GLP War Guide: Is the GMX ecosystem a nesting doll or a clever combination of DeFi Lego?

Original title: The complete guide to GLP wars
作者：Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong，Bixin Ventures
Real Yield is considered the purest form of income that people can find on the chain. It does not rely on excessive token release, but on fees and income generated by actual transactions in the protocol. If the protocol chooses to share profits with users, this sustainable income is extremely attractive to DeFi farmers.
GMX is a representative project that generates real income. As a popular perpetual trading platform, GMX uses GLP as the liquidity of transactions, and 70% of the losses and platform fees generated by user transactions will be distributed to LPs and GMX Token holders in the form of ETH or AVAX. In other words, as one of the largest fee producers in the DeFi protocol, GMX distributes most of the fee income to stakeholders.
Figure 1: Fees generated by DeFi protocols on February 11
Since the launch of GMX, the market demand for GLP has soared. At present, the total locked assets of GMX are worth more than 500 million US dollars, and it has been growing. The real income narrative triggered by GMX has also been sought after by more and more people. Developers have begun to build projects on GMX and attract GLP shares, and the GLP War has followed.
Figure 2: Causes of GMX’s TVL GLP War
Before understanding GLP War, let us first briefly review GMX and GLP.
GLP is a LPs liquidity pool similar to Uniswap. It consists of a basket of tokens as shown in the figure below, of which 48% are stablecoins and 52% are other currencies. Due to price fluctuations of currencies such as BTC and ETH, the overall value will fluctuate accordingly. Users are incentivized to stake GLP to profit from traders' losses, while obtaining esGMX and sharing 70% of the platform's transaction fees.
Figure 3: GMX's GLP portfolio
Due to market risk, GLP stakers may experience losses while earning returns. The following chart compares GLP returns and earnings. Since its inception, GLP's return rate is -13%.
Figure 4: GLP Returns
In addition, GLP income is paid to users in ETH or AVAX, and users must manually claim the rewards and reinvest them. Although Arbitrum and Avalanche have very low fees, manual reinvestment multiple times will inevitably incur corresponding fees.
Beginning
Various protocols noticed the problem of GLP and proposed solutions, such as what would happen if the risk exposure of GLP was hedged? What if the yield was leveraged? What if the yield could be automatically reinvested? What if GLP could be used as collateral? Developers began to look for a breakthrough point, and the GLP War followed.
Figure 5: GLP holding ratio of various protocols GMX Ecosystem PlutusDAO
PlutusDAO is a yield aggregator that conducts protocol governance through the native token PLS. It provides liquidity pledge for veAssets such as veJones, veDPX or veSPA. After integrating GLP, users can deposit GLP to unlock plvGLP with greater functionality.
With plvGLP, ETH rewards are automatically calculated every 8 hours. Due to automatic reinvestment, the value of plvGLP increases and holders can earn higher APY. PLS tokens are also distributed to plvGLP stakers as liquidity mining rewards. Plutus charges 10% of GLP earnings as a fee.
plvGLP also unlocks composability with other protocols. Conventional GLP can only be pledged on GMX and cannot be integrated with other protocols. plvGLP solves this problem by working with various lending and asset management protocols. Through Lodestar Finance and Vendor Finance, users can use plvGLP for borrowing or pledging, and users can develop better strategies based on this, such as holding leveraged long or short positions, or manually executing delta neutral strategies by borrowing BTC and ETH. @0xBobdbldr introduces the relevant strategies in detail here.
Recently, Plutus has also partnered with FactorDAO to enable asset management. Factor strategists can leverage Plutus products and create new use cases. One potential use case is the Plutus index vault, which aggregates all plsAssets and diversifies the sources of returns. They are also exploring opportunities for further integration with RodeoDolomite and other companies.
 Mugen Finance
Mugen Finance is one of the earliest projects on GMX. Mugen is a cross-chain yield aggregator built on LayerZero. Users can earn income from multiple protocols on multiple chains, which can be regarded as Yearn Finance on LayerZero. Currently, there is only one strategy on their platform, the GLP strategy.
The GLP strategy is executed by Mugen's treasury based on the amount of whitelisted funds for the strategy, and the treasury earns income by minting and staking GLP. Users who deposit funds into Mugen will mint the native token MGN, and Mugen staked in the form of xMugen will receive ETH income from the treasury. Users can choose to automatically reinvest their income and use ETH income to purchase MGN and pledge it. This helps increase APY because automatic reinvestment is more frequent than manual reinvestment.
Although Mugen's strategy is relatively basic, it provides farmers with diversified choices and automatic reinvestment of income. In the future, Mugen will integrate more protocols, and users only need to stake MGN to obtain income from multiple sources and chains.
Figure 6: Simplified workflow of Mugen Finance
 Vesta Finance
Vesta Finance is a collateralized debt platform where users can lock collateral and mint Vesta's stablecoin VST. GLP is one of the collaterals accepted by Vesta, which adds new use cases for GLP. Users can deposit GLP and borrow VST to maximize capital efficiency.
VST can be staked in Vesta's mining pool, and can earn 10-40% stablecoin yields depending on the lock-up period. At a stake rate of 150%, VST's yield will be 6.7%-26.7%. Overall, without any direct exposure, GLP yields can be increased to around 46.7%.
Vesta also allows leverage on GLP yields. Similar to Degenbox, users can deposit GLP to obtain a VST loan, which can then be used to purchase more GLP. This process can be repeated multiple times to obtain a larger leveraged position. At a 120% collateralization ratio, a 6x leveraged position is possible, and the APY will reach nearly 120%.
Figure 7: GLP yield leverage operation diagram
However, this strategy can be affected by price fluctuations of assets such as BTC and ETH, creating liquidation risk. Risk DAO has a great article on the risks of Vesta Finance and the security of its current configuration.
 Unstoppable Finance
Unstoppable Finance provides GLP holders with a completely free auto-reinvestor. Compared to other protocols that charge a percentage of earnings or deposits, there is no fee for using the auto-reinvestor, so users can save on gas costs. The protocol's vault is built using the ERC-4626 tokenized vault standard, and anyone can build on top of their vault.
They also have a new mechanism called TriGLP that is still under development. This mechanism tokenizes GLP into stableGLP and cryptoGLP, which earn different amounts of returns based on the risk they take. Their goal is to create a delta-neutral stablecoin-like position with an annual interest rate of about 10% and no volatility; and a cryptocurrency-like position with an annual interest rate of about 30% while maintaining full ETH/BTC exposure.
Figure 8: Diagram of TriGLP mechanism GMD Protocol
GMD Protocol is another yield aggregator that provides additional functionality by alleviating the direct exposure issue of GLP by offering the pseudo-delta-neutral strategy.
GMD provides a single collateral vault for BTC, ETH, and USDC, with deposit limits based on the relative ratios of GLP to USDC, ETH, and BTC, and the assets in the vault are used to mint GLP and earn yield. This allows users to maintain pseudo delta neutrality on the assets they deposit. For example, users who want to earn yield on USDC without touching BTC, ETH, or other tokens in GLP can deposit funds into GMD's USDC vault to receive part of the GLP yield. This pseudo delta neutral strategy uses a ratio based on the composition of USDC, ETH, and BTC in GLP.
Over time, the amounts allocated to the 3 vaults on GMD need to be manually rebalanced weekly to adjust to the new GLP ratio. The GMD protocol does not rebalance user funds, but it deposits 5-15% of the maximum total value into Delta-Neutral Vaults for rebalancing. This helps alleviate the low reserve problem because the protocol itself has liquidity to draw from.
To further reduce the volatility risk of smaller assets such as Uniswap in GLP, GMD provides a protocol reserve that contains GLP worth 5%-15% of the total TVL. The protocol reserve is funded by the treasury and will compensate users when the value of their assets falls below the value of GLP. GMD believes that the protocol reserve will only grow in the long run because it can gain value from the losses of GMX traders.
Figure 9: GMD working mechanism
In terms of actual performance, the three vaults had a yield of 2.6%-2.9% between December 11, 2022 and February 12, 2023. Extrapolating these results, the APY is about 16.6% - 18.7%, slightly lower than the advertised 20%-26% APY.
Figure 10: GMD Treasury Performance
While GMD attempts to remain Delta Neutral, it does not have any short exposure to remain truly Delta Neutral. The protocol itself requires reserves as a backstop for impermanent loss. This limits the scalability of GMD, as vaults cannot get too large without sufficient reserves (i.e. 5%-15% of TVL). They can only scale to a larger TVL based on the performance of the protocol reserves. As of now, GLP reserves are at breakeven, and GMD will be limited in expanding its vaults.
Figure 11: Performance of GMD Reserve Yield Yak
Yield Yak is an automatic reinvestor based on Avalanche. Every user can get AVAX compound rewards by clicking on reinvest. This mechanism is an incentive for users.
Thanks to Avalanche's $180 million incentive program Avalanche Rush, Yield Yak is able to offer more rewards to depositors. GLP strategy depositors will receive up to $300,000 in AVAX from Avalanche Rush. In addition, you can maximize GLP rewards by permanently staking esGMX on Yield Yak. To optimize GLP, Yield Yak has also upgraded Yak Swap. Yak Swap can automatically select the best path to swap assets to GLP, helping to rebalance GLP to the expected index weight. This reduces user slippage while helping GMX have a suitable asset ratio.
 Rage Trade
Rage Trade is a perpetual trading platform on Arbitrum that uses LayerZero. They are the first project to launch a dual vault system to minimize direct market risk, with Risk-Off Vault and Risk-On Vault to minimize BTC and ETH risk exposure by operating on Aave and Uniswap.
Users deposit sGLP or USDC into Risk-On Vault, which borrows BTC and ETH through flash loans on Balancer and sells them for USDC on Uniswap. The USDC obtained from the sale together with the USDC in Risk-Off Vault will be deposited into AAVE to borrow BTC and ETH, which will be used to repay the flash loans on Balancer. These operations will create a short position on AAVE because Risk-On Vault now borrows BTC and ETH.
Another important feature of the Risk-Off Vault is to provide collateral to the Risk-On Vault, which will be used to maintain the borrowing health factor of AAVE at 1.5. Every 12 hours, the position is reopened to collect fees and rebalance PnL between shorts of AAVE and GLP collateral, and rebalance the hedge based on the composition of GLP deposits.
Figure 12: Risk-On Vault Mechanism Figure 13: Risk-Off Vault Mechanism
Comparing Risk-On Vault's performance to GLP's, its theoretical profit return is about 25%, while GLP's is -13%.
Figure 13: Comparison of Treasury Return Performance
However, Risk-On Vault currently has a return of -1.2%, with GLP value loss primarily due to the high cost of hedging direct exposure and trader profit. After Rage Trade completes its second audit and increases its deposit cap, they will be able to significantly reduce hedging costs. In order to hedge a trader's PnL, Rage Trade will provide the option to partially or fully hedge a trader's PnL. These will be available to users in the form of separate vaults if they wish.
 Jones DAO
Jones DAO is a yield, strategy and liquidity protocol designed to improve capital efficiency. Relying on a dual vault mechanism to provide users with leveraged returns, Jones DAO's jGLP vault allows the deposit of GLP and any assets within GLP, and the jUSDC vault accepts USDC deposits.
USDC from the jUSDC vault can be used to mint more GLP and obtain leveraged positions in GLP. GLP rewards will then be distributed between jGLP and jUSDC depositors, who receive an annualized return of 33% and 11.3%, respectively. The jGLP vault will automatically balance its leverage to prevent liquidation, and users can also choose to automatically reinvest.
Figure 14: Jones DAO’s protocol mechanism
The fee structure of Jones DAO is as follows. They have established a unique fee structure for long-term growth. Users who continue to stake will receive fees from users who cancel their stake, encouraging users to continue staking in Jones DAO.
Figure 15: Fee Structure
The more USDC deposited into the jUSDC vault, the more GLP can be purchased, resulting in higher leverage. The following chart shows the relationship between jUSDC APY and vault utilization, where the GLP yield is 35%, and due to the increased leverage, the jUSDC yield can rise to nearly 20%.
Figure 16: jUSDC APY vs. Vault Utilization
In terms of return performance, jGLP does not hedge market risk, but actually amplifies it. This means that the actual performance of the jGLP vault depends on market conditions. Backtesting against 0% GLP yield and 80% utilization shows that jGLP outperforms ETH. If GLP yield is included, the results may be even better.
Figure 17: Performance of jUSDC and jGLP against ETH Abracadabra
Abracadabra is a lending platform with its own stablecoin MIM, which can be borrowed using interest-bearing collateral. It introduced magicGLP, an automatic reinvestor for GLP tokens. ETH proceeds from GLP will be used to purchase more GLP, which is then converted into magicGLP. Using MIM on the platform, users can choose to leverage their positions by 4% to achieve up to 84% APY on their GLP.
 Steadefi
Steadefi is a platform that offers strategies that automatically leverage returns, and they currently have a vault that offers 3x GLP leveraged positions.
For every $1 a user deposits into the treasury, $2 is borrowed from the lending pool to mint GLP. This effectively creates a 3x leveraged position that automatically reinvests over time and rebalances when necessary.
Figure 18: Steadefi mechanism
In terms of performance, GLP's PnL is 12.3%, and Steadefi's vault outperforms GLP with a PnL of 89.8%, a yield that is 7 times higher.
Figure 19: Performance comparison between Steadfi and GLP Comparison of key indicators of the protocol
protocol
Public Chain
type
APY
GLP TVL
release time
cost
PlutusDAO
Decision
Aggregator
61.4%
$8.2M
29/8/22
Withdrawal: 2%
-10% profit
Mugen Finance
Decision
Aggregator
19.6%
$3.4M
8/9/22
10% profit
Vesta Finance
Decision
CDP
19.6% - 120%
$2.9M
13/9/22
20% profit
Unstoppable Finance
Decision
Automatic reinvestment
19.6%
$57.5K
22/9/22
-
GMD Protocol
Decision
Delta Neutral
20% - 26%
$5.9M
5/11/22
Staking: 0.5%
Yield Yak
Avalanche
Automatic reinvestment
124%
$12M
18/11/22
10% profit
Rage Trade
Decision
Delta Neutral
9.26% / 5.56%
$7.4M
12/12/22
18.5% profit
Jones DAO
Decision
Leveraged Vault
33% / 11.3%
$13.5M
28/1/22
Withdrawal: 1%-3%
Abracadabra
Decision
Leveraged Vault
21.4% - 84%
$20.6M
31/1/22
1% profit
Note: GLP FDV data is up to February 16th Potential entrants Umami Finance
Umami Finance is expected to launch the v2 version of its GLP vault, which will provide an algorithmic hedging strategy. Umami is still in the background testing and optimizing their vault, and recent test results show an annualized rate of return of 26.7%.
Figure 18: Umami test results Yama Finance
Yama Finance is building a full-chain stablecoin optimized for maximum capital efficiency, speed, and security, and has not yet launched its GLP yield leveraged product on Arbitrum.
Yama is able to offer up to 101x leverage, providing better yield opportunities. For GLP, they limit it to 17x, bringing the APY to 333% (assuming a 19.6% GLP yield). Yama has not yet detailed the mechanism for its leveraged GLP liquidity yield. This may involve borrowers using GLP collateral to borrow YAMA and obtain a leveraged position to obtain higher returns.
The Future of GLP War
It can be seen that many developers have established many protocols based on GMX, and many protocols have also gathered millions of dollars of TVL. The entire market has a clear demand for GLP-based products.
Due to the composability of DeFi, this Lego-style operation allows GLP to play a role in various protocols, including yield leverage, automatic reinvestment, and lending. As the GMX ecosystem grows, more protocols are expected to integrate GLP into their protocols. Of course, GLP also has the risk of being completely exhausted due to traders earning profits from trading and withdrawing assets from GLP. Therefore, many protocols may try to hedge traders' PnL in the future to reduce risks.
Disclaimer: The above information does not constitute investment advice. In addition, the project mentioned above, Rage Trade, is one of our portfolio investments. You can read more about our research here.