Original author:Morty

Original author:

There has been a surprising amount of DeFi innovation happening on Arbitrum over the past period of time. One of the main reasons for this state is the deployment of the decentralized derivatives exchange GMX on Arbitrum - thanks to DeFi's LEGO attributes, other DeFi protocols began to build products based on GMX. Among them, the most common design is the product framework based on GLP.

Next, let's disassemble this product in detail.

First, what is GLP?

In the GMX ecosystem, there are two tokens, one is the governance and dividend token GMX, and the other is the liquidity token GLP.

GMX is not an order book model. In the GMX market, one party is a liquidity provider and the other party is a trader. Investors can provide liquidity to traders on GMX by purchasing GLP. Correspondingly, investors can obtain 70% of GMX transaction fee sharing. The liquidity provider and the trader are counterparties, which also means that the trader's profit represents the GLP holder's loss, and the trader's loss represents the GLP holder's profit.

GLP consists of a package of mainstream assets - 50% stablecoins, 28% ETH, 20% WBTC and some other mainstream assets. Liquidity providers enter or exit the market by minting or burning GLP.

In the design of most GLP derivative products, their main goal is to reduce the risk of investors and increase the income of GLP holders, thereby increasing the capital efficiency of assets.

Next, let's look at the strategies for these protocols:

1. Delta neutral strategy

It is the mainstream practice of most GLP derivative agreements to provide investors with a Delta neutral strategy to acquire users.

According to Wikipedia's explanation, in the financial field, if an investment portfolio is composed of related financial products, and its value is not affected by small price changes of the underlying assets, such an investment portfolio has the nature of Delta neutrality. In traditional finance, portfolio strategies designed to make money in sideways markets are known as delta neutral strategies.

That is, a delta neutral trade is intended to take a position that does not react to small changes in the price of the underlying asset. Therefore, the goal of the GLP Delta neutral strategy is to reduce its price sensitivity while providing income to GLP holders.

Let's take Rage Trade as an example.

Rage Trade provides users with a vault product called "Delta Neutral Vault", which is divided into Risk-On Vault (9% APY) and Risk-Off Vault (5% APY). Users can benefit by depositing USDC, and the current vault has reached the limit.

How does the vault work?

The basic work of Vault is to provide liquidity to GMX in a Delta-neutral way to earn ETH income. However, in order to reduce the risk exposure of users, Rage Trade has launched two products to meet the needs of users with different risk preferences. Through the matching of funds in Risk-On Vault and Risk-Off Vault, Rage Trade realizes the realization of returns under different risks.

The first stage: Rage Trade converts part of the user's USDC into GLP, and deposits it in GMX to obtain a commission income share.

GLP Derivatives Agreement Strategy Dismantling: Delta Neutral Strategy, Collateralized Lending, Liquidity Certificates and Competitors

Among them, in addition to staking GLP to obtain GMX commission dividends, Risk-On Vault borrowed USDC from Risk-Off Vault to complete the opening of airdrop positions to hedge against price fluctuations of ETH and BTC.

The Risk-Off Vault earns interest by lending USDC on Aave, and also receives a small portion of ETH rewards from GLP based on the amount of USDC lent to Risk-On Vault.

Every 12 hours, Risk-On Vault will update its hedging position according to the weight and price changes, and automatically compound the ETH return of GMX into GLP.

Phase 3: Based on the utilization of the Risk-Off Vault, the ETH rewards generated from GMX since the last rebalance are distributed between Risk-On and Risk-Off Vault.

The ETH reward share of Risk-Off Vault will be automatically converted into USDC and mortgaged on Aave to obtain more interest.

Rage Trade's product design pursues a Delta-neutral investment strategy, and provides different income strategies for users with different risk preferences in the form of Risk-On and Risk-Off.

GLP Derivatives Agreement Strategy Dismantling: Delta Neutral Strategy, Collateralized Lending, Liquidity Certificates and Competitors

How the DeCommas Delta Vault Works

2. GLP mortgage lending and minting stable coins

Since GLP is composed of a package of mainstream assets, and 50% of which is USDC, its volatility is low and it is very suitable for operation as lending collateral.

Let's take Vesta Finance as an example.

Users can deposit GLP into Vesta Finance, and Vesta will pledge GLP directly in GMX. Therefore, users will receive loan interest income and GLP dividend income (Vesta takes 20%). Users who deposit into GLP can mint the stable currency VST, and VST can be used for liquidation pledge and liquidity mining. This greatly improves the capital efficiency of GLP holders. At the same time, the protocol expects to accumulate esGMX to increase the income of staking users.

Currently, the TVL (Total Locked Value) of Vesta Finance is 22 million, and the number of VST minted is 8.75 million.

3. GLP liquidity certificate

Another way to improve capital efficiency is to mint liquidity certificates, just like Lido provides stETH certificates for ETH stakers.

The GMD Protocol is a good example.

It adopts a pseudo-Delta neutral strategy and provides investors with a vault product called "Delta-Neutral Vaults".

Investors can pledge USDC, ETH and BTC to GMD Protocol's single currency vault. GMD Protocol will compound the user's investment. Users will receive gmdUSDC, gmdETH and gmdBTC as asset certificates, and GMD Protocol will encourage users to obtain additional income through these tokens. When users choose to quit, they can exchange USDC, ETH, BTC and extra income through their gmdToken.

Does GMX have competitors?

The answer is yes.

Vela Finance, a perpetual leveraged exchange, has launched its liquidity provisioning product, VLP. Compared with GMX, the asset class in VLP is only USDC. Users only need to mortgage USDC to obtain VLP. Since there are no volatile assets, VLP holders only lose money when traders make money. The income of VLP holders comes from traders' losses and 60% transaction fees.

Due to its own Delta neutral property, VLP holders do not need other protocols to provide Delta neutral policies. Parts "2" and "3" in the previous article may be the part of innovation based on VLP.

How does Vela Finance compete with GMX?

It provides higher liquidity injection rewards and rewards VLP providers with native Token. The event will start on March 14th. The VLP coffers, currently worth $2.5 million, have already been filled.

However, compared with GMX, which has established a head advantage and a moat, Vela Finance, which has just started, still has a big gap. In a short period of time, especially when the GLP derivative agreement has matured, VLP cannot pose a threat to GLP. The Gains Network, which can really pose a threat to GMX's market share, uses the DAI treasury.

Due to the characteristics of the synthetic assets of the DAI treasury, Gains Network provides users with more trading pairs (cryptocurrency, foreign exchange and stocks), higher leverage and a complex risk control mechanism with high capital efficiency. Thanks to this, Gains Network will be able to compete with GMX with full asset guarantee - which has been deployed on Arbitrum today.

Since the gToken model is more complex and has Delta neutrality, it is more difficult to build products based on it, and it is very difficult to form a trend among developers.

at last

at last