Amber Token Insights (GMX, OW vs ETH)

Recommendation: Overweight vs ETH. Sound tokenomics, PMF and upcoming Synthetics upgrade as catalyst to drive fee revenue increase for GMX holders.

Feb 14, 2023

Recommendation:
Overweight vs ETH. GMX has proven product market fit (PMF), solid tokenomics, no VC overhang, real yields in ETH, a team with proven ability to ship, road map progression that benefits token holders and speculatively, access to Arbitrum air drop potential?

Liquidity Venues : Uniswap (Arbi) / Binance / OKX

Fireblocks Support : Yes

Prior Audits : ABDK Consulting

Links to report PDFs :

English : Amber Research Token Insights - GMX

Mandarin : Amber Research Token Insights - GMX (Mandarin)

Description of GMX:

GMX is a multi-chain (Arbitrum and AVAX) decentralized futures trading and spot-swap platform that allows users to trade on leverage (up to 50x). GMX’s key differentiator lies in its oracle pricing model where executed prices are sourced from oracles (no slippage) and not a central-limit-order book (CLOB) nor a X*Y=K model. Another standout for the GMX token is the governance token accruing 30% of all fees generated (all current and future chains), paid out in $ETH/$AVAX and escrowed-GMX (esGMX). GMX makes fees mainly from opening /closing of leveraged futures trading, 0.1% each way. Borrow fees paid per hour is based on utilization (assets borrowed) / (total assets in pool) * (0.01%). GMX is in the midst of expanding available trading pairs through its Synthetics upgrade (in progress).

Key Investment Points:

GMX’s proven PMF in the growing DEX market alongside the need for decentralized trading solutions

GMX operates in the DEX futures trading with an established PMF for trading BTC/ETH on chain. Since 1^st Sept’21, GMX did USD 91bn in volume, paid out ~USD 124mn in fees to users (in ETH and esGMX) and has a TVL of USD 468mn across GLP pool (Arbitrum + Avax).

We believe there will be more trading on DEXes, which would help GMX’s fees. Based on Token Insights; perp volumes for the top 10 exchanges (which constituted ~95% of volumes) in 2021/2022, DEXes constituted 3% of volume. A simple average of DEX-to-CEX spot volumes for 2022 came in at 13.7% according to data from the Block. We believe the path of least resistance for the DEX-perp market share is higher from 3%; which GMX would benefit from if it can maintain it’s market position (not an issue in our opinion given its PMF).

GMX currently lags DEX futures leader DYDX in terms of volume traded but they are structurally distinct. GMX operates on an oracle pricing model (no price discovery) while DYDX operates similar to CEXes, on a CLOB model (price discovery happens on CLOB). We believe that due to the lack of price discovery/CLOB, it would be difficult for GMX to be a primary venue for traders and hence, volumes. However, in light of the mishaps of CEFI in 2022, we believe the central tenets of cryptocurrencies are once again centerstage. We thus predict the further adoption of DEXes and inductively reason platforms with proven PMF and best-in-class tokenomics will accrue the most value to holders.

Best in class overall tokenomics design coupled with yields paid out in $ETH (“real yield” narrative)

GMX’s focus around real yields rewards long term holders. Staking GMX (no lock up unlike ve-model) confers holders various benefits such as fee distribution, a fee boost component commensurate with time staked (in the form of multiplier point “MPs”, revenue dilution to others) and esGMX emissions if GMX yields fall below a target yield (esGMX emissions end Mar’23).

As a boon to GMX holders, staking is incentivized. There is no limit on the amount of MPs one can accrue and consequently, the fee boost to one’s share of GMX’s rewards. MPs are burnt when GMX is un-staked, increasing the % share of existing GMX stakers. On the supply side, GMX has limited emissions and no VC unlocks. Token supply is capped at 13.5mn GMX (including esGMX; subject to a vote if any change is needed). The process to convert esGMX (unsellable) into GMX (sellable) involves vesting GMX for a minimum of 12 months, thereby reducing native token dumping pressure. Vested esGMX confers none of the staking benefits.

Given that 85% of GMX’s circulating supply is being staked for rewards, we think it seems safe to infer that the market’s consensus view reflects GMX’s tokenomics design of rewarding ‘stakers’ has been well received, understood and of sufficient magnitude.

Upcoming synthetics launch bodes (presumably) well for increased fee revenue + ETH production capabilities

Imminent (soon™) Synthetics launch gives GMX a wider range of tradable pairs (as long as oracle pricing is available). These trading pools would be backed by pair specific liquidity providers (not GLP), providing segregation which limits oracle manipulation risks for illiquid pairs. The ostensible deduction would be that accrued fees would increase for GMX holders as a result of a wider range of tradable assets on the platform. More real fees flowing to GMX holders would mean increased value accrual; hopefully price action follows?

A projection of fee increase from Synthetics: Expected fees in 2023 to hit ~116mn for 2023 annualised (just from BTC/ETH). For 2022, BTC+ETH volumes on Binance (as a proxy) constituted 55% of derivatives volume. When Synthetics launches, (2023 vs 2022 volume growth, factoring in adoption rate, available asset pairs as a % vs Binance), increasing tradable pairs on GMX, assume volumes/fees on GMX to increase initially by ~15% and by >=50-80% permanently? With GMX trading at 16x Price/Revenue (P/S) (fully diluted; Token Terminal), we expect the P/S to eventually halve, (all else equal), putting it firmly in the top quartile of DApps in terms of lowest P/S ratios.

GMX’s proven track record as a way to pay holders in ETH as a yield gives it a beta to ETH (analogy of the value of a gold mine to gold). If one is an ETH bull, being paid in ETH (at yields higher than staked ETH) to hold GMX while still maintaining exposure to ETH is an alluring proposition (GMX/WETH pair has been grinding higher). In the case where ETH turns deflationary through increased network usage(already has according to ultrasound.money), is it not conservative to assume that a source paying out ETH would similarly increase in popularity?

Risks to thesis:

Oracle manipulation risk as experienced on the AVAX GLP pool; significantly harder to manipulate BTC / ETH given liquidity and OI limits?

Oracle keeper bots manipulation; keepers bots run by team members that continuously update the prices. Watcher bots also run by team members that calculate the median and compare it to the price keeper bots set. If there is discrepancy, spread will be enforced when opening position. Internal rug possibility given that the watcher bots? Primary oracle is median of (Binance / Bitfinex / Coinbase).

Crypto markets undergo prolonged apathy that reduces trading volumes further leading to reduce yields for GMX? (2023 off to a good start)

Competitors produce similar products (GNS / DYDX) that captures market attention; unlikely given combination of edge mentioned above?

Adverse and sustained GLP situation: With GLP’s 2022 performance, doesn’t seem to be the case, but beware of turkey situations.

Regulatory crackdown targeting DEFI in general or GMX specifically.

Further DD / Questions / Red Flags:

Check if any plans to increase esGMX emissions to continue providing a soft boost to GMX yields? (esGMX emissions ends Mar’23)

Check if GMX team has any exposure to FTX? This might change their incentives given the sudden loss of personal funds?

Check on the progress of plans to better user experience such as guaranteed execution?

Check also runway for GMX development team and how they might raise funds to increase runway?

Check for expansion plans (after synthetics)? Inquire around limitations due to the lack of price discovery on the GMX platform?

Controversial, depending on the set up / background of the of investor class, as the development team and founder are anons.

Acknowledgements :

@RileyGMI / @WinterSoldierxz / @CryptoHayes / @FloodCapital / @DoveyWan / ultrasound.money / The Block / Token Insights / Token Terminal / CoinGecko / Llamacollege

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Author
Robin Lim is a trader for Amber Group’s Primary Markets Team.

Contributors : Robin Lim, Joshua Lim, Abhisheak Mall, Steven Shi.

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