Guide to earning yield on GMX V2
Published May 31, 2024
Hey Edge readers,
In this edition, we’re diving deep into the mechanics of GMX’s new isolated pools, showing you how to earn yield when traders lose. We’re also excited to introduce two new investable pools on Exponential, offering opportunities to earn up to 7% yield on LINK and a new USD pool for your idle cash.
Here's what we're covering this week:
  1. Guide to earning yield on GMX V2 📘
      2. We break down how the GM isolated and single-token pools function under the hood.
  1. New investable pools on Exponential ✨
      2. Earn up to 7% yield on LINK, plus a new USD pool to park your idle cash.
  1. Institutional crypto inflow at 2024 high 🗞️
      2. PYUSD on Solana, Layer 2 fragmentation, and more.
Stay sharp. 🫡
– The Exponential team
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Guide to earning yield on GMX V2

We previously covered perpetual exchanges and explored the innovative Hyperliquid platform. This week, we’re turning our attention to GMX V2, another standout player in the perp exchange landscape.

TL;DR on GMX

  • GMX offers leverage trading by letting users trade against its liquidity pools, which serve as the counterparty
  • V1 started with GLP, a basket of assets consisting of ~50% stablecoins and 50% crypto assets (i.e. BTC, ETH)
  • V2 introduces isolated GM pools to lower the risk of enabling long-tail assets as tradeable on the platform

What are GM pools?

A GM pool (GMX Market pool) consists of 50% Long token (i.e. ETH, BTC) and 50% Short token (i.e. stablecoins like USDC). GM pools provide liquidity for leveraged trading on the GMX platform. Users include:
  • Liquidity providers: Deposit long and short tokens into the pool and receive GM tokens representing their share
  • Traders: Use the GM pools to open leveraged long or short positions on crypto assets
The next evolution of GM pools is single-token markets, attractive to users who want 100% exposure to a single underlying token, without the rebalancing that occurs in dual-sided markets. The initial pools include:
  • BTC-only GM pool: A BTC-only pool for the BTC/USD market, backed by [WBTC/WBTC] as the Long and Short token.
  • ETH-only GM pool: A ETH-only pool for the ETH/USD market, backed by [ETH/ETH] as the Long and Short token.
For both types of pools, liquidity providers’ returns are a function of platform trading/borrowing fees, trader PnLs, and the price movements of the underlying assets.
To do leverage trading, traders must first deposit collateral into the protocol. When entering into a long position, a trader is ‘renting’ the upside of the asset from the GM pool. When entering a short position, a trader is ‘renting’ the upside of the stablecoin versus the volatile asset. Note: none of the assets in the GM pools are actually lent out. The pools mainly function to ensure that the necessary funds are available to cover long and short positions.

Under the hood of GM pools

Now that you have a gist of GMX, let’s unpack what is happening behind the scenes when a trader executes a leveraged position. We will assume 100% utilization in the pools for simplicity, but this rarely or never happens in practice. We also only look at cases when traders are profitable, so it’s clear what the risks of providing liquidity are.

Long position example

ETH-USDC GM pool
Trader comes to GMX, deposits 1 ETH as collateral, and goes 10x long ETH.
  • ETH price at entry: $2,000
  • GM pool composition: 10 ETH and 20,000 USDC
  • GM net asset value: (10 * $2,000) + $20,000 = $40,000
PnL calculation
  • ETH price at close: $4,000
  • Trader profit: ($4,000 - $2,000) * 10 = $20,000
  • Trader profit in ETH: ($20,000 / $4,000) = 5 ETH
  • GM pool composition: 5 ETH and 20,000 USDC
  • GM net asset value: (5 × $4,000) + $20,000 = $40,000 (unchanged due to ETH price increase)
ETH-only GM pool
Trader comes to GMX, deposits 1 ETH as collateral, and goes 20x long ETH.
  • ETH price at entry: $2,000
  • GM pool composition: 20 ETH
  • GM net asset value: (20 * $2,000) = $40,000
PnL calculation
  • ETH price at close: $4,000
  • Trader profit: ($4,000 - $2,000) * 20 = $40,000
  • Trader profit in ETH: ($40,000 / $4,000) = 10 ETH
  • GM pool composition: 10 ETH
  • GM net asset value: (10 × $4,000) = $40,000
When traders go long and win, the USD value of the GM pool stays constant. However, the pool relinquishes all upside appreciation of the tokens to traders. The end result is that GM pool holders finish with less overall ETH but maintains their value in USD terms.
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Short position example

ETH-USDC GM pool
Trader comes to GMX, deposits 1 ETH as collateral, and goes 10x short ETH.
  • ETH price at entry: $2,000
  • GM pool composition: 10 ETH and 20,000 USDC
  • GM net asset value: (10 * $2,000) + $20,000 = $40,000
PnL calculation
  • ETH price at close: $1,000
  • Trader profit: ($2,000 - $1,000) * 10 = $10,000 = 10,000 USDC
  • GM pool composition: 10 ETH and 10,000 USDC
  • GM net asset value: (10 * $1,000) + $10,000 = $20,000
ETH-only GM pool
Trader comes to GMX, deposits 1 ETH as collateral, and goes 20x short ETH.
  • ETH price at entry: $2,000
  • GM pool composition: 20 ETH
  • GM net asset value: (20 * $2,000) = $40,000
PnL calculation
  • ETH price at close: $1,000
  • Trader profit: ($2,000 - $1,000) * 20 = $20,000
  • Trader profit in ETH = ($20,000 / $1,000) = 20 ETH
  • GM pool composition: 0 ETH
  • GM net asset value: = $0
In these short scenarios, the GM net asset value is impacted greater because the value of ETH has also decreased. When a trader shorts, the GM pool keeps the volatile token and rents out its stablecoin exposure. Unlike the long example, there is a double loss from the USDC depletion and the decline in ETH price. For the ETH-only GM pool, the impact is even more severe due to the absence of stablecoins to mitigate part of the volatility, which results in the pool losing its entire value.
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Summary

The long and short examples above show what happens when traders win. Conversely, when traders lose, it benefits GM pool holders. Lastly, the GM pools’ net asset values are higher in practice due to the fees earned from entry, exit, and borrow fees.
  • Long positions: The impact on long positions is the same for both pools because profits are paid out in the Long token in both cases
  • Short positions: The single-token pool experiences a more significant impact versus the dual-token market because both the payout and the backing asset (i.e. ETH) are losing value simultaneously
Overall, the single-token pools face higher volatility and risk, particularly during market downturns, as the volatile token is used to back both long and short positions. GMX will initially manage this risk through lower trading caps on single-token markets, its auto-deleveraging feature, and adjustments to other risk parameters. Historically, traders are net unprofitable, which means you are better off providing liquidity as you earn from both fees and trader losses.
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New on Exponential: Earn 7% yield from Chainlink staking, plus a new USD pool to park your idle cash
stake.link LINK staking
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Fluid USD Lending
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In the news

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