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V1

GMX maintains a shared liquidity mechanism via the GLP token’s cryptoasset index approach. GLP accrues 70% of the platform’s generated fees. This shared liquidity model allows GMX to maintain a pool of all tradable assets on the platform as well as attract liquidity by incentivizing liquidity providers without creating inflationary token incentives.

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%). 

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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.

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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 Oracle Priced AMM model, as utilized by GMX, is noted for its simplicity and user-friendly interface, making it an attractive option for retail users who may not possess extensive trading expertise. Furthermore, this model provides a more straightforward mechanism for liquidity provision compared to CLOBs, enabling all users, not just professional market makers, to earn trading fees.

In terms of transparency and decentralization, Oracle Priced AMMs offer a higher degree. This is because order books, which require substantial computational resources, often necessitate a hybrid system where the order book is off-chain, and the remaining components are on-chain. Additionally, Oracle Priced AMMs typically offer higher average liquidity for trading, as liquidity provision in CLOBs relies heavily on active market makers, especially during the initial stages.

On the other hand, CLOBs present their own set of advantages. One of the key benefits is the clear differentiation between makers and takers, providing distinct fee systems for each. This can result in cost savings for certain users, such as market makers. Moreover, CLOBs allow for unrestricted price discovery as trading is not limited by other venues like oracles. This enables price discovery to occur directly on the platform, without being constrained by the liquidity of external sources. While arbitrageurs can balance all venues by capitalizing on spreads, CLOBs are not inherently limited in the same way as Oracle Priced AMMs. Lastly, CLOBs can offer faster execution as frontrunning is more challenging to perform or even impossible in some designs.

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.

GMX v1: Challenges and Implications

1. Price Impact Considerations: GMX v1 allowed zero price impact, a feature that potentially favored large traders. This provision enabled them to sustain their capital in the platform for prolonged periods, potentially saturating trading capacity. Such domination can lead to a disparity in open balances, deviating from the optimal user experience envisaged by the creators.

2. The Quest for Balanced Open Interest: An ideal decentralized exchange (DEX) prioritizes a balanced open interest, ensuring optimal liquidity utilization. Contrarily, unutilized capital not only signifies an opportunity cost for liquidity providers but also potentially limits the platform's overall efficiency.

3. Complexity of $GLP: Recognized as a pivotal DeFi component, $GLP's intricate nature presented obstacles. Its composite character posed challenges for other ventures looking to craft advanced financial strategies based on GMX v1.

4. Technological Limitations: With trading volumes surging, GMX v1’s technological limitations became increasingly evident. This strain underlined the platform's restricted capability to scale alongside burgeoning demand.

5. User Experience Concerns: GMX v1, compared to centralized exchanges, was found lacking in certain user-friendly features. Notably, the platform missed out on functionalities like setting take profits, stop loss triggers upon position initiation, and offering detailed price update charts.

However, these challenges should not be seen solely as flaws but also as signals of growing demand and opportunities for further development.

GMX v2: Advancements and Enhancements

While GMX v1 had its challenges, GMX v2 showcased several improvements, aligning with the needs of contemporary users:

1. Diverse Markets and Collateral: GMX v2 introduced a variety of markets and expanded its collateral types, catering to a wider user base and facilitating more intricate trading strategies.

2. Enhanced Execution Speeds and Lowered Fees: Not only did GMX v2 ensure faster trade executions, but it also successfully reduced associated fees, elevating its competitiveness in the crypto exchange arena.

3. The Evolution of $GLP: While the $GLP remained a composite index, akin to traditional stock indexes, its capabilities were enhanced. GMX v2 pools, with their increased flexibility, allowed the incorporation of riskier assets for trading without compromising the integrity of the GLP. This strategy furthered efficient pricing and addressed liquidity challenges, particularly in markets where native liquidity was scarce.

4. Attractive Yield Opportunities: GMX v2's beta phase showcased promising yield potential, marking a notable progression from the GLP model of its predecessor.

5. Revised Fee Structure: Another significant change in GMX v2 was the revisitation of its fee structure. The model introduced avenues for fee reduction, offering a balanced structure that incorporated open and closed fees, borrowing rates, and a novel element: price impact.

V2

One of the notable features of GMX V2 is its introduction of isolated liquidity GM pools, a solution that addresses the preceding challenges adeptly. With these GM pools, there's a level of autonomy given to liquidity providers: they can initiate GM pools that contain any DAO-approved assets they prefer. This flexibility ensures that LPs can select their desired exposure without being pigeonholed into a predefined index.

What's more, GMX V2 has democratized the process of supporting a lots of tokens. As long as an LP is predisposed to post collateral for a long-tail asset, the platform accommodates trading support, potentially paving the way for unhindered asset listings and fostering alliances with tokens eager for protocol-owned liquidity.

However, it's crucial to understand that these GM pools come with a caveat: they split liquidity. Delving deeper, GM pools bifurcate into:

• Fully Backed Market Pools: These comprise a stablecoin (or an assortment of stablecoins) suited for shorting and the specific assets oriented towards longing.

• Synthetic Market Pools: These markets, in contrast, are anchored with tokens divergent from the ones under trade, like a PEPE perpetual contract backed by assets such as ETH and USDC.

Cryptocurrency markets inherently consist of three elements: an index token, a long collateral token, and a short stablecoin token. To exemplify, in a SOL/USD market, SOL serves as the index token, ETH as the collateral for long positions, and USDC for short positions. Each component serves a specific purpose in maintaining the balance of the trading ecosystem.

In this architecture, liquidity providers, or LPs, generate revenues through trading fees from the liquidity pools they supplement. This model allows each market to potentially establish its unique fee structure. This freedom of operation enables a permissionless listing of assets, which augments liquidity for market makers, without requiring them to handle unwanted assets. Presently, GLP exposes users to an array of assets within the pool (ETH, BTC, UNI, LINK).

Traders can exploit this mechanism to their advantage. They can use ETH and USDC as long collateral to capitalize on an increase in the value of SOL. Similarly, they can utilize USDC and ETH as short collateral to profit from a decline in SOL's value.

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However, it might prompt a question. What transpires if the SOL price soars due to a bullish headline while the ETH backing the pools stays relatively stable? How does GMX v2 ensure solvency under such circumstances? Here is where the Auto-Deleveraging (ADL) mechanism steps in, safeguarding the system's solvency when the price of the index token quickly outpaces the long tokens backing it.

The V2 model introduces an innovative liquidity provision mechanism. In volatile markets, long positions will be collateralized in ETH and short positions in USDC, providing greater flexibility and scalability of liquidity. Liquidity for each pair will be isolated, allowing LPs to choose the pairs they want to commit liquidity to based on their risk tolerance and expected returns.

ADL becomes redundant in markets where the index token equals the long token and will not be enabled. But in markets where ADL is activated, profitable positions are adjusted to ensure the profits and losses of that specific market do not exceed the total amount supporting the pools.

The V2 model also introduces features that significantly improve the user experience. These features, which are innovative and directly impact order execution, address the main pain point of oracle-priced perpetual DEXs. The first feature is the implementation of low-latency oracles. These faster oracles, a new product from Chainlink, will make frontrunning more difficult and improve the user experience in terms of entry/exit price and order execution time. GMX will be the first protocol to implement these oracles.

The second feature is the introduction of lookback orders. With this feature, limit/stop orders will always be executed as long as the oracle reaches the selected price, even if the price changes occur rapidly. This is a significant improvement over the previous version, where some orders did not always execute during times of high volatility.

One of the salient facets of GMX V2 is its revamped fee structures, purpose-built to align long and short open interest. Traditionally, open interest (OI) on GMX has shown a proclivity towards the long side. This often positions LPs in a role akin to a market short since they act as counterparties for every transaction. The new mechanisms aim to promote equilibrium in open interest, allowing LPs to efficiently accrue fees without the overhang of traders' prospective gains.

Funding fees, borrowing fees, and price impact are applicable to each market. Individual markets can have their unique fee structures, which offer high flexibility for adding new assets such as stocks, forex, and commodities. These funding fees aid in mitigating major imbalances within the pools.  A relatively under-emphasized element of GMX V2, yet worth noting, is its fee structure for swaps. With a nominal fee ranging between 0.05% to 0.07%, and a flat rate of 0.01% for stablecoin swaps, GMX is positioning itself as a formidable contender in the spot swap arena.

If all users on GMX v2 hold long positions in ETH, those positions will contribute funding fees to the short side, thereby ensuring a balance. This mechanism ensures that the larger side compensates the smaller one through funding fees.

Currently, GMX v1 leverages its in-house oracles to calculate the median price from the top three exchanges for leverage trading. For liquidations, it employs Chainlink oracles. With version 2, GMX has decided to exclusively partner with Chainlink, availing their low-latency oracles in return for 1.2% of GMX's total v2 fees. This partnership received tremendous support from the community, with 1.7 million GMX votes cast in favor, indicating a 97% approval rate.

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In conclusion, while GMX v1 laid the foundational framework, GMX v2 signifies the crypto community's commitment to continuous refinement. As the crypto realm expands, it's platforms like GMX that underscore the importance of innovation, user-centricity, and resilience.