GMX v2 and its competitors: the new wave of disruption in the decentralized derivatives market

As the cryptocurrency market matures, decentralized derivatives exchanges such as GMX v2 and emerging platforms such as Vertex Protocol, Hyperliquid, and Apex Protocol are gradually emerging. These platforms are not only challenging GMX's leadership, but also heralding a major transformation in the field of decentralized finance (DeFi). This Bing Ventures research article will take GMX v2 as the entry point and discuss the evolution of the competitive landscape and future trends in the decentralized derivatives market around GMX and its main competitors.

The size of the decentralized derivatives market

Source: Coingecko

The above table shows the average daily trading volume data of spot and derivatives of decentralized exchanges and centralized exchanges in 2023. It can be seen that the spot trading of decentralized exchanges is $1.84B, slightly higher than the $1.44B of derivatives trading, but on the other hand, the derivatives trading volume of centralized exchanges is $64.74B, much higher than the $19.18B of spot trading.

Through the above data, we can find that the market of centralized exchanges is larger than that of decentralized exchanges in terms of spot and derivatives transactions, among which the derivatives market is particularly prominent. Despite the FTX incident and a series of previous failures of centralized institutions, it seems that centralized exchanges are still the first choice of the public. In addition, the derivatives trading volume of centralized exchanges has a very high ratio compared to the spot market, indicating that the derivatives market of centralized exchanges is far more active than the spot market.

Source: DefiLlama

GMX v2 and its competitors

GMX v2: A disruptive new player in the market

We analyzed the market changes since the official launch of GMX v2. The early market is still dominated by GMX v1 and dYdX, Mux Protocol and Apex Protocol can only follow with a distant TVL, and GMX v2 is just starting, with a negligible TVL. But 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 the latter two (GMX v2: $89.27m; Mux Protocol: $57.71m; Apex Protocol: $45.51m). Along with the growth of GMX v2, the TVL of GMX v1 also declined in the later period. We believe this is due to users migrating from v1 to v2, because v2 does solve many v1 shortcomings, thus leading to the current situation.

Source: Dune Analytics @gmx-io

GMX v2’s rapid growth in average daily trading volume since its launch signals the market’s positive 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 improving transaction efficiency and reducing user costs. GMX v2’s TVL growth not only shows the inflow of funds, but also hints at a deeper shift: the migration of users from older versions of the protocol and the addition 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

As can be seen from the picture above, the number of daily users of v2 has caught up with v1. However, for GMX v2, the sources of user growth are more diversified, including users migrating from the v1 version and new DeFi participants. Behind the user growth is the recognition of GMX v2’s optimized trading experience and higher financial efficiency. These factors have attracted a broad user group. In terms of handling fees, the handling fee income of v1 is still higher than that of v2, reflecting the difference in charging structure between the two. The influx of users reflects the success of GMX v2 in marketing and user education. However, the rapid growth of new users also brings challenges. How to convert these new users into long-term loyal users is a problem that GMX v2 needs to face. We believe that GMX v2’s future strategy should focus on continuous improvement of user experience and in-depth community participation to consolidate its position in the market.

At the same time, in order to promote the balance of long and short positions and improve the efficiency of fund use, the charging model of GMX V2 has also been adjusted. Specific adjustment measures include:

• Reduce position opening/closing fees: Reduce the original 0.1% fee to 0.05% or 0.07%. This rate depends on whether opening a position helps balance the long and short market. If it helps balance, a lower fee will be charged.
• Introducing funding fees: In the comparison of long and short forces, the stronger party needs to pay a funding rate to the weaker party. This rate is not fixed, but is adjusted in stages according to the position ratio. For example, if the total long position is greater than the short position, the funding rate that the long position needs to pay to the short position will gradually increase until the difference between the two falls below a certain threshold or reaches a certain upper limit. After the funding rate reaches the upper limit, it will remain unchanged. And vice versa. Such a dynamic segmented rate mechanism can increase the arbitrage space, attract the entry of arbitrage funds, and then promote the balance of long and short forces in the market.

In summary, we believe that one of the biggest challenges facing GMX v2 is how to maintain the security and stability of the platform while growing rapidly. In the DeFi field, security incidents occur frequently, and GMX v2 must ensure that its platform is protected from such risks. Another challenge is how to continue to maintain its advantage in the fierce market competition, especially in the face of competition from other emerging protocols. GMX v2 also needs to focus on how to continue to innovate to maintain the appeal of its products and services. Ultimately, the success of GMX v2 will depend on how it balances growth and stability, innovation and security.

Source: DefiLlama

At the same time, we compared the monthly TVL change rates of the top 15 derivatives protocols by TVL as of November 6, 2023. The increases in dYdX and gmx are not outstanding. Instead, the dark horses are Vertex Protocol, Hyperliuid and Apex Protocol. The TVL increases in the past month have reached 63.22%, 30.69% and 25.49% respectively. Therefore, we will explore the above three protocols one by one below and analyze the narrative or main driving force behind their rise.

Vertex Protocol: Competitiveness of low-cost operations

The Vertex protocol is a decentralized exchange that integrates spot trading, perpetual contracts and currency markets. The protocol uniquely combines a centralized limit order book (CLOB) and an automated market maker (AMM) to ensure enhanced liquidity, transforming users’ trading experience.

The protocol is built on Arbitrum’s second layer (L2) and is designed to reduce gas fees and combat miner extractable value (MEV), driving efficient and cost-effective transactions in the decentralized space. The Vertex protocol has three pillars: an off-chain sequencer, an on-chain AMM, and a powerful on-chain risk engine. The order book and AMM work together to accumulate liquidity, not only from API market makers, but also from on-chain contributors. Its risk engine ensures fast liquidations, while dual liquidity sources enable traders to obtain better prices. The growing transaction volume on Vertex is a testament to the success of this unique model.

The Vertex Protocol's cross-margin system makes it easy for both skilled and novice traders to use, significantly reducing margin requirements. For example, if a trader has a long spot leveraged ETH position and a short ETH perpetual contract position, the combined margin requirements may be lower than the margin required to open two separate positions using 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 appetite. If the value of the long ETH spot leveraged position falls, the excess margin (unrealized gains) from the short-term ETH perpetual contract can be used to maintain the required margin level and prevent the long ETH spot leveraged position from being forced to liquidate. It can be seen that Vertex's approach maximizes capital efficiency.

Project Performance

Since the establishment of the project, it can be seen from the above figure that the TVL and derivatives trading volume of vertex protocol have also been steadily increasing.

Total Locked Amount

Although the Vertex protocol provides an innovative trading experience, its TVL is still insufficient compared to GMX. This is mainly because its lending products are not yet fully mature and currently only support a limited number of mainstream currencies, such as wBTC, wETH, USDC, etc., a total of five. This limits its ability to attract more locked-in volume. In addition, as of the time of writing, its native token VRTX has not yet been officially launched, so it lacks the function of allowing users to earn interest through staking, which is another reason for the current low TVL.

Derivatives Trading Volume

In the fiercely competitive decentralized exchange market, Vertex Protocol has spectacularly captured 15–30% of the daily trading volume, showing superior performance even when compared to industry giants such as GMX, Gains, and Kwenta. Especially compared with GMX, Vertex's trading volume has a clear lead. 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 Income

GMX’s Fees; Source: DefiLlama

Vertex Protocol’s Fees; Source: DefiLlama

GMX charges higher transaction fees compared to the Vertex protocol. The Vertex protocol implements a zero-fee policy for makers and offers extremely low fees for takers on major trading pairs (2 basis points for stablecoin trading pairs, 2–3 basis points for core markets, and 4 basis points for non-core markets). In comparison, GMX v1 charges 0.1% when opening and closing a position (v2 reduces to 0.05% or 0.07%), and additional fees of up to 0.2% to 0.8% are charged if exchanges are involved in the transaction. This advantage in fee structure makes the Vertex protocol more attractive in the market, although its lower transaction fees may cause revenue growth to be less significant than transaction volume growth.

We believe that Vertex Protocol has quickly established itself in the market by offering a very competitive low fee structure. This low-fee strategy attracts a large number of traders looking for cost efficiency, especially in current market conditions where users are increasingly focusing on transaction costs. However, in the long term, this strategy will face profitability challenges, especially when 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 revenue was once high in the past, it has recently fallen to a similar level to Vertex Protocol (~$100K). Combined with Vertex Protocol’s growing transaction volume, it is expected that its future revenue has the potential to exceed GMX.

Hyperliquid: Own on-chain order book DEX on L1

Hyperliquid is an order book-based perpetual futures decentralized exchange. The DEX runs on the Hyperliquid chain, a layer-1 blockchain built on Tendermint. A key reason for Hyperliquid's rapid development is that it has its own layer of network. This allows the Hyperliquid team to flexibly adjust gas fees, MEV, slippage, etc. to achieve the fastest and most efficient trading experience. Its performance is powerful enough to support 20,000 operations per second.

Having their own layer of network also allows them to develop on-chain order books that ensure complete transparency of every executed transaction, which is very necessary in the market after the FTX incident was exposed. Hyperliquid L1 makes it possible for them to make the platform as on-chain, decentralized, trustless and permissionless as possible.

On Hyperliquid, vaults provide liquidity for on-chain trading strategies. Vaults can be automated or managed by individual traders. Anyone who deposits money into the vault can get a share of the profits, whether it is a DAO, protocol, institution or individual. The vault owner can get 10% of the total profits. Hyperliquid is also the first exchange to list index perpetual contracts for friend.tech. Initially this was based on TVL, but after it became clear that the TVL definition could be manipulated, it was changed to be based on the median price of 20 mainstream accounts in consideration of the growing open interest.

Project Performance

The TVL of the project is also rising like the vertex protocol. The monthly trading volume of derivatives has been close to 1.5b since its launch, with the peak reaching 8b, but on average, the vertex protocol is still superior.

TOTAL LOADED AMOUNT

Although Hyperliquid’s total value locked (TVL) cannot be compared with GMX, when compared with Vertex Protocol launched in the same period, except for September, Hyperliquid’s TVL is slightly insufficient. The reason for the low TVL is mainly due to the limitations of its pledge deposit function. The project mainly realizes fund locking through Vaults, and users obtain the profit share of the vault by depositing coins into the vault. However, this method of imitating trading inevitably involves certain risks, because the profit and loss of the transaction completely depends on the trading skills of the Vault Leader. Therefore, this does not provide much protection for investors and is less attractive.

For example, the chart above shows the performance of the Hyperliquidity Provider (HLP), which is the protocol’s own vault that does work, liquidates, and receives a share of transaction fees. We can see that the return on investment is negative (-2.41%) and the profit and loss ratio continues to decrease, which indicates that depositing funds into Vault may not be a wise choice for users.

Derivatives Trading Volume

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

Although it is not as large as Vertex Protocol in terms of market share, as an emerging protocol, it has a market share of about 6% which is not bad. However, the transaction volume has declined in the past month and has not been able to continue the past traffic.

Transaction Fees and Income

Hyperliquid’s transaction fee structure is as follows:

• The taker pays a fixed fee of 2.5 basis points, and the maker receives a rebate of 0.2 basis points. Referrs receive 10% (i.e. 0.25 basis points) from the transaction fees of the takers they recommend. The remaining fees go to insurance funds and HLP (approximately 2.05 basis points).
• Compared to Vertex, where the team or insiders holding large amounts of tokens are the main beneficiaries of fees, in Hyperliquid, fees are allocated directly to the community: 40% goes to the insurance fund and 60% goes to HLP.

Hyperliquid’s fee structure places a strong emphasis on distributing more rewards to the community. In contrast, the Vertex protocol offers zero fees for makers and extremely low fees for takers on major trading pairs, with a portion of its trading fees used to support its Vaults and liquidity providers. This difference shows that Hyperliquid’s fee distribution prefers to reward community members who directly support network operation and risk management.

ApeX Protocol: Multi-chain exchange powered by ZK Rollup

ApeX Pro is built using StarkWare's Layer 2 expansion engine StarkEx, and uses the order book model to provide cross-margin perpetual contract transactions to achieve a safe, efficient, and friendly user experience. At the same time, it is also non-custodial, which means that the trader’s assets are completely on the chain, and the trader controls the private key. The application of ZK Rollup's capacity expansion solution helps it improve transaction security and user privacy protection. Compared with similar products such as dYdX and GMX, ApeX provides more favorable transaction rates. Its staking rewards and token buyback rewards as well as referral reward mechanisms also add to its appeal.

The main attractions of ApeX staking mechanism for users include:

• No fixed term or plan. Users can start or cancel staking at any time. The longer users invest in staking, the greater the rewards.
• Staking rewards not only take into account the pledged assets, but also the user's trading activities will increase their earnings. The staking reward formula takes into account the scores of “T2E” activities to bring additional benefits to staking users.

Project Performance

Apex Protocol’s TVL has similarly risen steadily since the project’s launch. Its monthly derivatives trading volume has also remained stable at about 1.7b, which is similar to the previous two agreements.

Total Locked Amount

Apex Protocol's TVL is much higher than the previous two. Its two major revenue functions, Smart Liquidity Pool and Apex Staking Pool, have played a big role in the accumulation of TVL, and the participation in the past has been very enthusiastic. The staking on the platform provides an annualized yield of up to 56.31%, and Smart Liquidity Pool also provides users who provide liquidity for its market-making strategy with quite good returns, with a 7-day annualized yield of 13.03%.

Derivatives Trading Volume

Source: DefiLlama

Compared to the other two protocols, Apex Protocol’s transaction volume data shows a more stable growth trend, indicating a steady increase in its user base and engagement.

TRANSACTION FEES AND INCOME

Apex shows a similar growth trend to Vertex in terms of fee income. 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 market segments allows them to more effectively serve the unique needs of those markets. Hyperliquid’s innovation in providing on-chain order books has built its reputation among a select group of users. Apex Protocol has gained recognition among users through its cross-chain functionality and efficient transaction execution.

Comprehensive comparison

Based on existing data, we rated the four protocols (GMX v2, Vertex Protocol, Hyperliquid and ApeX Protocol) from five aspects: total locked volume (TVL), transaction volume, user growth trend, fee structure and market distribution. for an overall comparison of their combined strength and robustness. Some of the scoring results are shown below.

Source: Bing Ventures

As the current market leader, GMX v2 performs better on most metrics, especially TVL and trading volume. It also performs well in terms of innovation, user experience, and community engagement, but regulatory compliance may be an area that can be strengthened in the future.

Vertex Protocol stands out on its fee structure, reflecting its competitive advantage in the market. Although slightly inferior to GMX v2 in terms of TVL and transaction volume, it has shown potential in terms of user growth and community participation.

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

Apex Protocol is similar to Vertex Protocol in most metrics, but slightly better in community engagement and user experience.

The future trend of decentralized derivatives market

In summary, we believe that GMX's position in the decentralized derivatives exchange market is indeed challenged by emerging protocols, especially Vertex Protocol. Due to its advantage in transaction fee structure, it has begun to seize more market share. This competitive landscape shows that even in this relatively mature market, innovative and user-friendly pricing strategies are still a proven and effective means to attract users and increase market share.

From the perspective of total locked value (TVL), the current performance of these three emerging projects is not enough to be compared with GMX. This reflects a practical problem: 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 insufficient market awareness. Therefore, for these emerging protocols, how to attract user funds and increase TVL will be a major challenge they face.

In addition to market competition, the future development of these protocols will also be affected by various factors such as market demand, technological advancement and regulatory environment. Here are ten trends we believe will shape the future of decentralized derivatives markets. Recognizing and responding to these trends will be critical for both existing and new platforms.

1. Reconstruction of market experience

The decentralized derivatives market is undergoing an unprecedented restructuring. Emerging platforms such as GMX v2 and Vertex Protocol are not just technical iterations, they represent fundamental changes in market demand and user expectations. This transformation is not just an increase in functionality, but a comprehensive innovation in user trading experience, capital efficiency and market transparency. We foresee that this will lead to a major reshaping of the market landscape, with old leaders likely to be replaced by new, more flexible platforms that better meet market needs.

2. Acceleration of technological innovation

Technological innovation is the core of promoting the development of new platforms. We expect more innovative trading mechanisms to emerge in the future, such as more efficient liquidity pools and improved risk management tools, all designed to address the high volatility and liquidity challenges unique to crypto markets. Smart contracts will also undergo further optimization, not only in terms of security, but also in how to implement more complex and efficient financial strategies through smart contracts. This continued technological innovation will be the key for each platform to remain competitive.

3. The rise of cross-chain operations

As the crypto market matures, users increasingly demand seamless transactions between different blockchains. The development of cross-chain functions not only improves asset liquidity, but also provides users with a wider range of trading opportunities. We expect that platforms that support multi-chain operations will gain competitive advantages due to their enhanced interoperability.

4. Increased regulatory adaptability requirements

As the global regulatory environment evolves, platforms that can flexibly adapt and operate compliantly while maintaining their decentralized nature will have an advantage. This means that platforms must not only pay attention to technological development, but also pay close attention to international regulatory developments and promptly adjust their operating methods to comply with legal requirements in different regions. This regulatory adaptability will become an important criterion for differentiating platforms in the future.

5. Comprehensive innovation of user experience

User experience will become a key factor that differentiates various platforms. As the user base of decentralized finance expands, simplifying the user interface and transaction process and lowering the technical threshold will become the key to attracting a wide range of user groups. This is not just a matter of interface design, but also a rethinking of the entire transaction process. How to provide a user experience comparable to or even better than that of centralized exchanges while maintaining the decentralized characteristics will be the primary issue that each platform needs to solve.

6. Smart contract security is still important

Smart contracts are the cornerstone of decentralized finance, and their security is directly related to the credibility and asset security of the entire platform. Therefore, strengthening the security measures of smart contracts, such as conducting more stringent code audits and establishing bug bounty programs, will become an important means to enhance the credibility of the platform. This is not only to prevent the loss of funds, but also to build users’ trust in the platform.

7. Financial instrument innovation leads to improved capital efficiency

Decentralized platforms face huge challenges when it comes to capital utilization. While traditional financial markets have proven tools and strategies to improve capital efficiency, in crypto markets there is still a lot of room for growth in this area. Innovative financial instruments and complex trading strategies will be the focus of the development of decentralized platforms in the future. This will test market participants’ market understanding and financial innovation capabilities.

8. 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 the credibility of the platform and user engagement. We anticipate that future platforms will place greater emphasis on community input and make community participation an important part of the decision-making process. Not only does this help increase user loyalty, it is also a key step towards achieving true decentralization.

9. Synthetic assets and derivatives become more diverse

As the market develops, users' demand for diversified investment tools is growing. Synthetic assets and multiple types of derivatives will be key to meeting this need. We predict that decentralized platforms will provide more types of derivatives in the future, including options, futures and various complex financial products. More diverse products will attract a wider investor base and will also greatly enhance market depth and liquidity.

10. Liquidity mining and incentive mechanism

In order to attract and retain users, new liquidity mining and incentive mechanisms may be created and implemented. These mechanisms must not only attract user participation, but also maintain user activity over the long term. We expect that the future incentive mechanism will be more diversified and sustainable, not just simple token rewards, but also long-term rewards for user loyalty and participation.