The CeDeFi collapse has caused many people to move away from centralized exchanges and instead use decentralized alternatives for trading. This resulted in a huge surge in GMX users, which increased the prices of their tokens by four times.
GMX followers have had another profitable way of earning money: the platform’s liquidity provider token, GLP, has been rewarding users with ETH and AVAX for taking the opposite positions of traders.
Despite the success of liquidity providers, Andrew Kang could be looking to challenge their dominance.
A Summary of GMX and GLP
Before we delve into the specifics, let’s review GMX’s revenue model – if you already know it, you can move on to the following part.
GMX boasts about not compensating investors with inflationary returns in order to draw in TVL, instead relying on a two-token system which consists of the $GMX and $GLP tokens.
The $GMX token is the official governance token of the platform and can be used to gain different benefits such as $esGMX, $AVAX, $ETH and payments for services.
Nevertheless, we will primarily be concentrating on $GLP, the token that provides liquidity to the platform.
$GLP is composed of a selection of tokens such as $BTC and $ETH, and those who hold $GLP are the counterpart to all traders on GMX. In other words, if a trader at GMX goes long on $BTC, all holders of $GLP will be automatically short in relation to the amount they own.
If a trader incurs losses, all $GLP stakers will receive an amount corresponding to the size of their stake; conversely, if a trader earns profits, they will benefit as well.
Stakers are given rewards in the form of traders’ fees and a portion of the $GMX tokens that have been set aside as security in return for taking on this risk.
In the past, stakers of $GLP have been rewarded with an average of 20% annual percentage rate (APR) during the middle of last year, despite the fact that 90% of traders have not been profitable.
Who is Andrew Kang?
Andrew Kang is an angel investor and Co-Founder of Mechanism Capital, which is an investment business focusing on DeFi. He has put in more than $30 million into various cryptocurrency firms such as Nansen and perpetual protocol thus far.
He is also the most successful trader on GMX in terms of profit and loss, having generated a profit of more than $7.9 million with fees taken into account as of now.
I uncovered that he had conducted 47 transactions worth an estimated $26 million over the past 150 days by downloading information from a public wallet associated with him. Each trade had a median size of around USD$340,000, or 200 Ethereum tokens at the moment of composition.
https://arbiscan.io/address/0xe8c19db00287e3536075114b2576c70773e039bd
As a result of recent unsteadiness in the market, Kang has augmented the amount he is investing, having taken a $1.6M Bitcoin long position on the platform during the recent decline.
How This Affects GLP Stakers?
GLP Stakers receive a substantial portion of their income from unsuccessful trades. When a trader experiences liquidation or a negative PnL, their losses are divided among the GLP stakers according to each individual’s stake.
Since Andrew began trading on GMX, the cumulative profit and loss of traders has grown significantly, eliminating even the $33M deficit that existed in the middle of last year.
Profits from GLP stakers have been steadily increasing since the beginning of GMX, resulting in a net gain of $20 million.
The Bear Case For GMX
Having traders that are highly lucrative is an issue because it reduces the allure of staking $GLP for liquidity providers. For instance, even though the AUM and fees have risen, the APRs for $GLP have decreased from approximately 25% in the middle of last year to 12% presently.
In addition, traders such as Andrew Kang who make a lot of money on the platform usually take their earnings to other platforms or keep them for themselves instead of putting them back into GMX. Certainly, they have the right to do this, but it decreases liquidity in the system, which is critical for traders.
Recently, GMX has been subject to a bigger reduction in the amount of $GLP stakers than usual. When combined with the apprehension concerning $USDC’s depeg, there was a significant withdrawal of Assets Under Management (AUM) from GMX totaling $42 million in one day.
GMX often encounters circumstances where there is not enough capital to either buy or sell, particularly during times of market fluctuation. This week, $GLP experienced a surge in daily usage that was more than double its usual amount on two separate occasions.
Why does this matter?
Trade commissions make up a large part of $GLP’s income, so if traders remain successful, this could create a cycle of events which would lead to negative results:
- Traders on GMX are profitable, reducing $GLP AUM
- Trading conditions less liquid, less traders choose GMX
- $GLP APR falls, causing unstaking from holders
- Trading conditions less liquid, less traders choose GMX
- Repeat steps 3-4
If this process continues indefinitely, $GLP would experience a bank run, resulting in the downfall of GMX.
Will it Happen?
Although a bankrun could have potential adverse consequences, it is unlikely to occur.
Fees play a critical role in determining if stakers of $GLP will remove their liquidity from the platform. Taking Andrew Kang’s payment of about $2.6 million to open trades into account, unstaking would be a huge financial loss for them.
GMX requires a fee of 0.1% of the position size when opening a trade, and another 0.1% for closing it. This does not include any fees associated with borrowing, liquidation, minting, or swaps.
GMX has generated approximately $140 million in fees since its launch, with a total volume of $90 billion in trades on the platform. Additionally, it only has 226,881 users, which is much fewer than what many other centralized exchanges have.
Uniswap, the biggest DEX on the blockchain, has an average of 41,000 users a day in comparison to GMX’s 2,000.
Despite the fact that $GLP stakers have lost $20 million to traders on GMX over a certain period of time, they were compensated with $140 million in fees – which is seven times more. Although APRs are less than before, stakers can still get hold of real yield through ETH or AVAX; this is especially meaningful due to the inflationary yield given by other platforms.
Summary
Andrew Kang and other traders at the top of the PnL charts are proof that trading can be lucrative if the conditions are right.
However, most users on GMX break even or make a loss. They have earned significant returns at the expense of $GLP stakers, but most people trading on GMX still come out with a loss, though it is generally smaller than those who succeed.
As GMX grows and gains more users, it will bring in traders who don’t necessarily make profits – this would hopefully push up APR for $GLP stakers and create a beneficial cycle instead of an unhelpful one. Despite the optimistic outlook for GMX, it’s important for any Web3 investor to consider the possibility of a negative outcome.
This has been seen in the past with FTX, Luna and SVB; all of which experienced unlikely liquidity events.
