Author: Alex
Related Reading:
Related Reading:
GMX is a DeFi protocol on Arbitrum that allows liquidity providers (LPs) to deposit funds and provide leverage to perpetual traders. GMX's LP acts as the counterparty to each transaction, making money by charging transaction fees and providing leveraged funds. ByteTrade Lab hasAn article details the mechanism。
The agreement revenue will be distributed to LPs and GMX Token holders in a 70/30 ratio.According to https://stats.gmx.io, since its operation in August 2021, the protocol has generated a net profit of close to $100 million.
How do LPs in license-free agreements achieve such high passive returns in the current market environment?
This paper analyzes "markouts" (markouts are unrealized gains and losses on trades using future prices) of all GMX trades since December 2021 to measure order flow toxicity. (Toxic order flow refers to informed trading. It can be understood that informed traders have price prediction and order manipulation advantages over market makers, which makes market makers have negative short-term profit expectations after they trade with them.) The research results show that GMX traders Pretty innocuous, losing up to 11 bps in 1-minute markups net of fees.
GMX has 60,000 unique users with a median account transaction volume of $350 and an average account transaction volume of $1 million. As shown, toxicity increases with transaction size, but by a small amount. Also, large transactions before removing fees are not toxic to the protocol.
GMX has clearly found a balance between passive retail LPs and retail traders, resulting in a steady income stream.Prior to this, passive retail LPs in AMMs in DeFi were almost never able to win on a large scale. So how does GMX do it?
GMX relies on price oracles to guide price discovery, which increases the efficiency of price discovery.This is different from Uniswap's compromise to EV in order to keep the transaction price consistent with the fair price.
GMX transactions are carried out in two transfers, which is equivalent to setting a 5-second buffer zone to mitigate the impact of arbitrageurs performing front-running transactions before the oracle update.The change, introduced in April, has significantly reduced the amount of direct arbitrage activity. It's a simple but effective change. As shown in the figure, arbitrage trading has been effectively curbed after this setting took effect.
GMX transaction fees are quite high, and the protocol captures 10 basis points, known as slippage costs. LPs with sufficient book liquidity like BTC/ETH can obtain greater returns for smaller orders. Meanwhile, penetrating marketing campaigns and an effective referral program attract a steady stream of retail traders. These mechanisms help LPs by differentiating retail investors from arbitrageurs. Oracles, buffers, large transaction costs, and effective marketing campaigns filter retail traders from sharks.
GMX's business model is similar to a full-stack retail trading business that encapsulates US stocks. On the one hand, he allows retail traders to participate like Robinhood (zero slippage is the new zero commission trading), on the other hand, he provides liquidity to the market like Citadel Securities.
first level title
So should you be optimistic and participate in GMX
The agreement currently has approximately $40 million in revenue and an FDV of $450 million. FDV to revenue ratio is 11 times.
Perhaps the following factors should be considered:
1. The prosperity of the retail trading market
Taking Virtu as the benchmark, as the world's largest high-frequency market maker, its market share accounts for about 25% of US retail trading volume. Its P/E ratio is low (around 5-6) as the volatile retail trading and highly competitive market increases the risk of structural alpha decay. Retail trading volumes are volatile as narratives and incentives change. Copycats and competitors stealing market share and creating excess liquidity supply are common in the DeFi space.
Additionally, marketing campaigns and promotions to keep retail traders interested are notoriously costly. This can be seen from Robinhood.
2. Vulnerabilities and scalability issues
Price oracles are a double-edged sword. They are good at leading to efficient in-market price discovery, but at the same time have the potential for increased capacity caps and potential loopholes.
It's worth pointing out here that manipulating oracle prices via CEX to attack on GMX is prohibitively expensive. In September’s attack on Avalanche, including transaction fees and slippage,Hackers Can Lose Money。
Through simple market simulation modeling, the author of this article calculates that 20 basis points of price manipulation on ETH (including GMX arbitrage fees) will cost about 20 million US dollars.
Institutional-level participants can use their volume to attack GMX when trading.
Hypothesis: ZhuSu wants to buy $100 million in ETH in his new fund. He went long ETH with 0 slippage on GMX in advance, and then went to Binance to buy. In this case, ZhuSu can get 1-2% profit on GMX.
GMX addresses this issue by introducing stricter OI limits. This doesn't quite solve the problem and trades off scalability. OI limited to 30-40% of AUM means capital inefficiency. Marginal GLP minting does not increase liquidity and dilute existing LP yields.
3. Arbitrum Airdrop
ARB is one of the most anticipated airdrops of the year. GMX is the main protocol on Arbitrum, and the impact of deep participation in GMX on future airdrops is self-evident. A 2% airdrop on Arbitrum at a $10 billion valuation means Arbitrum traders could potentially get $200 million, which is more than enough to cover their trading losses. Of course this is just speculation.
Original link
IOS
Android