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The crypto derivatives market ā where crypto degens trade with leverage ā has become absolutely massive.
Let me show you.
This is the futures trading volume in crypto between February 2020 and October 2020 ā the period just before we entered the 2021 bull market.
Itās showing daily volumes of around $20 billion, with the occasional spikes to $30 and $40 billion.
Now letās zoom out to incorporate volumes during the 2021 bull market.
A massive increase. From 10s of billions in daily volumes, various exchanges started to collectively record 100s of billions in futures trading volumes every single day.
The derivatives market has become so big that over 73% of the monthly volume in crypto comes from derivatives trading, not spot trading.
In November, derivatives volumes rose by 36.8%, to $2.65 trillion in volume for the month.
So itās clear that people love to trade with leverage.
Thatās part of the reason why FTX was so successful before they imploded ā they offered leveraged trading with up to 100x. š³
But hereās the problem. Most derivatives trading is currently happening on centralized exchanges like OKX or Binance.
Thereās limited availability of onchain leverage trading, with only a few decentralized and permissionless protocols offering this service.
According to DeFiLlama, onchain derivatives have only breached the $100 billion mark in monthly trading volumes once.
In contrast, centralized exchanges consistently settle trades worth trillions of dollars each month. This means that over 98% of all trading volume happens on centralized exchanges.
While centralized exchanges provide a seamless UX, letās be honest, thatās not where you want to do your trading as youāre not in control of your money. Remember FTX?
So thereās clearly a need for a trusted decentralized platform where traders can use leverage. And there are a few that people can use already (e.g. dYdX, Vertex, Apex, Gains).
But, because youāre reading Web3 Academy, you know that solely providing a needed service is not enough. For an onchain protocol/application to be successful, they also need to have a sustainable business model put in place.
Today, I present to you GMX, a perpetual contract trading platform that provides up to 50x leverage trading options.
You might be wondering, Kyle, why are we talking about a derivatives exchange when you also donāt recommend using leverage?
Well, thatās because GMX is an onchain application with product-market-fit and also one of the only DeFi protocols that have figured out a sustainable mechanism to incentivize & reward ecosystem participation.
This is a model that other onchain applications could mimic so we want to make sure youāre aware.
Plus, leverage is extremely popular, and while we don't recommend everyone use it, playing with a small part of your portfolio won't kill you.
Here are some of GMXās numbers.
$153 billion in volume
4 million transactions
$75 million paid to $GMX holders
$2 million to Arbitrum
$700k to Avalanche
$500k to Ethereum
And hereās another kick-ass onchain value accrual visual.
Now remember that these numbers are miniscule when compared to the volumes and amount of transactions occurring on centralized exchanges.
And even if you compare this to Uniswap's almost $2 trillion volume & 270 million transactions, these numbers are insignificant.
However, GMX is an application thatās only 2 years old, and that still hasnāt been around during a bull market ā when most leverage trading happens ā so its best days are likely still yet to come.
By reading this report, youāll be way ahead of the rest.
Today, weāll go over:
What is GMX? š«
GMX Mechanics ā
GMX Key Stats š
GMX Value Accrual ā
Whatās Next for GMX? š
P.S.- At the end, I share my thoughts about whether or not this could be a good investment for the bull market. Make sure you read this through.
What is GMX? š«
GMX, a rebrand from the original Gambit exchange, provides perpetual contract trading with up to 50x leverage on all available pairs and charges a 0.015% fee on trades.
GMX has reduced their fee from 0.1% to 0.015% recently. Therefore, the majority of the data presented in this report reflects the period when GMX's fees were higher.
Moreover, trading fees on @Arbitrum have been lowered to ~0.015%, comparable to leading CEX's VIP tiers ā but available to *ALL* #DeFi traders instead.
1/2
Next-generation speed. Chainlink security.
blog.chain.link/data-streams-mā¦
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Built on both Arbitrum and Avalanche, GMX is one of the first (and only) DeFi protocols that provides sustainable yield for both stakers and liquidity providers.
Letās dive into how this works.
GMX Tokens & Mechanics ā
In this section, weāll go over various tokens and an overall complex mechanism that GMX has built.
Itāll probably get confusing but I wouldnāt stress too much if I were you ā you donāt need to understand every detail to get how GMX works.
All you should know is that this complex setup creates a very favorable tokenomic structure, one that the mainstream crowd wonāt grasp, nor do they need to.
At the end of this section, Iāll give you concise bullet points summarizing the key takeaways. Letās go.
$GMX
The $GMX token is primarily used for governance and staking on the GMX platform. Holders can create or vote on proposals and stake their tokens to earn passive yield.
Staking $GMX offers holders an APR of ~5% at the time of writing, with 30% of the platform's fees used to reward stakers.
APRs are updated weekly on Wednesday and will depend on the fees collected for the week.
The rewards include Escrowed GMX (esGMX), Multiplier Points and ETH/AVAX.
Escrowed GMX (esGMX): By staking $GMX, you initially earn esGMX tokens that have no market valueāessentially, they're non-liquid and valued at zero.
These can be converted into tradable $GMX over a one-year vesting period.
To vest esGMX into GMX, an equivalent amount of $GMX or $GLP tokens must be held and locked for 365 days.
Once vested, these tokens can be claimed & used/sold anytimeāāāā.
Multiplier Points: These are awarded for long-term holding without causing inflation.
Staking $GMX yields Multiplier Points at a rate of 100% APR.
For example, staking 1000 GMX for a year earns 1000 Multiplier Points.
These points can be staked for additional fee rewards in ETH/AVAX, similar to regular GMX tokens.
If GMX or esGMX tokens are unstaked, a proportional amount of Multiplier Points is burntāā.
ETH/AVAX Rewards: Rewards from swap and leverage trading fees are given in ETH if staking on Arbitrum and in AVAX if staking on Avalancheāā.
GMX has designed this mechanism to discourage immediate selling of earned tokens by stakers. As a result, a whopping 69% of $GMX tokens are staked. š²
It's an interesting strategy aimed at sustaining value and commitment within the ecosystem, and it also doesnāt cause inflation. Kudos.
So now that weāve talked about staking, letās talk about those who keep the GMX platform going: The liquidity providers.
Provide Liquidity, Earn $GLP & $GM
While GMX is the utility and governance token, $GLP & $GM act as indexes of all assets that provide liquidity for the exchange.
Note that $GLP is the token on V1 of the GMX platform, while $GM is for V2.
Let me explain how these tokens work by first explaining how Uniswap works. On Uniswap, if you want to provide liquidity, youāre simply using the tokens.
For example, if you want to provide liquidity for the $AAVE token on Uniswap, youād simply provide an equal amount of $ETH and $AAVE.
On GMX however, youād convert the $ETH and $AAVE into $GLP (for V1) or $GM (for V2).
The reason GMX does this is to limit the impermanent loss that often occurs when providing liquidity & it allows them to easily distribute the earned tokens to its LPs.
Impermanent loss is when you put cryptocurrency into a trading pool and the value goes down because the prices of the coins you put in change compared to when you added them.
So, when you want to add liquidity to a pool on GMX, youāre basically converting your tokens to mint $GLP or $GM in return.
Why would you do that? Because you can earn cash!
$GLP holders receive 70% of all fees generated
$GM holders receive 63% of all fees generated.
The rest is going to $GMX stakers and the GMX treasury.
Also note that $GLP & $GM pools act as a counterparty for traders.
When $GLP/$GM token holders supply liquidity for leveraged trading, they profit when traders incur losses, and the opposite is also true.
A GMX TL;DR:
$GMX is the governance token for the GMX platform
Staking $GMX gets you 10%+ APY
The APY doesnāt cause inflation ā 30% of trading fees are shared with $GMX stakers
Staking rewards come in exGMX, Multiplier Points & ETH/AVAX to discourage immediate selling
Liquidity providers make 70% of the trading fees
I hope that this section has given you enough context to understand how $GMX, $GLP & $GM holders make money.
This will help you understand how the value flows from GMX to its wider ecosystem onchain. Vamos.
Note: the stats below donāt include numbers for December!
GMX Key Stats š
Before we start, please note that weāre super early! Check this out.
Only 403k wallets have ever interacted with GMX.
And these have done a total of 4 million transactions.
Compare that to:
Uniswapās 9.2 million total wallets and 270 million transactions
Binanceās 150 million users
ā¦ and youāll understand how early GMX is.
Also note that the GMX platform launched in August 2021, a few months before the crypto bull market peak.
So, they havenāt really been through a bull market just yet. And remember that the product that they offer is much more appealing during a bull phase so we should expect a big increase in the numbers shared below, as the bull market picks up.
And, as you can see, the amount of active wallets has already started to see new highs since September, as the positive sentiment grows.
Lastly, you should know that although GMX works on both Avalanche and Arbitrum, it is the Ethereum L2 that sees the most activity.
358k of all 403k wallets operate on Arbitrum while only 45k are using Avalanche.
As for transactions, 3.3 million occurred on Arbitrum and 660k on Avalanche.
So, from all of this activity, who has made money?
GMX Value Accrual ā
In total, GMX has settled $153 billion in volumes. $128 billion on Arbitrum and $24 billion on Avalanche.
From all this volume, GMX charged a 0.1% fee (thatās now lower), 30% of which went to GMX stakers.
In total, $GMX stakers received $74 million ā $61 million on Arbitrum & $13 million on Avalanche.
The rate at which $GMX stakers are rewarded will probably decrease now that GMXās fee dropped from 0.1%. However, thatās all dependent on trading volume and activity.
When it comes to liquidity providers, on GMX V1, $GLP holders received a total of $171 million ā $139 million for those using Arbitrum and $32 million for those on Avalanche.
Note: These fees represent 70% of all revenue generated from the GMX pools on V1.
As for V2, which launched in July 2023, $GM holders received $2.6 million, aka 63% of all revenue generated from GMX pools on V2.
So thatās it for the GMX stakers and liquidity providers. But what about the blockchains upon which the GMX app is built?
A total of $2.7 million was distributed to the underlying blockchains, with Arbitrum getting $2 million, while Avax made $707k.
Meanwhile, Ethereum ā the settlement layer for Arbitrum ā received $498k.
Ethereum burned $489k from this revenue.
Ethereum validators (stakers) received $9k from all activity that occurred on GMX.
All of this value flow can be visualized in this single infographic, which hopefully makes more sense by now.
Wrapping Up š§µ Whatās Next for GMX?
Iām excited for the future of GMX, especially because this bull market will be the first one that GMX goes through.
And I think theyāll do really well. Hereās why I think that.
In-Demand Product: GMX is offering a service that's highly sought after, especially during bull markets.
The ability to trade with leverage is a feature that traders often look for, and GMX provides this on decentralized rails.
Low cost: Operating on blockchains like Arbitrum and Avalanche, GMX brings the advantage of lower-cost transactions.
This is crucial for facilitating futures trading at more affordable rates compared to centralized platforms.
Hereās a quick comparison of trading fees on various CEXs:
While the fees on centralized exchanges might seem competitive to GMXās newly introduced 0.015%, they often come with additional, less obvious costs like spread fees, withdrawal/deposit fees, and margin fees.
Meanwhile, dYdX, the current leader in derivatives exchanges, runs on the Ethereum mainnet, notorious for high gas fees in bull markets.
This cost factor could lead traders to prefer GMX for their trading activities.
The Safer, Decentralized Alternative: Opting for a permissionless and decentralized protocol, like GMX, over a CEX, is a smarter and safer choice, if you want to avoid incidents like the FTX collapse.
And, because the fees on GMX are now at similar levels with other CEXs, thereās no reason for users not to opt for the decentralized version.
Increased Trading Activity in Bull Markets: Typically, trading activity increases significantly during bull markets.
Therefore, volumes on platforms like GMX are expected to rise, which will directly benefit $GMX token holders and liquidity providers through fees and other rewards.
So should you buy this token?
From a long-term perspective (10+ years), I have no idea.
But short term, it is appealing for 2 reasons.
One, because of staking. By locking your $GMX, you can earn a 5% APY, which doesnāt cause inflation ā good for token sustainability.
Currently 69% (classic) of the supply is staked and stakers are continuously incentivized to keep staking. This is a very good sign from the tokenomics perspective.
Secondly, Iām saying this again, but futures trading is extremely popular during bull markets.
When weāre in the mania phase, I see no reason why GMXās volumes donāt go through the roof.
If that happens, $GMX holders and stakers could do really well, benefiting both from a substantial yield and a soaring token price.
All in all, I think that GMX has built a really cool mechanism through which they distribute value across their entire ecosystem, which incentivizes growth & long-term involvement.
GMX is one of the only DeFi protocols to achieve this in a sustainable manner that doesnāt cause inflation. Itās impressive how theyāve built this in such a short period of time.
Hats off to them.
P.S. I donāt own any $GMX and I havenāt done enough due diligence to recommend investing in it. That said, I believe the use case that GMX solves is about to explode and the economics of this application look great.
Do with that information what you will.
If you need help figuring out whether or not GMX has a place in your portfolio, consider taking our Web3 Investing Masterclass, which will help you properly design your portfolio.
As a PRO member, you get a 50% discount, which you can grab below. š
Thanks for reading. And remember, you're strong, youāre powerful, youāre alpha! ā¤
How'd you feel about our read today?
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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