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GMX V2 upgrade and optimization: Focus on infrastructure to ensure protocol security and balance.
Summarized by AI
Original Title: "Changes and Impacts of GMX V2"
Source: LD Capital
GMX V2 was officially launched on August 4, 2023. This article reviews the development and issues of GMX V1, compares the modifications made in V2, and analyzes potential impacts.
One, GMX V1: An Effective Model for Derivative DEX Protocols
GMX V1 was launched at the end of 2021, using the GLP mode, providing a concise and effective trading model, and creating the concept of "real income" in the derivative DEX protocol, which has an important position. Many projects have forked the GMX V1 model.
GMX V1 protocol has captured a large amount of fees. Since 2023, GMX V1 protocol revenue has reached $98.1 million, ranking eighth among all projects and first in the derivative DEX track.
Source: token terminal
However, GMX V1 also has limitations, including:
1. The imbalance of open interest (OI) in unclosed contracts poses a significant risk to LP providers.
The cost of GMX V1 includes opening/closing fees and borrowing fees, without funding rates. Borrowing fees create costs for holding positions, thereby avoiding unlimited liquidity occupation. In addition, the dominant party needs to pay more fees, but since both long and short parties are charged fees, there is no arbitrage space, and open contracts cannot be quickly balanced through arbitrage.
And if this balance is not handled properly, in extreme cases, the GLP pool will face huge losses, and LP providers will suffer losses, leading to the collapse of the protocol.
2、There are few tradable assets.
GMX V1 only has 5 tradable assets, which are BTC/ETH/UNI/LINK and AVAX. However, DYDX and Synthetix offer dozens of trading assets. Gains provides forex trading assets. The new platform HMX offers commodity and US stock assets.
3、The cost for small and medium-sized traders is relatively high.
The opening and closing fees for GMX V1 are both 0.1%, which is relatively high. In the highly competitive world of derivative DEX, many protocols charge less than 0.05%.
二、GMX V2: Ensuring the Security and Balance of the Protocol
1、Core
The core of GMX V2 is to ensure the security and balance of the protocol, by modifying the fee mechanism to maintain a balance between long and short positions, in order to reduce the probability of systemic risk of GMX in the face of severe market fluctuations. By setting up isolation pools, high-risk trading assets are increased while overall risk is controlled. Through cooperation with Chainlink, more timely and effective oracle services are provided to reduce the probability of price attacks. The project also considers the relationship between traders, liquidity providers, GMX holders, and the continuous development of the project, and ultimately adjusts and balances the protocol's revenue distribution.
2、Fee Model Adjustment: Increase Funding Rate and Price Impact Fee
The pricing model of GMX V2 has undergone significant adjustments, focusing on how to balance long and short positions and improve capital utilization efficiency. The specific pricing model is as follows:
Reduce opening/closing costs.
The fee has been reduced from the previous 0.1% to 0.05% or 0.07%, depending on whether the opening position is beneficial to the balance of long and short positions. If it is beneficial, a lower fee will be charged.
Increase funding rate, with the strong party paying the funding rate to the weak party.
The funding rate will be adjusted in segments. When the dominant party's position / full position is between 0.5-0.7, the funding rate is at a lower level. When it reaches 0.7, it will be raised to a higher level, increasing the arbitrage space and encouraging arbitrage funds to enter, thus restoring the balance between long and short positions.
Source: chaos labs
Keep the borrowing costs and avoid unlimited occupation of liquidity.
Increasing the price affects fees, and the larger the position, the more disadvantageous it is for long and short balance, resulting in higher fees charged.
The price impact affects the dynamic process of price changes in the simulated order book trading market, which means that the larger the position, the greater the impact on the price. This design can increase the cost of price manipulation, reduce price manipulation attacks, prevent price flash crashes or spikes, and maintain a balanced long and short position to maintain good liquidity.
The following image shows the price impact fee rate faced by different opening positions under simulated conditions. It can be seen that the larger the position, the higher the fee rate. The horizontal axis represents the opening position size (in millions of US dollars), and the vertical axis represents the fee rate (in basis points).
DYDX: maker 0.02%, taker 0.05%, the larger the trading volume, the greater the discount;
Kwenta：maker 0.02%，taker 0.06%-0.1%；
Gains Network: 0.08% opening/closing fee + 0.04% spread + price impact fee.
As can be seen, the cost of GMX V2 is still relatively high, but it has decreased from the previous high level to a moderate level, with the opening/closing costs reduced by nearly 50%. For small and medium-sized traders, the fees of V2 are more friendly.
3、Liquidity Provision: Increase Isolation Pool Mode, Increase Synthetic Assets
The liquidity pool of GMX V2 is called the GM pool, and each pool is independent of each other. You can see the amount of funds, funding rates, and funding utilization of each pool on the official website.
Source: GMX
The advantage of isolation pools is that different token markets can have different underlying support and different parameter settings, achieving their own risk control with a high degree of flexibility, while still being risk-controlled. For liquidity providers, they can also choose risk exposure based on risk preferences/return expectations. The problem with isolation pools is the fragmentation of liquidity. Some funding pools may not be able to attract enough liquidity.
Currently, GMX V2 has divided the market into three different types:
Blue chips: BTC and ETH. These two tokens have a lower possibility of price manipulation, so the price impact fee can be set at a lower rate, making them more competitive than CEX. Both are supported by native tokens.
Medium market cap assets: Market capitalization between $1 billion and $10 billion, with high liquidity and trading volume on CEX. However, they are susceptible to external factors that can cause significant price fluctuations, such as regulatory news leading to a sharp drop in coin prices. For these types of assets, the price impact fee is set at a higher percentage, and liquidity is not higher than other external markets, increasing the cost of attack. LINK/UNI/AVAX/ARB/SOL belong to this category and are supported by native tokens.
Medium market cap synthetic assets: Instead of using native tokens, they use ETH as underlying liquidity support. DOGE and LTC belong to this category.
This type of asset faces the problem that if the related token experiences a significant short-term increase, the ETH in the pool may not be able to cover all of the profits.
If there are 1000 ETH and 1 million USDC in the pool, with a maximum long position limit of 300 ETH for DOGE. However, if the price of DOGE increases by 10 times while the price of ETH only increases by 2 times, the profit will exceed the value of ETH in the pool.
In order to avoid this situation, the function of ADL (Automatic Deleveraging) is introduced. When the pending profit exceeds the threshold of market allocation, the profitable position may be partially or completely closed. This helps to ensure that the market always has the ability to pay, and all profits at the close can be fully paid. However, for traders, automatic deleveraging may lead to the loss of advantageous positions, resulting in missed profits in the future.
According to the report issued by Chaos Labs, during the initial operation period of V2, the upper limit of open positions for BTC and ETH futures contracts is 256 million US dollars respectively, and the upper limit for AVAX/LINK is 4 million US dollars respectively, while the upper limit for other tokens is 1 million US dollars. The upper limits can be adjusted according to the actual operation situation in the future. However, the total TVL of the GM pool is currently about 20 million US dollars, which is still far from the upper limit.
4、Enhancing User Experience: Adding Coin-based Contracts, Faster Execution Speed, and Lower Slippage
In GMX V1, traders can only open U-based contracts. Regardless of the asset used to open a position, the position value is calculated in USD based on the opening price, and the profit is equal to the USD value at the time of closing minus the USD value at the time of opening.
In GMX V2, coin-based contracts have been added. Traders can deposit relevant trading assets as collateral without converting them to USD. This will meet the needs of more traders and provide a richer investment portfolio.
In addition, the oracle system of GMX V2 will price each block, and orders will be executed as close to the latest price as possible, with faster execution speed and lower slippage.
5、Allocation Mode
In order to maintain the long-term development of the project, the protocol revenue of GMX V2 has also been adjusted. 8.2% will be allocated to the protocol treasury for project operations and other matters.
GMX V1: 30% is allocated to GMX stakers and 70% is allocated to GLP providers.
GMX V2: 27% is allocated to GMX stakers, 63% is allocated to GLP providers, 8.2% is allocated to the protocol treasury, and 1.2% is allocated to Chainlink. This allocation has been approved by the community through voting.
Three, GMX V2 operation status
GMX V2 has been in operation for about 2 weeks, with a TVL of approximately $20 million, a daily trading volume of $23 million, a daily protocol revenue of $15,000, and open interest of $10.38 million. There are approximately 300-500 daily active users. As a starting point, the performance is still acceptable without using trading incentives.
Some users of V1 have already migrated to V2. The trading volume and daily active users of V2 are roughly equivalent to 40%-50% of the trading volume of V1. The trading volume, protocol revenue, and user comparison between V1 and V2 are shown in the following figure:
Source: dune
GMX V2 traders are currently in a net loss state, with a cumulative net loss of $40,000.
Source: dune
From the perspective of yield, GMX V1 has been experiencing a continuous decline in recent yield rates. This week, the GMX staking yield rate is 1.44%, while GLP (arbitrum) is 3.18% and GLP (Avalanche) is 8.09%. In comparison, the yield rate of GMX V2 is higher, as listed below:
Source: GMX
After the launch of GMX V2, the market response was not high and the capital reaction was average. The main reason is that the recent market volatility has dropped to historically low levels, overall trading volume has shrunk, and the competition within the industry has intensified, leading to weak growth in protocol revenue.
Four, Conclusion
GMX V1 is a successful model derived from the DEX track, with many followers. The delivery of GMX V2 also meets market expectations, demonstrating the strong protocol design capabilities of the GMX team. In terms of mechanism, V2 improves the balance of liquidity pools, expands the types of trading assets, and provides multiple collateral positions. For liquidity providers and traders, investment options are more diverse, risk is better balanced, and fees are lower.
However, from the initial stage of development, due to the use of independent pools, there is a problem of liquidity fragmentation, and some assets may have insufficient liquidity. In addition, the GMX project party has also not taken any marketing or trading incentive measures, and in the short term, there is no significant impact on the protocol's new users and new transaction volume.
Essentially, GMX V2 places more emphasis on protocol infrastructure, protocol security, and balance. In the current bear market environment, focusing on the construction of the underlying architecture, ensuring the security of the protocol, and using accumulated data to design better risk parameters may be of greater help to the project's future development in the bull market. At that time, it can provide higher open interest contract capacity, a more diverse trading market, and can also launch more marketing measures and attract more new users in conjunction with market trends.
Original article link
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