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Technical Risks
While GMX uses a technical design that avoids the shortcomings associated with traditional AMM models (no slippage losses), relying solely on oracle pricing for protocol operations has a downside. This downside comes from oracle failures and exploits. For volatile, less liquid assets, Chainlink oracle data feeds are not immune to problems. So, there's the possibility of data feed slowdowns or stoppages during heightened periods of volatility. This poses a direct risk to traders in the GMX ecosystem.
AVAX Oracle Exploit
A specific example of an oracle exploit was realized during the AVAX exploit in September 2022. A user or entity was able to manipulate the price of AVAX on centralized exchanges, which led to the user managing to successfully acquire a $430k gain on GMX. It’s unclear as to whether that user did, in fact, turn a profit, as slippage and fees from the attack are expected to have contributed to net losses for the user. Nevertheless, it demonstrates that it was theoretically possible to use GMX’s oracle pricing approach against the platform to exploit pricing for financial gains.
Financial/Project Risks
The major risk of GMX as a project is that its team is composed of fully anonymous contributors. Also seen by the developers of THORChain, GMX developers remaining anonymous gives the GMX project more of a decentralized protocol feel rather than an on-chain business entity. There are no organizations associated with the project, operating entirely through anonymous developers. This brings up the risk of a lack of accountability if something were to ever go wrong.
There are no public-facing individuals to receive criticism, and, as established in Governance, these anonymous developers have the sole power and responsibility of posting proposals to be voted on. Therefore, governance is entirely dependent on their continued good faith in the project. The GMX team does have a track record of two other protocol launches in XVIX and Gambit, but scrutiny is to be encouraged.
Additionally, GMX’s smart contracts have been successfully audited by ABDK, the same firm that audited Uniswap V3. Risks to users and traders on the GMX platform regarding leverage are not unique to GMX, but rather to margin trading itself in the crypto market. Leverage can be extremely risky, especially in times of volatility in the crypto market.
GMX’s model of using shared liquidity as a counterparty for perpetual futures is a new model and, as such, comes with unique and unknown risks in volatile market conditions. If an event were to wipe out liquidity providers, traders would have no liquidity to trade against. The GMX platform also has much more limited collateral options if compared to a centralized competitor, such as FTX, which offered coin-margined perpetuals.
Risks to Holding GLP
GMX is a zero-sum game, meaning there will always be trading winners and losers. When LPs win, traders lose. When LPs lose, traders win. This means the risks of GLP need to be understood properly by potential investors. In the event that traders make significant gains, holding GLP outright can come with substantial downside risk. Of course, this pain is lessened by LPs receiving the majority of revenues that the protocol generates.
On-chain data suggests that traders typically have negative performance outside of major bull market environments. Through Q1 2023, traders have managed to reap significant profits (upwards of $3 million).
GLP as a liquidity token also has some drawbacks in terms of long-term viability. This is most apparent through the unknowns surrounding the shared pool model versus already-accepted industry models. As established above, the risk that traders simply roll on the momentum of a bull market can't be understated. GMX officially launched in September 2021, just two months before the previous bull market top. Since then, the entire crypto market has been in a severe bear market. Precisely how the shared pool model will perform in a full bull market is simply unknown.
GMX also does not have a current mechanic for balancing open interest (OI). The protocol simply calculates the borrowing rate via asset utilization, meaning that funding rates always end up positive. This could potentially exacerbate the issues described above.
