As one of the earliest users of Gambit and GMX, the author of PANews has experienced the process of GMX from being unknown to being well-known. However, so far, there are still a lot of misunderstandings about GMX in the market. This article will summarize common misunderstandings in GMX and try to solve everyone's doubts at once.
Since there are already many articles introducing GMX, this article is mainly aimed at readers who already have a certain understanding of GMX. If you want to have a basic understanding of GMX, you can check out PANews’ previous articles. Related reading: "Can GMX, which rises against the market trend, become the new king of decentralized perpetual contracts?" 》.
1. Will extreme market conditions cause GLP to return to zero?
Although GMX is called a perpetual contract exchange, it actually conducts spot and leverage trading (the funding fee in GMX is actually a borrowing fee), and the size of all positions is limited (set by the team), which is lower than GLP The existing liquidity in GLP, that is, only part of the liquidity in GLP is used by traders to increase leverage. The discussion here needs to be divided into two situations: rising and falling markets.
When the market rises, the extreme situation is that no one is shorting at all and the long position reaches the upper limit set. If this happens, some of the value in the GLP basket that would otherwise increase as the market rises will be captured by the longs. However, because each asset has an upper limit on long and short positions, the price of GLP will still inevitably rise at this time.
When the market falls, because there are already about half of risky assets such as BTC and ETH in GLP, if the short position held by the trader reaches the set upper limit and no one is long, the trader will increase the downside risk of GLP.
As per current data, the value of ETH in GLP is $128 million, long positions are capped at $80 million, and short positions are capped at $35 million. If the market falls and the trader's short selling reaches the upper limit, and no one is long, taking into account the three factors of the decline in asset value in GLP, the impermanent loss of spot trading, and the profit of short positions, it will also need to fall by about 90% at one time to cause GLP goes to zero.
2. In the bull market, because of capital costs, traders on GMX are only willing to do long positions but not short positions?
This may be a misunderstanding. In contract trading on centralized exchanges, long orders and short orders always correspond one-to-one. There is no situation where long orders are higher than short orders in a bull market. Contracts on centralized exchanges are what determine the trading volume of the crypto market. Main force.
If you consider the funding costs, the funding costs for long positions in GMX are much higher than those for short positions. If you consider the funding costs and do not go short in GMX, then no one should be long at this time (as of January 20, the annualized interest rate of ETH borrowing is 57%, USDC’s annualized borrowing interest rate is 20%, longs borrow risky assets such as ETH, and shorts borrow stablecoins).
The current disparity in the long-short ratio in GMX may come from the influence of a few large investors, which will be introduced below.
3. After observing that traders on GMX are profitable, does it make sense for GLP holders to withdraw?
The recent large profit-making position of a certain trader on GMX has aroused the attention and concern of some GLP holders. On January 16, when the total open interest of GMX on Arbitrum was only US$145 million, the trader held more than Long orders worth $70 million account for half of the total open interest in GMX. If you withdraw from GLP before the trader closes its position, can you avoid the adverse impact of the trader's profits on GLP holders?
In fact, the trader's unrealized profits and losses will be included in the price of GLP in real time, and it will be too late to exit when you find that others are making profits. Just imagine, if GMX only included profits and losses into the GLP price when the trader closed the position, it would probably be exploited.
4. Why might the official website show a significant increase in the trader's profits when the market is less volatile? Is there anyone doing evil?
The official website statistics of trader profits and losses only take into account closed positions. If some traders open positions and make profits, but as long as the positions are not closed, the profits will not be included in the statistics. Similarly, in the case of profit, even if the market does not fluctuate, the operation of closing the profitable position will cause the trader's profit to rise suddenly as shown in the figure below.
Combining this question with the previous question, that is, the trader's profit and loss will be included in the price of GLP in real time, but will not be included in the trader's profit and loss results reported on the official website.
5. The project party has allocated all the fees to GMX and GLP holders. Can it continue to operate?
Before the revenue is distributed between 70% (GLP) and 30% (GMX), the necessary operating expenses, namely recommendation rewards and keeper fees, are deducted, which generally only account for 1% of the revenue, so GMX does not have the pressure to continue operating.
6. The project party controls the price of GMX. Is there any possibility of doing evil?
GMX's price feed is managed by the keeper, who uses the median price of Binance, Bitfinex, and Coinbase to make quotes. On this basis, there are two guarantees.
First, compare it with the Chainlink price. If the error is within 2.5%, the price of the keeper will be used. If the price difference is above 2.5%, then the long operation will be executed at a high price and the short operation will be executed at a low price.
In addition, a watcher node is also run to confirm whether the keeper is working properly. The watcher continuously calculates the median price of the three exchanges and compares it with the price submitted by the keeper.
The keeper and watcher are run by different GMX team members, and there are currently multiple watcher accounts set up.
This mechanism ensures the efficient operation of GMX, but it has also been criticized because of centralization. It cannot be ruled out that the team can jointly do evil, such as by controlling the quotation at a position 2.5% higher or lower than the Chainlink price, and opening a position at once. You can earn 5% profit by closing the position.
The team may consider using Chinlink keeper or Intel SGX execution environment in the future for further decentralization.
7. Is there a risk of GMX being exploited by others?
GMX on Avalanche has previously experienced incidents of traders making profits by manipulating market prices on centralized exchanges. As long as the liquidity of GMX is better than that of centralized exchanges, attacks may occur.
In addition, if an institution has enough funds to conduct transactions and can change the prices of BTC and ETH on centralized exchanges, then it can first open a position on GMX and then trade on the centralized exchange, so that it can start from GMX with a lower risk. Profit from it. When the operation of the centralized exchange causes price fluctuations, it will change the transaction price on GMX, but there is no slippage in leverage trading on GMX, which will not cause price fluctuations on GMX, let alone the price of the centralized exchange. Influence.
In addition, traders who help these institutions perform operations can also use GMX to open mouse positions. The essence of these operations is that GMX provides additional liquidity.
8. Why are positions in GMX liquidated earlier than expected?
Users may also have this question when their positions are liquidated on centralized exchanges.
In GMX, when the user's collateral value-loss-borrowing fee is less than 1% of the position value, the position will be forcibly liquidated. The borrowing fees of GMX are much higher than those of centralized exchanges, which may be overlooked by unfamiliar users.
9. What is the difference between exchanges such as GMX and dYdX?
From the perspective of trading products, dYdX is similar to centralized exchanges such as Binance, but GMX has created a new trading model.
The essence of GMX lies in "slippage-free trading." For example, the above-mentioned trader holding long ETH orders worth $50 million does not have enough liquidity in dYdX for him to close his position. Even on Binance, selling an ETH/USD perpetual contract worth $50 million (approximately 30,000 ETH) will result in a 1% spread.
Corresponding to this is the difference between the leverage multiple and the forced liquidation line. If you want to hold a $50 million ETH/USDT perpetual contract position in Binance, the leverage multiple will not be higher than 3 times; when the remaining margin in the account When it approaches 6% of the position, it will be forcibly closed.
For large investors, the trading experience of GMX is even better than that of Binance. It can be said that GMX solves some pain points in trading.
On the whole, large investors on GMX can obtain the core advantages of no-slip trading, higher leverage, and better forced liquidation lines, while paying higher long-term holding costs (borrowing fees) and Slightly higher than the trading fees of other exchanges.
10. Is GMX the ultimate solution for decentralized contracts?
Futures were originally designed to facilitate hedging for users, but the highest holding cost of similar products in GMX determines that it is not a good hedging tool, but a "gamble" tool.
It is undeniable that GMX is a very good trading product, but it may not be the ultimate solution.