Rapid Insights: GMX V2

GMX has been a prominent player in decentralized leverage trading, largely due to the success of its GLP liquidity system which has attracted over $500M of inflows since inception (Figure 1, below). In short, users mint GLP by providing a basket of assets (ETH, WBTC, and stablecoins). The protocol uses them to back margin positions offered to traders. For instance, traders wanting to long ETH can take positions up to the amount of ETH deposited to the GLP pool, which guarantees traders’ profit by effectively renting out the upside from ETH LPs. In return, GLP minters earn 70% of exchange fees and margin interest paid by traders. Positions are offered with low slippage and no price impact, which has been a large contributor to GMX’s success with large traders.

While generally considered to be a DeFi success story, GMX V1 has faced several challenges. For instance, the protocol offers trades with zero price impact which is popular with traders but risky for LPs. This has allowed malicious traders to earn risk-free profit by taking large positions on GMX with no price impact and then subsequently manipulating oracle pricing by entering and exiting large trades on centralized exchanges (Figure 2, below). GMX has limited the risk of such exploits by constraining available liquidity for non-ETH/BTC trading. However, this also severely limits the scope of markets that can be listed on GMX.