Although GMX V1 provided a relatively comprehensive on-chain derivatives solution and became the largest on-chain derivatives market by TVL, it had several user experience issues. These included high trading fees, potentially high borrowing costs for both long and short positions leading to high holding costs, significant skew in long and short positions causing losses for GLP holders, and the risk of a single asset causing losses for all GLP holders. GMX V2 introduced substantial updates that can be considered a completely different approach, including:

1. Replacing the single liquidity pool (GLP) with multiple risk-isolated GM pools. Each asset’s liquidity is independent, allowing support for more long-tail assets. This isolation prevents all liquidity providers from facing risk if one asset’s price is manipulated, as seen in past AVAX price manipulation attacks.
2. Introducing funding fees determined by the open interest of long and short positions, facilitating balance between the two through arbitrage.
3. Changing the borrowing fee structure to only charge the side (long or short) with greater open interest, instead of charging both sides.
4. Reducing trading fees from 0.1% to either 0.05% or 0.07%, depending on whether the trade promotes balance or imbalance between long and short positions.
5. Introducing price impact, giving trades that promote balance better pricing and imposing negative price impact on trades that increase imbalance.
6. Adding other features, such as limit orders.

These features primarily isolate risks among liquidity providers and incentivize arbitrageurs through varying fees to balance long and short positions. Trades that promote balance benefit from lower fees, favorable price impacts, no borrowing fees, and additional funding fee income.

Comparison of GMX V1 and V2

GMX V2 has significantly improved performance, functionality, and user experience, further solidifying GMX’s leading position in the DEX space. As the GMX ecosystem develops, more innovations and improvements are expected.

Conclusion

GMX innovatively redefines liquidity pools, allowing users to exchange assets at a low cost and without price slippage, even for large transactions. For liquidity providers, GLP liquidity pools are not plagued by impermanent losses. They can add and redeem liquidity with a single asset and earn various revenues, such as transaction fees, funding rates, and liquidation fees. GMX also supports perpetual contract trading with up to 30x leverage, zero spreads, and aggregated oracle quotes to help traders reduce liquidation risk, more accurately control positions, and predict gains and losses.

The success of GMX has been demonstrated on many levels, whether it be trading volume, the number of users, integration with other protocols, etc., all showing upward growth. The indexed combination of GLP liquidity pools tied to a basket of cryptocurrency assets also reveals the potential for other Decentralized Finance (Defi) applications, where different types of income products can be expected to emerge to participate in GLP liquidity pools through cryptocurrency lending and contract hedging to hedge price risk while earning stable The GMX proposal for multi-asset liquidity is a good one.

Although GMX’s proposed multi-asset liquidity pool model has proven its feasibility and its community-oriented business objectives have been well received by many investors, it should be noted that GMX’s development team has remained anonymous. The GLP liquidity pool is still subject to the risk of smart contracts or the possibility of liquidity depletion. Still, like a master contract trader, winning all the money on the platform is theoretically possible, but it is almost impossible. In retrospect, most market participants have lost, and the investors must carefully weigh returns against other potential crises before deciding to participate in an investment.

As the GMX protocol continues to evolve, the release of Version 2 (V2) has introduced numerous innovations and improvements. V2 enhances trading efficiency and user experience by incorporating new features and optimizations. For instance, the trading mechanism in V2 has been refined to reduce transaction costs while improving capital efficiency. Additionally, V2 has strengthened risk management tools, providing users with more protective measures to cope with market fluctuations. These updates indicate GMX’s ongoing efforts to boost the platform’s competitiveness and deliver better services to its users.

With the protocol upgrade, users and liquidity providers should pay attention to the changes brought by the new version, including new terms of use, risk factors, and how to adapt to these changes to maximize benefits. Although the GMX protocol demonstrates strong potential and a positive development outlook, the market is always uncertain. Therefore, users must conduct comprehensive analysis and risk assessment before making investment decisions.