Key Points:
There are two tokens in the GMX ecosystem: the governance and dividend token GMX and the liquidity token GLP.
GLP derivative products’ fundamental objective is to lower investors’ risk and boost holders’ income, which will raise the capital efficiency of assets.
The GMX and GLP derivatives agreement is a win-win partnership.
There has been a surprising amount of DeFi innovation happening on Arbitrum over the past period. One of the main reasons for this state is the deployment of 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, 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 is a trader. Investors can provide liquidity for traders on GMX by purchasing GLP, and accordingly, 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 loss of the GLP holder, and the trader’s loss represents the profit of the GLP holder.
GLP comprises a package of mainstream assets – 50% stablecoins, 28% ETH, 20% WBTC and 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 holders’ income, thereby increasing the capital efficiency of assets.
Next, let’s look at the strategies for these protocols:
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. The goal of a GLP Delta neutral strategy is, therefore, to reduce price sensitivity while providing yield 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 treasury has reached the limit.
How does the vault work?
The foundational work of Vault is to provide liquidity to GMX in a Delta-neutral way to earn ETH. 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 the 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 share of the service fee.
The second stage: According to the ETH and BTC positions in GLP, flash loans on Balancer to lend ETH and BTC, and sell ETH and BTC on UniSwap to obtain USDC. Rage Trade then deposits USDC into AAVE and borrows ETH and BTC to repay the loan on Balancer. For capital efficiency, Rage Trade maintains a healthy 1.5x factor on short positions in Aave.
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.
While Risk-Off Vault earns interest by lending USDC on Aave, it 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 hedge position based on weight and price changes and automatically compound the ETH yield of GMX into GLP.
Phase 3: ETH rewards generated from GMX since the last rebalance split between Risk-On and Risk-Off Vault based on Risk-Off Vault utilization.
The ETH reward share of the Risk-Off Vault will be automatically converted into USDC and mortgaged on Aave to earn 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.
Compared with other Delta neutral vaults, Rage Trade’s product design and volatility strategy are more complicated. It refines the previous process: For example, DeCommas only buys half of USDC into GLP and deposits half into AAVE to earn interest to reduce risk exposure. And this design is the main advantage of Rage Trade.
GLP Collateralized Lending and Minting Stablecoins
Since GLP is composed of a package of mainstream assets, 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 stake 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 staking 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 stake users.
Currently, the TVL (Total Value Locked) of Vesta Finance is 22 million, and the number of VST minted is 8.75 million.
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 stake USDC, ETH, and BTC into 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 additional 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 to GMX, the only asset class in VLP is 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 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 tokens. 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, especially when the GLP derivative agreement has matured, VLP cannot threaten 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 can compete with GMX with a full asset guarantee – currently deployed on Arbitrum.
DAI treasury has the same principle as GLP, but it does not have the high scalability of GLP. However, on December 8 last year, Gains Network announced a new vault strategy: users will receive gToken after depositing assets into the vault.
If we deposit DAI into a vault, we receive a gDAI credential. The redemption price of gTokens is affected by accumulated fees and open interest PnL measurements. The principle is similar to VLP but more complex than VLP. In the future, Gains Network will also set up liquidity lock incentives.
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.
Conclusion
GMX and the GLP derivatives agreement are win-win cooperation, GMX provides investors with LP tokens with low volatility, and the GLP derivatives agreement provides GLP holders with a strategy that is more capital efficient and has higher hedging returns.
The GLP launched by GMX not only supports the GLP derivatives agreement but the GLP derivatives agreement will also promote GLP to continue to expand its share and establish a strong liquidity moat for GMX.
However, challengers in the spot/futures leveraged trading track can only attract liquidity providers through higher incentives like Vela Finance. Perhaps only if there are innovators on this track can they have the opportunity to truly threaten the leading position of GMX in the future.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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Harold
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