How GMX is disrupting a $1 QUADRILLION industry

9 min readMar 4, 2023

GMX is one of the hottest protocols in crypto.

It’s the dominant player in the decentralized perpetuals market — a space that might have a quadrillion dollar potential — and its $GMX token has increased over 400% through a bear market.

This article will tell you everything you need to know about this protocol including:

What are derivatives?
What are perpetuals (“perps”)?
What makes perpetuals so groundbreaking?
What are decentralized perps?
How big is the market for decentralized perps?
What is GMX?
What’s the long-term potential of GMX?

Let’s dive in…

What are derivatives?

Derivatives are financial instruments that have become an essential part of the global financial system. They derive their value from an underlying asset, such as a stock, bond, commodity, market index, or currency.

The two most common types of derivatives are options and futures:

Options are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and date
Futures, on the other hand, are contracts that obligate the holder to buy or sell an underlying asset at an agreed-upon price and date

Derivatives have many practical uses, including hedging and speculation.

For instance, a farmer could buy a corn future to protect against a potential drop in the price of corn at the time of sale. In contrast, traders can use derivatives to speculate on the direction of an asset’s price movement, either to profit from a potential price increase or to protect themselves from a potential price decline.

The traditional financial industry’s estimated value of derivatives is an astonishing $1 quadrillion, which is more than ten times the value of the world’s stock markets.

Most traditional derivatives are traded on conventional exchanges such as the Nasdaq or Chicago Mercantile Exchange (CME).

What are perpetuals?

Derivatives have gained significant popularity in the crypto industry, with an estimated market capitalization of $2 trillion (and almost $5 trillion during the 2021 bull market). Cryptocurrency derivatives come in many forms, but one of the most popular is known as a perpetual contract.

A perpetual is a unique type of futures contract that obligates the owner to buy the underlying asset at some point in the future. However, unlike traditional futures, perpetuals do not have an expiration date, which means they can be held indefinitely.

Perpetuals have become popular in the crypto industry because they offer traders the ability to take both long and short positions without worrying about the contract’s expiration date. Additionally, perpetuals allow traders to use leverage, which can significantly increase their potential profits (as well as losses).

What makes perpetuals so unique?

Perpetuals are a groundbreaking innovation in the world of derivatives because they combine the best features of the derivative and spot markets. In particular, they offer traders:

Leverage: Leverage is one of the main benefits of futures and options, as traders can take leveraged positions without having to take ownership or custody of the actual asset. This allows them to buy large positions with relatively small amounts of money, which can magnify potential profits.
Indefinite Holding Periods: Traditional futures and options contracts expire, which means that traders have to close their positions or roll them over into new positions. This can be costly and time-consuming. Perpetuals eliminate this problem, allowing traders to hold their positions for the long-term.

As a result, perpetuals are the first practical way for traders to take a long-term leveraged position.

This has made them very popular, with the daily volume of perpetuals traded often three times that of the spot market. In fact, over 90% of all crypto futures trades are perpetuals.

Perhaps the most interesting thing about perpetuals is that they are crypto-native.

While the concept of perpetuals was first proposed by Nobel Laureate Robert Schiller in 1992, they didn’t become practical until the introduction of cryptocurrencies. The first perpetuals were launched by BitMEX in 2016, and since then, they have become a staple of the crypto trading world.

Today, most crypto perpetuals are traded on decentralized exchanges such as:

Binance
OKX
Bybit
Bitget

FTX was a also large player before its collapse.

What are decentralized perps?

Decentralized perpetuals are a type of financial instrument that is traded on decentralized exchanges (DEXs). Unlike traditional centralized exchanges, DEXs allow users to directly trade with one another without the need for intermediaries such as banks or brokers.

Trading on DEXs offers several benefits, including:

Security: Decentralized exchanges are more secure than centralized exchanges because they don’t hold users’ funds. Instead, users hold their own funds in non-custodial wallets, reducing the risk of hacks and security breaches.
Privacy: Decentralized exchanges don’t require users to provide personal information such as their name or address, providing greater privacy and anonymity for users.
Transparency: All transactions on decentralized exchanges are recorded on the blockchain, providing a high level of transparency and making it easier to audit transactions.
Censorship resistance: Decentralized exchanges are not controlled by any central authority, making it impossible for any individual or organization to censor or restrict trading on the platform.
Greater control: Decentralized exchanges allow users to have greater control over their assets and trading strategies. Users can trade directly with one another, set their own prices, and manage their own orders.
Lower fees: Decentralized exchanges often have lower fees than centralized exchanges because they don’t have to maintain expensive infrastructure or pay for costly regulatory compliance.
Global accessibility: Decentralized exchanges are accessible to anyone with an internet connection, regardless of their location or financial status.

How big is the market for decentralized perps?

The market for decentralized derivatives, in comparison to traditional and centralized crypto derivatives, has historically been relatively small. As of February 28th, 2023, it’s worth $1.47B, which is less than 0.1% of the crypto derivatives market and less than 0.0001% of traditional derivatives market.

One of the main factors that has limited the growth of decentralized derivatives is the high fees associated with trading on decentralized exchanges. Additionally, there have been issues with capital inefficiencies, poor pricing, and a general lack of sophistication among professional users.

However, the market for decentralized derivatives started to change in 2021. Newer and more sophisticated players entered the market, leading to exponential growth. In 2021, the market for decentralized derivatives was valued at $68M, and it has since grown to $1.47B, which is an increase of over 2,000%.

This growth can be attributed to several factors, including the development of more advanced trading tools and platforms, increased adoption by institutional investors, and improvements in the overall infrastructure of decentralized exchanges. Additionally, the emergence of decentralized autonomous organizations (DAOs) has created new opportunities for decentralized derivatives, allowing users to participate in governance and decision-making processes on the platform.

Overall, the growth of the decentralized derivatives market is a positive sign for the broader cryptocurrency industry. As decentralized finance continues to mature, we can expect to see increased adoption of decentralized derivatives and other financial products, leading to a more decentralized and democratized financial system.

What is GMX?

Protocol Overview

GMX is the largest decentralized perpetual platform by nearly a factor of two.

The protocol allows users to trade derivatives of popular cryptocurrencies such as BTC and ETH directly from their crypto wallets. They can perform spot swaps and trade perpetual futures up to 50x leverage, similar to a centralized exchange. However, unlike centralized exchanges, GMX allows users to maintain custody of their assets using a cryptocurrency wallet.

GMX provides a range of advantages, such as:

Lowered Liquidation Risks: Liquidations are determined by a collection of high-quality price feeds, which keep positions secure from short-term price fluctuations
Cost Savings: Traders can enter and exit positions with minimal spread and zero price impact, obtaining the best price without any extra costs.
Easy Swaps: User can conveniently open positions using a user-friendly swap interface, which enables them to switch from any supported asset to their preferred position

The platform launched in September 2021 on Arbitrum and expanded to Avalanche in January 2022. Since launching it has significant traction and records:

$107B of total trading volume
$194M of open interest
244K total users

GMX is backed by the $GMX token, a governance and utility token that allows token holders to participate in voting on proposals that help determine the exchange’s future direction.

Users can also stake $GMX to receive awards including:

30% of all protocol fees generated
Escrowed GMX (esGMX) tokens, which can be staked for rewards or vested. These tokens convert back into GMX over 12 months, and their emissions serve as locked staking, preventing inflation and immediate selling of GMX
“Multiplier Points” that increase yield and reward long-term holders, promoting commitment to GMX and decentralized ownership of the platform

The GMX token has a maximum supply of 9.0 million, with 8.5 million tokens circulating

How does it Work?

GMX’s trading is facilitated by a multi-asset pool named GLP, comprising stablecoins, ETH, BTC, and other altcoins like Uniswap and Chainlink.

Users add liquidity to the pool by minting GMX Liquidity Provider Tokens (GLP) and, in return, earn 70% of all generated fees on the corresponding blockchain. Unlike some other liquidity pools, GLP does not suffer from impermanent loss.

Anyone can become a liquidity supplier and earn fees, while users can trade perpetual swaps or spot using the provided assets. Furthermore, as GLP token holders supply the liquidity utilized for leverage trading, they profit when traders incur losses — and vice versa.

The GLP token can be minted using any of the index assets and redeemed for any index asset. Unlike the GMX token, it is automatically staked and non-transferable. GLP’s price, rewards, and index composition vary between Arbitrum and Avalanche.

What’s next for GMX

GMX’s DAO has outlined plans for several initiatives to help improve the user experience. The current roadmap includes:

New Products: GMX plans to introduce synthetics, a type of token that derive their value from underlying assets, such as stocks, commodities, or other digital currencies
UX/UI Improvements: GMX plans to enhance the user interface and experience of the protocol, such as integrating TradingView charts into the platform
Enhanced Functionality: GMX’s longer-term vision is to become an advanced automated market maker (AMM) that allows other DeFi projects to customize their liquidity pool functions entirely, with a project called X4: Protocol Controlled Exchange.
Network Expansion: GMX also plans to expand the network to a third blockchain network, in addition to Arbitrum and Avalanche.

What is the long-term potential of GMX?

Decentralized perpetuals represent a massive opportunity.

They offer several benefits over centralized derivatives exchanges such as transparency, censorship resistance, anonymity, and deep liquidity. These advantages have attracted users and professionals to decentralized exchanges, as evidenced by the rapid growth of the market from $68M in 2021 to $1.47B today.

Furthermore, they are operating in a space with enormous potential — as stated previously, the $1.47B crypto derivatives market is less than 0.1% of the centralized crypto derivatives market and less than 0.0001% of traditional derivatives market.

As the leader in the space, GMX is a project worth watching.

Note: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.