The Yield Farmer's Almanac: GMX

GMX is a decentralized exchange on Arbitrum and Avalanche, and while it does traffic in spot tokens, perpetual futures are its true bread and butter. The platform’s users can trade perps with up to 30x leverage, and more importantly than that, they can pay fees to do it. GMX has brought in over $40M in revenue since its launch in September, and 100% of that has been portioned out to holders of its two native tokens, GMX and GLP.

The latter is an LP’s veritable dream, offering a rough index of the broader market with no impermanent loss, which pays rewards out in blue chip tokens. So whether you fashion yourself a day trader in search of a leverage fix, a responsible investor looking for a hedge, or a simple liquidity provider who’d like to lend money to degenerate gamblers for unspeakable yield, the protocol may have an alluring proposal for you. The following is a gentle primer on GMX.

To gaze on Sam Bankman-Fried is to wish that you were Sam Bankman-Fried, and this is the gift that GMX offers the world. If at any time over the past few years you’ve had the sneaking suspicion that the exchanges might be making more money than the average trader, this platform provides an easy way to get in on the action. If it seems like the house always wins, then in a sense, GMX is a decentralized casino that you can provide liquidity for in exchange for a cut of the profits.

Overwhelmingly, these profits come from the fees associated with perpetual futures – contracts derived from an underlying asset that grant a user leveraged exposure to its price movement. When these contracts are settled, somebody has to hold the underlying asset with deep enough liquidity to pay out the profitable trades, and this is what GMX does. It is essentially a multi-asset liquidity pool that acts as the counterparty to leveraged futures trades, and it achieves this with the help of two native tokens.

The protocol’s gas token is the namesake GMX, and there’s not terribly much to say about it. It’s a gas and governance token, it goes up when people use GMX, and devs need to get paid too. The protocol’s liquidity token, however, is known as GLP. Originally brought into existence at the project’s launch, GLP is minted as payment for deposits into a treasury of protocol-owned blue chips. In this case, that treasury acts as a liquidity pool – but here’s where it gets interesting. Because this pool is used not only to provide liquidity for token swaps but also to settle profitable trades, it’s comprised of the tokens that GMX offers futures on, and GMX allows users to open these positions by depositing any of them as collateral. This means two things for GLP.

First, it means that GLP is an index of those assets’ value. Given that half of the pool is comprised of stablecoins and the rest of BTC, ETH, LINK, and UNI, to own GLP is to own a conservative grouping of currencies with reduced exposure on both sides – hardly a sacrifice in periods of choppy price action. Second, it means that when you provide liquidity to the futures exchange, you are sharing a pool with your counterparty’s collateral. And this, dear degen, is where the yield comes in.

The most important thing to know about a futures exchange is that it doesn’t matter whether you win or lose, it matters that you pay fees to do either. While GMX levies a variety of charges on both sides of the trade, it’s almost disingenuous to include the ones applied to liquidity providers. The overwhelming majority of revenue comes from leveraged traders, to the point that 125,570 dollars were forked over in margin fees yesterday while LPs burned GLP to the tune of $731. What does this equation mean for those of us who opt to provide liquidity? Well, there’s no way around it – it is extravagantly lucrative.

Margin fees are distributed amongst token holders, with 70% paid to holders of GLP and 30% to esGMx, the escrow token you receive in exchange for staking GMX. Incredibly, these rewards are split between GMX emissions – pre-escrowed to avoid any unsavory inflation – and ETH itself, with rewards paid out in AVAX should users choose to operate on that chain.

Stakers of GLP currently receive 12.27% APY esGMX rewards and a whopping 29.87% APY on ETH. GMX stakers receive a more modest 18.17% on ETH and 16.69% esGMX, though users can stake these as well to double their rewards. All in all, the protocol offers APYs between 35% and 42%, half paid out in ETH or AVAX, in exchange for staking a token that tracks the broader crypto market with exposure diluted by the inclusion of stablecoins. A better crab market play would be hard to design.

On a final note, one peculiarity of collateralizing perps with a Balancer-style liquidity pool seems to bear mentioning. Profitable trades may draw their proceeds from the basket of coins deposited on the contract, but just as liquidity comes from the pool, to the pool it shall return. It is the final resting place of the collateral from liquidated trades, which means that every time a trader is liquidated, their claims dissipate while the supply of GLP stays the same. So when things go poorly for the guy on GMX’s Discord who “just took a loan out on his house to 30x LINK before Consensus,” that house actually becomes part of the collateral pool, and your bags will pump accordingly.

And GMX knows this. There’s an understated cruelty to the way the Stats page boasts of their customers’ dismal performance, but the numbers don’t lie. The publicly available .CSV file shows us that users lost over $545,000 yesterday alone, and the chart of their cumulative PnL has been a steady, downward slope since mid-November. Like Sisyphus in reverse, GMX’s traders just find themselves condemned to roll downhill forever. A moment of silence might be in order for the ones who entered the liquidity pool and forgot the profit and loss so that we could prosper. Before you mint, take pause, reflect – then step forth and let the blue chips fall where they may.

There are plenty of ways to capitalize on good yields, but GMX is often used as a conservative avenue for yield farming with relatively low risk.

1. If providing liquidity on the platform long-term, staking GMX not only returns esGMX and ETH/AVAC, it also provides “multiplier points” that can be staked to compound other rewards. These build up over time but disappear when the original GMX is unstaked. esGMX also takes a year to vest before it can be exchanged for GMX, so GMX staking is a good conservative option for longer time horizons.

2. Sending ETH to your Arbitrum wallet to buy GLP is a better short-term option that still brings in ~40% APY. If you find yourself searching in vain for the distant glimmer of an alt season long past, buying on the Avalanche chain pays out in AVAX as well. Alternatively, if you’ve come to terms with the bear market blues, you could always listen to the haters on Twitter and cash your LINK bag in directly for GLP.

Whatever you choose to do, remember to perform your own due diligence, remember to factor all risks into your position size, and most importantly, remember that nothing you just read is financial advice.