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GLP Token and Multi-Asset Pool
The GLP multi-asset pool provides liquidity for margin trading. Generally, DEXs operate with single-asset liquidity pools. In other words, there's a pool for each individual asset on the exchange. GMX places all of this fragmented liquidity into a single multi-asset pool.
The GLP token itself is representative of shares of the multi-asset liquidity pool, with fees varying depending on whether deposits or withdrawals balance or imbalance the pool. So, the token value is determined by the total worth of assets in the pool, including unrealized profits and losses of open positions held by traders (divided by the GLP supply). GLP holders function as the counterparty to traders, so when traders earn a profit, GLP holders experience a loss, and vice versa. Therefore, GLP holders are sometimes referred to as the House or the casino because, on average, more traders lose money than they earn. GLP token holders have risk exposure to the index of assets in the multi-asset pool and they're subject to the volatility introduced when positions are closed by traders.
This pool lets you open long or short positions, perform swaps via a minting/burning process, and take leveraged positions. The pool itself earns LPs fees from user swaps and leverage trading, which is eventually distributed to GMX stakers (30%) and GLP holders (70%).
To participate in leverage trading, you must first deposit collateral into the protocol. Then submit your long or short position with as much as 50x leverage, allowing you to essentially “claim” the upside or downside of a particularly volatile asset from the existing GLP multi-asset pool. However, none of the physical assets within the pool are actually claimed and given out to the users opening these positions.
Rather, when a position is officially closed, the payout depends on the winner of the “bet.” If the user’s position is successful, the user’s profit is paid out by the pool in the underlying asset in which they put a claim (i.e., ETH). If the user loses, the loss is deducted from the submitted collateral and paid to the pool. This is how GMX functions as a zero-sum game where either the traders, i.e., users, win and the LPs lose, or the traders lose and the LPs win.
To reiterate, GMX does not operate an order book. Other competitors, notably dYdX, operate off-chain order books, but GMX uses its own multi-asset pool to fulfill orders. There are two primary types of derivative DEX AMMs: hybrid AMMs and stable AMMs. GMX uses a hybrid model that consists of 50-55% stablecoins and the remainder consisting of blue-chip crypto assets. This all stems from the multi-asset pool.
The LPs on GMX submit these assets to the pool (stablecoins, ETH, BTC, UNI, LINK) in exchange for minting GLP tokens of an equivalent value. LPs must pay a minting fee when depositing assets that varies depending on the demand for the asset being deposited into the multi-asset pool. For instance, assets that the pool is lacking will come with lower fees to incentivize LPs to deposit more of that particular asset.
Source: @eli5_defi
Likewise, LPs can also burn GLP tokens to redeem any of the assets within the pool. This is in accordance with the dollar value of both GLP and the asset in a 1:1 ratio minus the minting/burn fees associated with the transaction.
Pool Rebalancing
The minting/burn fees discussed above are related to pool rebalancing, a factor extending from asset demand. If the index has a large percentage of one asset compared to another, any actions that boost the dominant asset in the pool will have higher fees compared to the asset that's lacking.
In addition to mint/burn fees, the pool also rebalances the token weights of assets in the pool. Token weights are adjusted to help hedge LPs versus the positions of traders. An asset with a large amount of open long positions will have a higher token weight in the pool. A lot of open short positions in the pool will result in a higher token weight for stablecoins.
These mechanics work to influence the supply and demand of the included pool assets to ensure the pool remains appropriately balanced. The target pool balance per asset is adjusted entirely on the existing demand of traders on the platform on a weekly basis. If more traders are opening long positions on ETH, the pool will create a target weight to compensate for this demand.
