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GMX is a decentralized, permissionless spot and perpetual swap exchange that allows users to trade assets directly from their own crypto wallets on both Abritrum and Avalanche. Operating as a non-custodial DEX, GMX doesn’t feature an order book like centralized exchanges do. Instead, users interact with the DEX through multi-asset pools and liquidity providers.
GMX launched officially in September 2021 with a focus on crypto-based perpetual futures contracts. In other words, tokens themselves are not traded, only the contracts on those tokens. Futures trading refers to the creation of contracts between two parties (investors) that bet on the future price of a particular asset, in this case, cryptocurrencies. This gives investors another way to gain exposure to certain assets without physically owning those assets and is typically used as a diversity tactic.
GMX’s founders have chosen to remain anonymous, though GMX started as a merger between XVIV and Gambit. Both projects converted their tokens to GMX tokens, the native token to the GMX exchange, which fulfills a handful of notable use cases. This includes serving as the DEX’s governance, utility, and liquidity token. Notably, one of the only public-facing developers of the ecosystem is X. GMX’s anonymous development is similar to that of THORChain.
GMX has grown rapidly since September 2021 amid the rising demand for DeFi perpetual swaps on decentralized exchanges, especially on layer-2 networks.
Exchanges serve as valuable core infrastructure components, and whichever exchange wins the spot of the top on-chain DeFi perpetuals platform with the most trading volume will serve as a contender to top centralized exchanges, such as Kraken and Coinbase. In 2021, the total perpetual futures trading volume was $57 trillion.
Only $1.71 trillion of this was in decentralized finance futures platforms, such as GMX and others. Of this $1.71 trillion, GMX accounted for just 4%of the market share of DeFi perpetual trading at the time. This $1.71 trillion that makes up DeFi perpetuals volume should increase substantially as a proportion of total trading volume, regardless of the bear market. This can be attributed to the general growth in crypto adoption, as well as the collapse of major CeFi platforms, such as Voyager and Celsius, during 2022. User trust and attitudes may shift away from trusting centralized platforms with the custody of funds.
Primary Use Case
Crypto trading is conventionally conducted via two platforms: centralized exchanges (CEXs) and decentralized exchanges (DEXs). The former resembles traditional financial exchanges, operating as intermediaries that match buyers and sellers for a fee and hold client assets in custody. In contrast, DEXs facilitate trading through liquidity pools composed of assets contributed by their owners in return for fees. Traders exchange their assets with the assets within the pool.
Despite CEXs' dominant position in the spot and derivative trade volume, the tide is turning in favor of DEXs, in part because they are on-chain, remove counter-party risk, and are quickly closing the gaps in terms of liquidity, slippage, and fees.
Derivative DEXs, albeit in their nascent stages, are positioned to witness considerable growth due to the following factors:
- Vast Market Size: The derivative markets outpace spot markets, with trading volumes ~355% larger than the latter. This provides a significant opportunity for growth and expansion for derivative DEXs.
- Unexplored Market Share: The current derivative DEX market is still small, representing only 1.7% of the CEX derivative volume. This contrast with spot DEXs, which account for 10.6% of the CEX spot volumes, indicates significant room for growth.
- Permissionless and Composable Nature: As with all DeFi protocols, DEXs are permissionless and composable, enabling direct code integrations. DeFi protocols and DEXs work in tandem to create an interconnected web of functionality. This open nature contrasts with the permissioned, costly, and limited integrations offered by CEXs.
- CEX Turbulence: Recent events, including the collapse of FTX, one of the largest derivative exchanges, and scrutiny of Binance, the largest derivative exchange, have led traders to rethink their reliance on CEXs, further fueling the shift towards DEXs.
Above all, GMX functions as a spot and leveraged trading exchange that uses oracles for zero price impact swaps. So, GMX is not technically a perpetual exchange, despite being referred to as one by GMX itself. On GMX, traders are technically renting liquidity from the liquidity pool without the LPs experiencing impermanent loss. This approach differs from other DEXs and CEXs, as long traders rent out the upside on their assets while short traders rent out the upside on stablecoins held by the pool. Long traders receive payment in the asset they are trading, while short traders receive payment in stables. The liquidity pool consists of multiple assets, and liquidity providers can mint or burn GLP based on their deposits or withdrawals.
Perpetual contracts are a type of futures contract. Perpetual contracts do not include an expiration date or a specific settlement designation. In other words, these contracts can continue on forever until the two parties involved in the contract choose to close it. This is made possible by a funding rate in which both long and short positions make payments to one another depending on the price action of the underlying asset (e.g., Bitcoin).
Without an expiration date, perpetual contracts are a popular investment option among established cryptocurrency exchanges offering futures contracts, such as BitMEX, Bybit, and Binance. With funding rates, the perpetual contracts can keep pricing close to the asset’s spot price and give traders additional financial tools with which to gain exposure to digital assets. For cryptocurrency exchanges, funding rates on perpetual contracts are usually paid out in crypto-native assets, most notably US Tether (USDT).
Users can conduct swaps and trades on GMX with up to 50x leverage as of Q2 2023. The exchange features a diverse set of assets, including Bitcoin, Ethereum, Chainlink, a healthy offering of stablecoins, and a handful of other altcoins. You can also receive portions of the fees collected from exchange activity by holding and staking the GMX token itself. Through the GMX token, stakers earn 30% of the total protocol fees, which are paid out in either ETH or AVAX, depending on the user’s chosen network. Additionally, users also earn escrowed GMX (esGMX) that can be re-staked to boost your stake’s weight and multiplier points to boost your claim to protocol fees.
