GMX: advancing towards the next DeFi Hyperstructure
The ultimate road to create one of DeFi's foundational protocols
GMX is a decentralized perpetual and spot exchange protocol currently on Arbitrum and Avalanche. It allows users to leverage trades on-chain with no slippage thanks to its multi-asset pool structure (aka. GLP).
In this post, I won’t focus on what GMX is or how it works since other people has already done it for me. What I am going to explain here is why I believe GMX can become a foundational protocol in Web 3 and help to recreate the future of finance.
Uniswap, Curve and ... GMX?
In the must-read article by Jacob, he defines Hyperstrucutres as “Crypto protocols that can run for free and forever, without maintenance, interruption or intermediaries”.
The internet as we know it today was created around a set of different Hyperstructures (HTTP, TCP/IP, or FTP, among others) that allowed users to easily build and create applications on top of such protocols. Web3 is attempting to do the same thing but using the blockchain as the base layer to provide additional security to Web1’s promise.
As of today, I’d argue that there are only two Hyperstructures in DeFi: Uniswap and Curve. Both protocols have provided the foundational structure for Web3 to flourish. They allow tokens and stablecoins to be traded by providing value to every participant of the network (from the LP to the dApp) while also being the base layer for many other protocols.
While GMX is far from achieving such recognition, I’d argue that GMX is on track to become the base layer for leverage trading in Web3.
The road to become a Hyperstructure
7 characteristics define Hyperstructure as per Jacob’s post:
Unstoppable: the protocol cannot be stopped by anyone. It runs for as long as the underlying blockchain exists.
Free: there is a 0% protocol wide fee and runs exactly at gas cost.
Valuable: accrues value which is accessible and exitable by the owners.
Expansive: there are built-in incentives for participants in the protocol.
Permissionless: universally accessible and censorship resistant. Builders and users cannot be deplatformed.
Credibly neutral: the protocol is user-agnostic.
Positive sum: it creates a win-win environment for participants to utilize the same infrastructure.
I’ll be going one by one and thinking through why GMX has or could have such characteristics in the coming future.
Unstoppable
This is a feature for any protocol that runs on the blockchain. As opposed to centralized networks, in Web 3 no one is able to change the rules of the game without forking or voting for those changes. As long as Ethereum and Arbitrum keep running, GMX will not be stopped. If you believe Ethereum will be here for the next decade or so, then GMX will not be paused.
Free
Here’s where it starts to get more nuanced. There are two types of fees that are built into the protocol:
Execution fee: this one is needed to pay for the blockchain network costs and any protocol will charge it.
Trading fee: currently to open or close a position GMX charges 0.1% of the position size.
Some could argue that the trading fee goes against the ethos of being a free protocol but I believe that this fee is what makes the protocol lower users’ total costs. This fee helps liquidity providers earn a minimum yield which translates into users always having the best price compared to other exchanges (GLP’s flywheel effect into action).
In summary, the ability to have the best price (and no slippage) outweighs the trading fee costs.
Valuable
This is also not very straightforward and we still have a long way to find the real value of holding the governance token. One could argue that the true value of GMX is the ability to earn a share of the revenues they generate (30% of the platform fees).
However, if we take a more long-term view and if the protocol becomes a foundation for other DeFi protocols to build on top of it, you could potentially hold the keys and get to decide how the financial ecosystem should flourish. I believe that the concept of composability has yet to show its full potential.
Expansive
Here GMX stands out from the crowd, there is no second best. The built-in incentives that the protocol has provided value to every participant of the network. To sum it up:
Liquidity providers: by providing liquidity through GLP (multi-asset pool) users can earn 70% of the protocol revenue. GLP is currently 50% stables and 50% ETH, BTC, and other small positions. GLP not only has very little impermanent loss (due to asset diversification) but it also has massively outperformed its comparable LPs.
Trading participants: as mentioned above, the fact that they pay a fee is what allows their trades to be efficient against other platforms due to the abundant liquidity in GLP. The data point that the percentage of existing users is always above 80% shows how strong the product market fit is.
Permissionless
Three things stand out here: 1) anyone can interact with the protocol and is no KYC required to trade their perps (as opposed to most CEX) 2) the team is laser-focused on ensuring to be censorship-resistant and has made progress to decentralize the front end and 3) having an anon team and founder reinforces the values of the project.
Credible neutral
GMX is user-agnostic. The protocol does not discriminate against any specific people and treats every participant fairly. To be fair, this has yet to be tested in an extreme case where a government or financial institution asks to enforce a particular action for a specific set of users. The recent examples of Aave or USDC complying with the Tornado Cash sanctions is a great example on how this Credible-neutral characteristic could break down for GMX.
Positive-sum
If all of the previous characteristics are met, the chances that a protocol has a net benefit to everyone is very high. The beauty of Web3 is that if there is something that can be done better you can just fork it and grow on top of those beliefs. GMX is being forked in different ways and the fact that is happening is overall positive.
Since I believe the protocol is positive-sum for its participants, forks might gain traction but they will not accomplish the infrastructure layer that GMX is creating. The fact that projects keep building on top of GMX is a good indicator that there is a unique value to capture from GMX’s network. This is an indicator that in a very competitive environment, GMX’s infrastructure is having a net positive benefit for everyone through their shared liquidity and the network effect of integrations.
Conclusion
The two characteristics that are yet to be proven and that will make GMX a true infrastructure play are: Valuable and Positive-sum.
For the governance token to be valuable, we must see more active discussions from DAOs or projects to want to own a piece of its governance. I am yet not sure this is happening and people see the token as a real-yield only play. Interest similar to what happens with CRV or CVX is what I’m looking to validate my hypothesis.
Positive-sum will come with time. The increasing number of forks could be a misleading indicator in the short term (thinking of OHM season) and might delay the process of becoming an infrastructure play. I will keep a close eye on the amount of projects that build on top of GMX as an indicator that the ecosystem is benefiting from the protocol.
Disclaimer. This is not financial advice and you should not base any investment decision based on this article. I am personally invested in the GMX.