Author: @CryptoScott_ETH | @RealResearchDAO
The speculative nature of the cryptocurrency market is extremely strong, and users who participate in crypto investment have a high risk appetite. Therefore, we can see that the trading volume of leveraged trading products on centralized exchanges is much larger than the spot trading volume. The outbreak of DeFi summer has caused some spot transactions to be migrated to on-chain decentralized exchanges, so that people who are also looking forward to leveraged trading can participate in decentralized exchanges. Last year was the first year of the outbreak of the new alt public chains. The gas fees of these new public chains were much cheaper than Ethereum mainnet, which greatly reduced the cost of leveraged transactions and provided the basis for the outbreak of leveraged trading on-chain. However, the on-chain leveraged trading did not explode on a large scale like the spot trading in DeFi summer last year, mainly due to
Optimism has recently seized the market share of Layer 2 protocols by launching their tokens, which has further stimulated the rush of token issuance of Layer 2 protocols. With token incentives, the liquidity of the entire Layer 2 protocols will be improved. At the same time, it’s worth noting that Layer 2 protocols are more secure than other new public chains. Therefore, the rush of token issuance of the L2 protocols is expected to trigger the outbreak of on-chain leveraged trading. This article evaluates the investment value of GMX by comparing three well-known L2 leveraged trading protocols, DYDX, Perpetual Protocol, and GMX.
DYDX is a leveraged trading platform built on the Layer 2 protocol called StarkEx. It uses an order book model for trading, so the trading experience is almost the same as CEX, and the funding fee mechanism is used to balance naked positions. The entire transaction process is executed off-chain without going on-chain, and only goes on chain when the funds are transferred in and out of the margin account. DYDX has introduced professional market makers to enhance their liquidity. The entire transaction process is a three-party game process between market makers, long traders, and short traders.
Perpetual protocol is a decentralized perpetual trading protocol built on Optimism. In their V1 version, the transaction process uses virtual AMM (vAMM) for pricing. The virtual AMM refers to the x * y = k model of AMM. The vAMM does not store real assets, but it is convenient for liquidation. When trading, virtual assets are minted in vAMM. If you open a long position with 10x leverage at 100 USDC, 1000 vUSDC will be minted and put into vAMM. A funding fee mechanism is used to balance naked positions. Since the K value setting in the V1 version has a greater impact on the pricing results, in their V2 version, vAMM is abandoned and the AMM mechanism of Uniswap V3 is adopted. When the user deposits funds to provide liquidity, the funds will be deposited into the Vault, and a group of LPs will be minted into Uniswap V3. When users trade, the margin will be deposited into the Vault, and vUSD will be minted and swapped in Uniswap V3. The entire transaction process is a game process between AMM's LP and the long and short traders.
GMX is a leveraged trading protocol deployed on the Layer 2 protocol Arbitrum, which currently supports up to 30x leveraged trading. The counterparty of all transactions is the GLP pool. The GLP token is a special token composed of BTC, ETH, USD and other tokens in a certain proportion. Users can use the tokens included in the GLP to purchase GLP to start market making , because it is a single currency liquidity, so there is no problem of impermanent loss. Since the counterparties of all transactions are LPs, there is also a zero-sum game between LPs and traders: the margins of traders' losses will be directly allocated to GLP (reflected in the price increase of GLP), and traders earn profits directly from GLP they acquired (reflected in a drop in the price of GLP). Since the order book and AMM modes are not used, there is no problem of price deviation, and there is no need to balance long and short positions through funding fees. The price of opening and closing positions is provided by the keeper or oracle.
Although DYDX has been leading in trading volume, the price of DYDX token has continued to decline since its listing due to the massive selling pressure generated by DYDX's trading reward incentives and the inability of the token to capture the profits generated by the protocol.
As a perpetual futures product that issued tokens earlier, it enjoys a certain advantage in the derivatives market. However, the k value of the vAMM mode of the v1 version is not easy to set, and it’s vulnerable to attacks. The game process is more complicated. If the market is not balanced between long and short, traders may still lose money even though they bet in the right direction. Although the V2 version is based on the real liquidity of Uniswap V3, the AMM model has many defects, and the pricing process is more complicated. In the case of insufficient liquidity, the trading experience is poor. After DYDX issued their token, it attracted the attention of investors in the derivatives market and seized most of the market share, which made Perpetual Protocol's revenue and token performance continue to decline.
The game theory of GMX is simple and reasonable. Since it was deployed on Layer 2, its performance has continued to grow. The price chart of their GMX token has also followed the sentiment of the cryptocurrency market, and it has not crashed badly like DYDX and PERP.
GMX is a perpetual trading protocol migrated from XVIX and Gambit on BNB Chain to Arbitrum.
GMX Token Allocation
The governance token is GMX, and the total supply is 13.25 million.
GLP - The Counterparty of Trading
Capturing Value
Platform’s revenue source
GMX
GLP
Comparison in Trading Liquidity
Trading liquidity is measured by the TVL available for trading.
The token staking rate reflects the token’s ability to capture value and the degree of reluctance to sell stakes.
Value capture ability:
The staking rate of GMX’s circulating tokens is high, and the market stakes are relatively reluctant to sell; PERP V2 trading dividends are being designed, and the veToken model is expected to be used. At present, there is a certain lock-up period for withdrawing from staking. The poor performance of the token market also reduces users' willingness to stake.
Since DYDX has the advantage of trading mining reward, the best liquidity, and low transaction fees, its revenue far exceeds the other two protocols. Although Perpetual Protocol's TVL is 1/9 of GMX's, its revenue is only 2 times that of GMX, so Perpetual Protocol's capital utilization rate is relatively high.
Summary
Comparison in Valuation
From the PS point of view, GMX is the lowest but close to DYDX. Since only GMX tokens can realize the value capture of the protocol, only GMX has a price multiplier; GMX's FDV/TVL is far lower than other protocols. Since GMX has 2 million staking rewards distributed through esGMX and Multiplier Points, it will take longer to convert into tradable GMX, so the actual price multiplier of GMX will be lower. Judging from the comprehensive valuation comparison indicators, GMX has the possibility of being undervalued.
The Top-Down Valuation Method
The recent crises of centralized institutions such as Celsius and Babel have caused market liquidity crises and trust issues, and users’ demand for DeFi has further increased. At present, there is still a large gap between the market share of the entire decentralized leveraged trading scene and the centralized exchanges. The market share of the entire decentralized leveraged trading scene is expected to grow further.
Optimism’s issuance of tokens will force competitors to fight back. Before Arbitrum officially issues their tokens, users may interact on Arbitrum for the purpose of hunting airdrops. GMX is currently the product with the highest TVL on Arbitrum, and its security is relatively high, so it can attract the attention of some airdrop hunters. After Arbitrum issues tokens, some of the money that flows in will remain in the ecosystem. GMX will be the first choice for big players to conduct liquidity mining, and with the TVL increasing, the trading cost will fall to attract more trading,which is expected to promote the positive flywheel of GMX.
Valuation Model
A top-down valuation of GMX based on the above assumptions is expected to have a target price of 92.92 by the end of 2022 and a target price of 139.38 by the end of 2023. The current price of 19.91 is somewhat attractive.
Sensitivity Analysis
By controlling the target P/E and conducting a sensitivity analysis on staker's revenue in 2022, in an extremely pessimistic case, the price of GMX will be 11.32, and the decline from the current 19.19 is limited. The valuation center is between 67.92 and 169.81, which is several times the current price, so the current price of GMX has good odds.
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