How GMX V2 works

GMX V2 is a significant evolution of the GLP liquidity system deployed on Arbitrum. Initially, GLP brought innovation to the market by providing a multi-asset pool for perpetual trading on-chain without external market makers. This democratized liquidity provision, enabling users to easily provide trading liquidity and facilitating seamless perpetual trading. GLP also presented an attractive yield opportunity, giving exposure to BTC and ETH and attracting significant liquidity. However, over time, GLP faced limitations. The unpredictable hedging of trader PnL introduced excessive risk exposure for liquidity providers, and it constrained GMX from listing additional non-BTC/ETH markets. GMX V2 introduces several key advantages for traders and liquidity providers over V1. Traders benefit from lower fees, the ability to open larger positions, and improvements to open interest mechanics that allow entering big trades without slippage or limitations. Furthermore, GMX V2 extends its support to prominent Layer 1 tokens, including SOL, XRP, LTC, DOGE, and ARB. This expansion opens new doors for traders, making GMX V2 a versatile and attractive choice for a broader audience. Expanding markets to improve the on-chain experience was a longstanding goal for the team. Finally, V2 increases composability through auto-compounding rewards.

How GMX V2 manages risk

GMX V2 introduces several new risk management strategies to ensure the safety and security of the platform. One of the critical aspects of risk management is the introduction of isolated GM pools. These pools offer liquidity for specific market positions, allowing liquidity providers to choose their preferred market and level of risk exposure. The isolated pools per trading pair enhance stability and safety by containing risks within pairs, ensuring issues do not propagate across markets. These improvements make liquidity provision safer and more effective on GMX. In addition to isolated pools, GMX V2 employs a dynamic fee structure to balance long and short positions. It features a funding rate mechanism, where the dominant side pays the funding rate to the weaker side. This funding rate adjusts in segments, incentivizing traders to restore balance when the dominant side's position becomes too skewed. This mechanism not only prevents systemic risks during intense market fluctuations but also encourages arbitrage funds to enter, promoting equilibrium. GMX V2 also addresses the issue of infinite liquidity occupation by maintaining borrowing costs and introducing a Price Impact Fee. The Price Impact Fee mimics the dynamic nature of order book trading markets, where larger positions have a more substantial impact on prices. This design discourages price manipulation attacks, maintains balanced positions, and optimizes liquidity while mitigating risks.

How GMX V2 makes money

GMX V2 employs a new fee model that has been significantly revamped to align with its risk management strategies and enhanced capital efficiency. The fee structure in GMX V2 includes opening/closing fees, borrowing expenses, and the introduction of the Price Impact Fee. Opening/closing fees have been reduced from 0.1% to 0.05% or 0.07%, depending on their impact on long and short positions. The dynamic funding rate ensures that the dominant side pays the funding rate to the weaker side, further enhancing fee efficiency. The Price Impact Fee is a key component of GMX V2's revenue model. It imposes higher fees on larger positions and those that deviate significantly from the balance between long and short. This fee structure discourages price manipulation attacks, maintains balanced positions, and optimizes liquidity.