Centralized exchange (CEX)

As the name implies, CEXs are crypto exchanges created by centralized organizations. Those organizations are the only owner and have absolute control over the exchange (including your funds). The centralized organization serves as the intermediary between buyers and sellers. Some of the common examples of centralized exchanges are Binance or Coinbase.

Decentralized exchange (DEX)

Following the definition - decentralized exchanges are free from the control of any single entity, serving as intermediaries. Decentralized exchanges are actually smart contracts tailored for offering peer-to-peer transactions. You do not have to deposit your funds to any other entity to do the trade. You can still be the only owner of the assets in your self-custody wallet and be able to experience most of the CEX advantages.

Comparison of advantages between CEX and DEX

The tab of advantages between CEX and DEX summarize our first paragraph of this article - Centralized exchanges at a first glance seem to be really user friendly. With only a little catch. I am not the owner of my funds. Is this really such a big deal? Most of those exchanges seem to be so well funded, trustworthy, having such an amazing… No, stop right here. It is a big deal. And let me show you why..

The biggest hacks and frauds of centralized exchanges in the crypto industry

Since the time when Bitcoin was born, there have been many events which you could avoid by holding your asset in self-custody wallet.

1. Mt. Gox: In 2014, the Japanese cryptocurrency exchange Mt. Gox was hacked and lost 850,000 bitcoins, which was worth around $450 million at the time. The hack was the largest in cryptocurrency history and led to the bankruptcy of Mt. Gox.

2. Bitfinex: In 2016, the Hong Kong-based cryptocurrency exchange Bitfinex was hacked and lost 120,000 bitcoins, worth around $72 million at the time. The hack resulted in a significant drop in the value of bitcoin, and Bitfinex was forced to halt trading and issue a "socialized loss" to affected users.

3. Coincheck: In 2018, the Japanese cryptocurrency exchange Coincheck was hacked and lost around $530 million worth of the cryptocurrency NEM. The hack was one of the largest in history, and led to increased regulation of the cryptocurrency industry in Japan.

4. FTX: In 2022, the Bahamas-based cryptocurrency exchange collapsed due to a lack of liquidity and mismanagement of user funds, followed by a large volume of withdrawals. FTX’s balance sheet was showing $9 billion in liabilities and just $900 million in assets that could be easily sold. Balance turns out to be negative $8 billion.

So what should be the outcome here? Remember “Not your keys, not your money”. It is as simple as that.

So do we have any solid DEX alternative, you might ask? Yes, we do.

What is GMX?

GMX is a decentralized, permissionless perpetual swap and spot trading platform that supports low swap fees, allowing users to leverage up to 50x on their trades just by connecting their wallets. This DEX has its own native token called GMX. Function of a token is not just a governance like in the case of many DEXs. The biggest advantage is the possibility to stake GMX tokens and earn a portion of GMX’s protocol fees, plus benefit from other incentives. The protocol first went live on Arbitrum in September 2021 before launching on Avalanche at the beginning of 2022.

What’s the plan for GMX?

The clear focus of GMX is to become a more complex multi asset and user friendly DEX for on-chain leverage trading. Let’s have a look at most interesting future ideas and plans.

Synthetics

Synthetics will most likely be a new class of tokens that will become available on the DEX. Synthetic crypto assets derive their value from any underlying asset, such as stock, commodity, or digital currency. They are essentially digital representations of derivatives.

Better UI and UX

GMX plans to improve the user experience even further. We can expect the TreadingView charts implementation to the platform.

AMM

Long term goal of GMX is to become automated market maker (AMM). This would allow other DeFi projects to build on top of its liquidity pools, and customize the functions of their pool entirely.

Network expansion

GMX also plans to roll out the exchange on a third blockchain network, alongside Arbitrum and Avalanche.

TOKENOMICS

There are various tokens related to GMX platform. Let’s go one by one.

GMX

Flagship token of the platform. Token distribution can be found below:

Max supply of GMX is 13,250,000, with current circulating supply of 8,288,000 tokens.

The increase in circulating supply will vary depending on the number of tokens that get vested, and the amount of tokens used for marketing / partnerships. The forecasted max supply is 13.25 million GMX tokens. Minting beyond the max supply of 13.25 million is controlled by a 28 day timelock. This option will only be used if more products are launched and liquidity mining is required, a governance vote will be conducted before any changes.

Actual market cap put GMX at #82. GMX token exists on Arbitrum, Avalanche and can be bridged to ETH mainnet via Synapse bridge.

But actual usage of GMX token is on first two mentioned chains, where it’s holders can stake tokens via GMX platform and gain following: escrowed GMX tokens, Multiplier points and ETH rewards. 30% of fees generated from swaps and leverage trading are converted to ETH / AVAX and distributed to staked GMX tokens. If you are staking on Arbitrum you would receive ETH, if you are staking on Avalanche then you would receive AVAX.

Escrowed GMX

esGMX can be used in two ways:

Staked for rewards similar to regular GMX tokens

Vested to become actual GMX tokens over a period of one year

Each staked Escrowed GMX token will earn the same amount of Escrowed GMX and ETH / AVAX rewards as a regular GMX token.

Once you decide to turn your gained esGMX into GMX, to be able to sell them, you will have to vest those esGMX. To be able to do that, you have to let the protocol reserve GMX tokens that you used to gain those esGMX for the whole period of vesting - 365 days. Vested esGMX are being converted to GMX proportionaly every second. Vested tokens are as well not gaining any rewards.

GLP

GLP consists of an index of assets used for swaps and leverage trading. It can be minted using any index asset and burnt to redeem any index asset. The price for minting and redemption is calculated based on (total worth of assets in index including profits and losses of open positions) / (GLP supply).

Actual composition of the GLP can be found here.

At the moment, 30% of GLP is ETH, 18% BTC, small portion of LINK and UNI and the rest are stablecoins.

Holders of GLP tokens are automatically eligible for 70% of the fees generated by GMX platform. Holders of GLP tokens on Arbitrum are getting the rewards in ETH, Holders of GLP on Avalanche are getting the rewards in AVAX. There are as well rewards in esGMX being paid out to GLP holders. Rewards and their APR are recalculated once a week, based on the fees paid on the platform.

As GLP holders provide liquidity for leverage trading, they will make a profit when leverage traders make a loss and vice versa.

MULTIPLIER POINTS

Last thing to mention are the multiplier points - rewards to long term supporters and stakers/hodlers of the tokens.

When you stake GMX, you receive Multiplier Points every second at a fixed rate of 100% APR. 1000 GMX staked for one year would earn 1000 Multiplier Points.

Multiplier points can be staked for fee rewards by pressing the "Compound" button on the Earn page, each multiplier point will boost ETH / AVAX APRs at the same rate as a regular GMX token.

For example, if the ETH APR is 10% and you have $10,000 worth of GMX and esGMX, then your rewards would be $1000 annualized, if you additionally have an amount of Multiplier Points equivalent to 20% of your total amount of GMX and Escrowed GMX, your "Boost Percentage" would display as 20%, and you would get an extra $200 of ETH rewards annualized.

COMPETITION

Main competitor with almost the same TVL is DYDX, which runs on Ethereum and offers much wider spectrum of perpetual contracts. Token price suffers significantly (1.8$) while at the top reached 25$, not a long after initial token distribution and trading.

Is saying “nothing is as good as it seems” correct in case of GMX too?

Let’s highlight few risks.

• Scaling issues

It’s hard for GMX to list perpetuals for other assets, then main ones listed now - BTC, ETH, LINK, UNI.

I am afraid we are betting on the fact, that GMX manages their capacities and GLP weightage well. I have no idea how this is calculated, but given the attention GMX is getting more and more people will try to find fault in this. One of such examples was Septembers AVAX exploit. User was able to open leveraged position of AVAX on GMX and manipulate the price of AVAX off-chain in favor of his position. As a result, GMX has capped the amount of OI for AVAX, due to its relatively thinner liquidity than other tokens.

Therefore, scaling to other perps is limited. Will this be enough for the market demand?

• With this issue is connected also a risk for GLP.

Assets like AVAX make up a small percentage of GLP, so that a loss in GLP wouldn't affect LPs that much. But definitely, theres a space for mistakes in calculations and highly profitable trader, or someone searching for such mistakes could use it which could affect LPs in negative way.

GLP pool is made as mentioned before of around 50% stables and 50% risk assets, more specifically those:

The GMX scheme should work properly in regular market. But what if we experience a situation where during one day risk assets drop in price by 50%? In case of huge shorts OI on GMX, it could potentially lead to bankruptcy of GLP stables pool. It could usually be solved by involved slippage, but there is no slippage in case of GMX. Will this happen? Probably not, but it’s good to be aware of such risk. Do Kwon probably thought about risks for Luna too late, or at least people who lost money there. Am I saying this is like Luna? Not at all. Just saying it’s good and you should know risks connected with investing.

• The last risk I wanna mention is the regulatory one.

GMX is sharing revenue it earns with GMX stakers as well as with LPs through GLP. If you are not scared to hold something, that most probably wouldn't go through the Howey test and therefore becomes a security, then you are fine.

GMX showed us there is strong demand for on-chain trading products and real yields. Making a decentralized exchange for leverage is a really difficult thing to do. GMX has been one of the few protocols that have been able to align the needs of LPs and traders to create a thriving product and stand out. But it remains to be seen if GMX can overcome its challenges and truly scale in the long term. While there are obstacles and limitations involved and certainly no investment is without a risk, so far it seems GMX is on the right track.

We hold and stake GMX, been accumulating it for quite some time, collecting multiplier points and in case you haven’t done so yet and you are interested in exploring the world of decentralized finance and on-chain trading, consider trying out GMX. If you're a DEX enthusiasts, its the place to be, for now.

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