Gains Network: The Underdog of On-Chain Perp Exchanges

Everyone is familiar with the big names: dYdX, Perpetual Protocol and if you are a man of culture, good ol’ GMX. But few have come across the beast that is Gains Network.

Gains Network is the brains behind gTrade, a leveraged trading platform built on Polygon that is both capital efficient and user-friendly.

Gains offers a large variety of tradable assets. Beyond cryptocurrency majors, the platform also supports a handful of large-cap US stocks including popular tech names like AMZN, AAPL, AMD, among 20 others. The platform also supports 10 forex trading pairs at the moment!

gTrade uses a unique design to enable a wide range of products and high leverage despite maintaining only a small pool of locked liquidity on their platform. This keeps it ahead of its competition in the space and is their key differentiating factor. Since launching in October 2021, it has processed more than $13B in trading volume and currently processes an average of $40M-80M in volume daily, all with only $11M in total value locked.

More impressive still, liquidity providers for gTrade are receiving between 40% and 120% APY yield from platform fees alone – even in the midst of today’s market-wide drawdown.

How does the Gains Network manage to do this? Let’s dive in.

The premise sounds simple enough: Leveraged trading, on-chain, for a wide range of products.

What makes gTrade truly special is the way it is structured – that is, the underlying infrastructure that allows such high leverage across their huge range of assets despite commanding such a meager TVL.

gTrade achieves this through the use of a synthetic asset system in which the entire trading platform runs solely on DAI and the Gains Network native token, GNS. This means that unlike exchanges like GMX, where users can only trade assets sitting in their pools, users on gTrade will be able to trade any asset that is supported by gTrade’s oracles (more on that in a bit).

As the leverage is synthetic, there is no need for Gains Network to maintain a deep liquidity pool of each of the assets they support. By the same token, listing new assets is relatively easy since they only need to ensure oracle support to start trading. Moreover, no borrowing fees are required to be paid either, as no asset is actually borrowed.

Since the traded assets are not actually borrowed to create the leverage required for each trade, the amount of leverage each user can take is much higher.

That’s right, gTrade offers a whopping 150x leverage for cryptocurrency trades on their platform! In fact, leverage can reach all the way to 1000x on forex trades and 50x on stocks, which you might say is pretty high by the standards of traditional finance.

As discussed earlier, gTrade runs on a single GNS/DAI pool and a DAI vault to provide for the liquidity required for trades. In this pool, liquidity providers earn a share of the fees made by the platform. This is key, as the yield earned by liquidity providers here comes solely from fees as opposed to liquidity mining incentives generated by inflating the GNS token supply. This is similar to GMX’s famous tokenomics model in which 70% of fees earned by the platform are given to their liquidity providers. At the point of writing this article, the single sided DAI vault yields 42% and the GNS/DAI pool is earning a lovely 121% APY.

Okay, but where does the token actually accrue value from?

In a sentence, GNS is minted when traders on gTrade win, and conversely, GNS is burnt when traders lose.

To understand why, let’s take a look at an example of a trade:

1. To execute a trade, the trader begins by depositing DAI into the DAI vault.
2. He then makes his trade, for example, longing BTC at 5x leverage.
3. Taking the example of a losing trade, BTC takes a plunge and the trader is liquidated.
4. Since the trader has lost and has been liquidated, the DAI vault gets to keep the amount deposited by the trader.
5. In this manner, the amount of DAI in the vault has increased. Once it passes a specified threshold, excess DAI is utilised to buy back GNS (from the GNS/DAI pool) and these tokens are burnt.
6. Conversely, if the trader makes a winning trade, gains are paid out from the DAI vault. Similarly, under the threshold, GNS is minted and sold into the GNS/DAI pool to refill the DAI vault to its required levels.

In a sense, GNS bets that traders in the long run will lose more than they win (which in theory should be true). This also means that in the long run, GNS should be deflationary. Currently, the total supply of GNS is fully circulating, which is 25.2m tokens, a contraction from 38.5m tokens. Its maximum supply though, sits at 100m tokens, giving the GNS token room to inflate and deflate based on trader performance on gTrade.

A-ha, that’s not all that Gains Network has though. Gains Network also hosts a set of NFTs known as the GFARM2 NFTs. These NFTs are split across 5 tiers: Bronze, Silver, Gold, Platinum and Diamond. At the moment, the Bronze floor sits at 0.73Ξ while the Diamond sits at an impressive 7Ξ.

These NFTs give their holders boosts on their liquidity pool yield as well as a reduced spread when trading.

Pretty sweet, huh?

But as always, leverage is a double-edged sword. With high leverage brings higher risks to the protocol if it does not have a robust oracle and liquidation system in place. After all, if a trader is using 1,000x leverage, a miniscule discrepancy in price reporting can result in millions of liquidated capital. gTrade uses a combination of Chainlink Price Feeds and a custom-built Decentralised Oracle Network (DON) to ensure reliable prices for both protocol safety and the safety of their users.

For an order to be executed, the DON fetches the current spot price via an aggregator contract. This contract receives the price from a set of 8 Chainlink nodes, which individually produces a median spot price from 7 exchange APIs. The aggregator contract compares each of the median prices with the current Chainlink Price Feed to filter out for outliers and errors. Once a minimum number of accepted prices have been received by the contract, it is sent back to gTrade to execute the trade. For more details on the oracle infrastructure, this Medium article goes into detail on its operation.

This elaborate oracle infrastructure ensures that prices are accurate, which is key when a small move on a 150x leveraged trade could be the difference between huge gains and liquidation of the end user. In addition, by taking the median across 7 exchanges, this prevents liquidations due to the so-called ‘scam wicks’ which ahem certain exchanges are well-known for. Plus, this allows for zero price impact on trades which is a big win for all traders on gTrade. Last, but certainly not the least, the oracle infrastructure also provides for guaranteed stop losses (i.e., no blowing through stops).

Did I also mention that this oracle network is the first-of-its-kind that is live on mainnet?

With that said, every system has its risks and downsides as well, and gTrade is no exception.

From the earlier illustration, you might come to realise that a string of large and highly profitable trades could very easily reduce the amount of DAI in the DAI vault and under-collateralize the entire protocol. This is especially so, considering that the TVL on gTrade is just over 11m now.

However, fear not, gTrade has some limitations in place to prevent this. Besides limitations on number of open trades and open interest on each asset, there is also a limitation on trade size based on the amount of DAI in the vault. Currently, no one trade can take up more than 1% of the total amount of the vault’s DAI. If the DAI vault currently holds 4m DAI, no single trade will be able to take up more than 40k DAI worth of collateral.

This can be very limiting for certain traders, especially whales. In turn, this could reduce interest in the gTrade platform and impact its long term growth.

Another risk for gTrade lies in their infrastructure. gTrade is built on the Polygon network. Polygon has had instances of prolonged outage, with the most recent being eleven hours in March 2022. In markets that move as fast as crypto and forex, having outages could easily lead to liquidations, especially when they last eleven hours. The team does have plans to move to a zk-rollup of sorts at some point, and is currently in talks with Polygon regarding future zk solutions. This will allow for quick trade settlement while maintaining the security inherited from Ethereum. This might also convince ETH maxis, many of which would never touch Polygon, to move over to use gTrade, which would help to grow the platform.

Gains Network has built quite a beast of a protocol thus far, and with a small team of only 6 people.

However, they’re just getting started. After having just onboarded 23 stocks onto their platform, the team is also targeting indices and commodities which are planned for a launch in Q3 2022. Moreover, due to their oracle system and synthetic leverage, they are looking to also implement custom pairs (e.g., TSLA/DOGE) as well as custom asset groups (e.g., 33.3% BTC, 33.3% ETH, 33.3% MATIC).

They are also looking to add more features for traders, including partial stop-losses/ take-profits, partial open/close of positions and stop/limit orders.

Another exciting feature they’re looking to build is to own more liquidity on their protocol, so that they can transition to having a single stake GNS pool as well, which will also receive a portion of the fees generated on the platform. This is quite similar to the GMX/GLP model where liquidity providers and GMX stakers earn from platform fees, although in different proportions. This will also help Gains transition towards using GNS as a governance token, which is expected to occur in Q1 2023.

There are many more proposed features to roll out over the course of the year, including metaverse and casino features too, but all in all, the vision for Gains Network is pretty grand. But with a competent team at the wheel, I have no doubt that GNS holders are in good hands.

To round up, I do think Gain Network has adopted a unique model at targeting the leveraged trading and perp exchange business model. Its unique approach has allowed it to provide higher leverage than its competitors and at lower fees as well, not to mention an ever-increasing range of tradable assets.

While there are certain limitations on the platform that are quite significant, I can’t help but be impressed by the team’s long-term vision and ability to ship. I think Gains Network is a project to watch in the perp exchange arena, and you can look forward to seeing this underdog rise up and take on the heavyweights.

Today, both the market cap and FDV of GNS stand at $17.7M, and they have collected $8.7M in fees from their platform since launch – $14.5M on an annualized basis. When you consider their largest competitor, GMX, collects about $70M in annualized trading fees¹ and has a market cap of $153M (with an FDV of $266M), even as a GMX bull myself, it’s hard not to feel that GNS is undervalued. Considering the roadmap ahead, it definitely seems like Gains Network and their gTrade platform have a bright future.

¹ Source: Tokenterminal.com