Key points to remember
- GMX is a decentralized exchange built on Avalanche and Arbitrum.
- It allows DeFi users to trade with up to 30x leverage without permission.
- GMX offers a smooth user experience perfectly suited for retail DeFi traders.
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GMX users can “buy” or “sell” up to 30 times the size of their collateral by borrowing funds from a large pool of liquidity.
GMX is a popular decentralized exchange that specializes in trading perpetual futures. Launched on the Ethereum Layer 2 Arbitrum network in late 2021 and then deployed on Avalanche, the project quickly gained traction by offering users leverage of up to 30x their deposited collateral.
Leveraged trading – the act of borrowing funds from financial platforms in order to increase exposure to price movements – has become a staple of the crypto ecosystem in recent years. Among other things, it allows market participants to take advantage of price declines, reduce risk in uncertain conditions, and bet big on an asset when convinced.
There are several ways to leverage crypto. Binance, FTX, and other centralized exchanges offer customers the ability to borrow funds for trading purposes. Binance and FTX both allow customers to borrow up to 20 times their initial deposit. DeFi protocols like Aave and MakerDAO issue loans against crypto collateral without permission. More recently, traditional financial firms such as GME Group and ProShares have begun offering their institutional clients access to leveraged products such as options on Ethereum futures and Bitcoin Short ETFs to their institutional investors.
GMX differs from these services in that it is a decentralized exchange that offers leveraged trading services. In this regard, it combines a similar experience to other DeFi exchanges like Uniswap with the leveraged trading services offered by Binance. On GMX, users can get 30x leverage on BTC, ETH, AVAX, UNI, and LINK trades. In other words, if a trader deposited $1,000 in collateral at GMX, they could borrow up to $30,000 from their liquidity pool. In this guide, we unpack the GMX offer to determine if it’s safe and whether you should use it for your next high conviction bet.
Trade on GMX
Trading on GMX is backed by a multi-asset GLP pool worth over $254 million at press time. Unlike many other leveraged trading services, users borrow funds from a liquidity pool containing BTC, ETH, USDC, DAI, USDT, FRAX, UNI, and LINK rather than a single entity.
Users can go “long”, “short” or simply trade tokens on the exchange. Traders go long on an asset when they expect its value to rise, and they go short hoping that they can buy back an asset at a lower price. On GMX, users can select a minimum leverage level of 1.1x their deposit and a maximum level of 30x on long and short trades.
GMX is powered by Chainlink Oracles. It uses aggregate price feed from major volume exchanges to reduce the risk of temporary wick liquidations. A liquidation occurs when a user’s collateral becomes insufficient to maintain a transaction; the platform then forcefully closes the position and pockets the deposit to cover its losses.
When a user opens a trade or deposits collateral, GMX takes a snapshot of its dollar value. The value of the collateral does not change throughout the transaction, even if the price of the underlying asset changes.
The trading fee to open or close a position is 0.1%. Variable borrowing fees are also deducted from the deposit hourly. The swap fee is 0.33%. As the protocol itself serves as the counterparty, there is minimal price impact when entering and exiting trades. GMX claims that it can execute large trades exactly at the reference price depending on the depth of liquidity in its trading pool.
When a user wants to go long, they can provide collateral in the token they are betting on. All the profits they receive go into the same asset. For shorts, the guarantee is limited to stablecoins supported by GMX: USDC, USDT, DAI or FRAX. Profits on shorts are paid in the stablecoin used.
Tokenomics and liquidity
The protocol has two native tokens: GMX and GLP.
GMX is the utility and governance token. It can currently be staked for an interest rate of 22.95% on Arbitrum and 22.79% on Avalanche.
Stakers can earn three types of rewards when locking GMX: Escrowed GMX (esGMX), Multiplier Points, and ETH or AVAX rewards. esGMX is a derivative that can be staked or traded against GMX over a period of time, while point multipliers reward long-term GMX stakers by increasing the interest rate on their holdings. Additionally, 30% of fees generated from swaps and leveraged trading are converted to ETH (on Arbitrum) or AVAX (on Avalanche) and distributed to staked GMX holders.
The GMX token also has a floor price fund. It is used to ensure that the GLP pool has sufficient liquidity, provide a reliable stream of ETH rewards for staked GMXs, and buy and burn GMX tokens to maintain a minimum price of GMX against ETH. The fund grows through fees accrued through the GMX/ETH liquidity pair; it is also supported by OlympusDAO Bonds.
At the time of writing, GMX’s total supply stands at 7,954,166, worth over $328 million, 86% of which is staked. The total supply varies depending on esGMX redemptions, but the development team has predicted that the supply will not exceed 13.25 million. Beyond this threshold, the creation of new GMX tokens will be subject to the approval of the DAO.
The second token, GLP, represents the index of assets used in the protocol’s trading pool. GLP coins can be minted using index assets, such as BTC or ETH, and can be burned to redeem those assets. GLP holders provide the liquidity traders need to gain leverage. This means that they make a profit when the traders take a loss, and they make a loss when the traders take a profit. Additionally, they receive esGMX rewards and 70% of the fees generated by the protocol. Fees are paid in ETH or AVAX. GLP tokens are automatically staked and can only be traded instead of sold. The current interest rate is 31.38% on Arbitrum and 25.85% on Avalanche.
The price of GLP depends on the price of its underlying assets, as well as the market exposure of GMX users. Most notably, GLP suffers when GMX traders short the market and the price of assets in the pool also declines. However, GLP holders can profit when GMX traders are short and prices are rising, GMX traders are long and prices are falling, and GMX traders are long and prices are rising.
GMX is user-friendly. The trading experience is smooth and the system provides users with comprehensive data. Whenever you enter or close a position, it is easy to find the collateral size, leverage amount, entry price, liquidation price, fees, available liquidity, slippage, spread and PnL (profit and loss). The protocol’s interface provides an abundance of information related to its assets under management, trading volumes, fees, and trader positions. The website also details the market capitalizations of GMX and GLP and highlights the project’s related partnerships, integrations and community projects. He furthermore includes a documentation section, which provides information on the various components of the exchange and suggests methods for bridging to Arbitrum or Avalanche, or acquiring GMX and GLP tokens. Thanks to its detailed dashboards, GMX exudes a sense of transparency. As a result, the mechanisms of the protocol are relatively simple to understand.
With its permissionless accessibility and leveraged trading offering, GMX combines the experience of decentralized and centralized exchanges, showing that DeFi protocols are innovating every day. The protocol’s trading volume has more than tripled in the past two months and is now between $290 million and $150 million per day, indicating growing interest among crypto natives. As GMX does not yet handle billions of dollars in volume like its centralized counterparts, it is currently a product better suited to smaller retail merchants. Yet, after rapid growth over the past few months, GMX may soon attract the institutional market as more big players start experimenting with DeFi. With more room for growth to come, it’s worth keeping an eye on.
Disclosure: At the time of writing this article, the author of this article owned ETH and several other cryptocurrencies.