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Despite current macroeconomic conditions, traders continue to trade in this uncertain market. While we have seen a great decline in trading volumes, crypto remains one of the most tradable asset classes in bull and bear markets due to its volatile nature.
With the market looking to form a bottom and perpetual protocols gaining popularity again, let us look at the fundamental numbers of various perpetual protocols (perps) to explore which is potentially undervalued.
Perps have the potential to open up a wide range of unique financial products. They provide composable leverage that other Dapps can use while improving capital efficiency across the board in the DeFi ecosystem. In this article, I will be comparing the statistics and value accrual of the largest perps including
dYdX
GMX
Gains Network
Perpetual
Let’s compare the current valuation of these perpetual exchanges.
A perpetual exchange is an alternative way to trade assets as it allows investors to buy and sell the value of the underlying asset without having to own the asset. Perps do not expire, do not have a settlement date, and are easy to long or short.
Perpetual exchanges closely follow the price of the underlying asset due to the funding rate mechanism, which balances the demand between buyers and sellers of the perpetual swaps so that the price of the swap aligns with that of the underlying asset.
Decentralized perps are non-custodial and permissionless, which means that liquidity is provided by its users and exchanges cannot execute forced liquidations, unlike their centralized counterparties. They also do not require KYC which reduces counterparty risk, provides a censorship-resistant platform and their traders to trade pseudo-anonymously.
dYdX is the largest on-chain perpetual exchange, supporting over 40 different assets and up to 10x leveraged trading of assets. The protocol uses a central limit order book (CLOB) model. It is a non-custodial order book with on-chain settlements while running on off-chain matching engines.
dYdX is built out on a StarkEx implementation - a permissioned ZK Rollup. It sits on its own Layer 2 network providing instant finality and gasless trading. While they currently lack composability, the team has announced that they will be migrating to Cosmos sometime in the future.
Their trading volume dominates over 90% of daily trading volume across DeFi perps and has reached a staggering $650 billion traded since its inception in 2018. On most days, volumes easily surpass $1 billion, reaching over $5 billion on volatile days.
While liquidity on dYdX is supplied by community-approved market makers, users are given an option to provide liquidity in the form of USDC, offering capital efficiency to attract quality market makers and earning DYDX rewards in the process.
Their hybrid infrastructure allows the platform to offer a similar trading experience to popular centralized exchanges (CEX) like Binance. For those who prefer the classic user interface of CEXs, dYdX is a great platform that provides a similar user experience.
DYDX is the utility and governance token for the dYdX platform. It has a max supply of 1,000,000,000, of which 100% have been minted and will be unlocked over the next 5 years, starting in August 2021.
However, this max supply is soft capped and can be readjusted after 5 years based on dYdX governance. The max supply of new tokens to be minted is capped at an inflation rate of 2% per year. All newly issued tokens will be allocated by governance and will vest immediately. For more details, check out their tokenomics page.
There are a few things you can do with DYDX.
Stake DYDX in an insurance safety pool
Do note that staker funds could be slashed to make traders whole should there be any issues with dYdX.
Voting on governance proposals
A large portion of DYDX is controlled by early investors so individual holders have little ability to change the outcome of proposals.
Discounted trading fees
LP in Uniswap pools
Unlike other platforms, staking DYDX does not give users a portion of platform revenue. Instead, all fees are distributed to the traders, market makers or back to the exchange.
There will be massive unlocks coming up for early investors, team members and the foundation, so holders can expect the price of DYDX to dump should they choose to exit their positions.
Additionally, the inflation schedule of DYDX puts token holders at a disadvantage while traders benefit from the liquidity mining program, essentially earning and dumping DYDX.
GMX is a decentralized perpetual exchange that supports low swap fees, zero price impact trades and up to 30.5x leveraged trading. All trades are supported by GLP - a basket of assets on Arbitrum and Avalanche that earns liquidity providers fees from market making, swap fees and leverage trading.
Traders can use any of the GLP assets which vary on Arbitrum and Avalanche to open long or short positions. A fee is charged for opening and closing positions along with a borrow fee which is similar to funding fees on centralized exchanges.
The trading volume on GMX has been climbing steadily and has recently crossed $39 billion of assets traded. The average trading volume of the platform ranges between $50 million to $100 million per day.
GMX is the governance and utility token for the GMX platform. The current max supply is 13,250,000 GMX, of which majority are currently vesting from liquidity rewards and team allocations.
Similar to DYDX, this max supply is soft capped and minting beyond the max supply is controlled by a 28-day time lock governance proposal. This will only occur if more products are launched and liquidity mining is required on GMX. The platform distributes 30% of all fees collected to GMX stakers in the form of ETH or AVAX and escrowed GMX (esGMX).
Users are incentivized to re-stake your esGMX to increase their GMX APR and are required to vest their esGMX over a year if they wish to convert them into liquid GMX. Additionally, the protocol requires a certain amount of GMX staked on the platform in order to start the vesting process of esGMX.
Essentially, you’re highly disincentivized to convert your esGMX into GMX.
GLP is a basket of assets on both Arbitrum and Avalanche. The Arbitrum index consists of ETH, WBTC, LINK, UNI and various stablecoins, while the Avalanche index includes AVAX, WETH.e, WBTC.e, USDC and MIM. Each asset in the index has a targeted weight which varies depending on its utilization rate.
The index (GLP) is essential to the ecosystem as it acts as liquidity for the platform, enabling trades and swaps to occur. 70% of fees are distributed to GLP holders in ETH/AVAX and esGMX.
Users are incentivized to mint GLP with lower fees given to "underweighted" assets as compared to an "overweighted" asset. This helps to automatically rebalance the index weightings.
GLP exposes you to an index of relatively safe assets against (~50% in stablecoins), giving holders a reasonable yield while minimizing downside risks.
As mentioned above, the GMX vesting model requires one year to fully vest esGMX into GMX. This could see future selling pressure should there be a coordinated attack to vest and eventually dump GMX.
Regarding GLP, only tokens in the index can be swapped or leveraged since the index assets are real and not synthetic. This limits capital efficiency which means GLP has to grow substantially to meet the needs of potential whale participants.
GLP holders also take a loss if traders are profitable upon closing their traders, making GLP a PvP-like asset. Luckily for them, statistics show that traders lose money in the long run, which means GLP holders are likely to benefit eventually.
Another important risk to note would be the potential bank run risk around GLP. During a black swan event, 10% of GLP holders would not be able to exit their positions until all open positions on GMX have been closed or liquidated.
Gain Network uses a similar model with certain differentiating factors to GMX. Currently, the protocol only has one product - gTrade, which runs on the Polygon network.
It operates a synthetic asset model with single-asset collateral where users simply deposit DAI into their vaults to start trading. This allows for significant trading flexibility and a wide range of options compared to other platforms. This could also be attractive to those who prefer a one-stop shop for leveraged trading.
gTrade replaces the typical order book model which we see with most leveraged exchanges. The DAI vault and GNS/DAI pool provide liquidity for all synthetic assets listed. The team has also created a custom pricing model which uses a hybrid Chainlink oracle and Decentralised Oracle Network (DON) structure.
The platform boasts the most capital-efficient model in the market, which explains how such high levels of leverage are possible on low-volume traded assets. Their unique approach easily allows any synthetic assets to be listed in the future.
The volume on gTrade exploded in March 2022, surging to all-time highs of $312 million in a single day. Currently, gTrade averages around $20 million of trading volume on quiet days to over $100 million on busy days.
The max supply of GNS is capped at 100 million GNS. It is said that the cap is used as a failsafe mechanism that should never be reached.
GNS is similar to GLP which is crucial to gTrade and its synthetic structure. Currently, GNS is a single utility token that is meant to capture the PnL of traders and drive that value back to token holders.
GNS tokens are minted when traders profit from their trades and burnt when they make a loss. The supply of GNS has been deflationary since its launch in November 2021 but has recently increased due to the increase in winning trades.
Similar to GLP, GNS holders are exposed to the risk of traders’ performance. This allows them to earn the upside of losing trades while the token supply contracts but also risk losing big from profitable trades while the token supply expands from minting and dumping.
The current lack of additional incentives to trade on gTrade limits growth vs another platform like dYdX that uses its token for liquidity mining. There are trading competitions with rewards mainly from Polygon ecosystem funds.
There are also limits on how much collateral can be borrowed for higher value trades which will definitely drive whales away. Trading volume will remain limited until the pools expand which will cause the GNS/DAI pool APR to drop if the volume does not increase along with the price of GNS.
Ultimately, if APR drops low enough, users may prefer to just hold GNS in their wallet, which limits the platform’s ability to grow and service high-value trades or greater volume. Not to mention the impermanent loss that could occur if you deposit the token to the GNS/DAI pool.
DeFi perpetual futures have the potential to disrupt a large market. There are a number of protocols currently available that balance user experience, decentralization, and risk in various ways.
While each model has its pros and cons, they serve different purposes on individual blockchains. CLOB models like dYdX offer high performance but sacrifice full composability. On the other hand, AMM models like GMX are fully on-chain and composable but are limited due to the lack of adoption on EVM-compatible layer 2 networks. I believe the first successful multichain combination of these protocols would likely take up a huge portion of perps market share.
On a side note, Uniswap v3 appears to be gaining popularity as an execution layer among on-chain perps protocols such as Rage Trade. This could trigger the next wave of protocols launching on top of Uniswap, making way for potential new primitives in the perps market.
Despite current macroeconomic conditions, traders continue to trade in this uncertain market. While we have seen a great decline in trading volumes, crypto remains one of the most tradable asset classes in bull and bear markets due to its volatile nature.
With the market looking to form a bottom and perpetual protocols gaining popularity again, let us look at the fundamental numbers of various perpetual protocols (perps) to explore which is potentially undervalued.
Perps have the potential to open up a wide range of unique financial products. They provide composable leverage that other Dapps can use while improving capital efficiency across the board in the DeFi ecosystem. In this article, I will be comparing the statistics and value accrual of the largest perps including
dYdX
GMX
Gains Network
Perpetual
Let’s compare the current valuation of these perpetual exchanges.
A perpetual exchange is an alternative way to trade assets as it allows investors to buy and sell the value of the underlying asset without having to own the asset. Perps do not expire, do not have a settlement date, and are easy to long or short.
Perpetual exchanges closely follow the price of the underlying asset due to the funding rate mechanism, which balances the demand between buyers and sellers of the perpetual swaps so that the price of the swap aligns with that of the underlying asset.
Decentralized perps are non-custodial and permissionless, which means that liquidity is provided by its users and exchanges cannot execute forced liquidations, unlike their centralized counterparties. They also do not require KYC which reduces counterparty risk, provides a censorship-resistant platform and their traders to trade pseudo-anonymously.
dYdX is the largest on-chain perpetual exchange, supporting over 40 different assets and up to 10x leveraged trading of assets. The protocol uses a central limit order book (CLOB) model. It is a non-custodial order book with on-chain settlements while running on off-chain matching engines.
dYdX is built out on a StarkEx implementation - a permissioned ZK Rollup. It sits on its own Layer 2 network providing instant finality and gasless trading. While they currently lack composability, the team has announced that they will be migrating to Cosmos sometime in the future.
Their trading volume dominates over 90% of daily trading volume across DeFi perps and has reached a staggering $650 billion traded since its inception in 2018. On most days, volumes easily surpass $1 billion, reaching over $5 billion on volatile days.
While liquidity on dYdX is supplied by community-approved market makers, users are given an option to provide liquidity in the form of USDC, offering capital efficiency to attract quality market makers and earning DYDX rewards in the process.
Their hybrid infrastructure allows the platform to offer a similar trading experience to popular centralized exchanges (CEX) like Binance. For those who prefer the classic user interface of CEXs, dYdX is a great platform that provides a similar user experience.
DYDX is the utility and governance token for the dYdX platform. It has a max supply of 1,000,000,000, of which 100% have been minted and will be unlocked over the next 5 years, starting in August 2021.
However, this max supply is soft capped and can be readjusted after 5 years based on dYdX governance. The max supply of new tokens to be minted is capped at an inflation rate of 2% per year. All newly issued tokens will be allocated by governance and will vest immediately. For more details, check out their tokenomics page.
There are a few things you can do with DYDX.
Stake DYDX in an insurance safety pool
Do note that staker funds could be slashed to make traders whole should there be any issues with dYdX.
Voting on governance proposals
A large portion of DYDX is controlled by early investors so individual holders have little ability to change the outcome of proposals.
Discounted trading fees
LP in Uniswap pools
Unlike other platforms, staking DYDX does not give users a portion of platform revenue. Instead, all fees are distributed to the traders, market makers or back to the exchange.
There will be massive unlocks coming up for early investors, team members and the foundation, so holders can expect the price of DYDX to dump should they choose to exit their positions.
Additionally, the inflation schedule of DYDX puts token holders at a disadvantage while traders benefit from the liquidity mining program, essentially earning and dumping DYDX.
GMX is a decentralized perpetual exchange that supports low swap fees, zero price impact trades and up to 30.5x leveraged trading. All trades are supported by GLP - a basket of assets on Arbitrum and Avalanche that earns liquidity providers fees from market making, swap fees and leverage trading.
Traders can use any of the GLP assets which vary on Arbitrum and Avalanche to open long or short positions. A fee is charged for opening and closing positions along with a borrow fee which is similar to funding fees on centralized exchanges.
The trading volume on GMX has been climbing steadily and has recently crossed $39 billion of assets traded. The average trading volume of the platform ranges between $50 million to $100 million per day.
GMX is the governance and utility token for the GMX platform. The current max supply is 13,250,000 GMX, of which majority are currently vesting from liquidity rewards and team allocations.
Similar to DYDX, this max supply is soft capped and minting beyond the max supply is controlled by a 28-day time lock governance proposal. This will only occur if more products are launched and liquidity mining is required on GMX. The platform distributes 30% of all fees collected to GMX stakers in the form of ETH or AVAX and escrowed GMX (esGMX).
Users are incentivized to re-stake your esGMX to increase their GMX APR and are required to vest their esGMX over a year if they wish to convert them into liquid GMX. Additionally, the protocol requires a certain amount of GMX staked on the platform in order to start the vesting process of esGMX.
Essentially, you’re highly disincentivized to convert your esGMX into GMX.
GLP is a basket of assets on both Arbitrum and Avalanche. The Arbitrum index consists of ETH, WBTC, LINK, UNI and various stablecoins, while the Avalanche index includes AVAX, WETH.e, WBTC.e, USDC and MIM. Each asset in the index has a targeted weight which varies depending on its utilization rate.
The index (GLP) is essential to the ecosystem as it acts as liquidity for the platform, enabling trades and swaps to occur. 70% of fees are distributed to GLP holders in ETH/AVAX and esGMX.
Users are incentivized to mint GLP with lower fees given to "underweighted" assets as compared to an "overweighted" asset. This helps to automatically rebalance the index weightings.
GLP exposes you to an index of relatively safe assets against (~50% in stablecoins), giving holders a reasonable yield while minimizing downside risks.
As mentioned above, the GMX vesting model requires one year to fully vest esGMX into GMX. This could see future selling pressure should there be a coordinated attack to vest and eventually dump GMX.
Regarding GLP, only tokens in the index can be swapped or leveraged since the index assets are real and not synthetic. This limits capital efficiency which means GLP has to grow substantially to meet the needs of potential whale participants.
GLP holders also take a loss if traders are profitable upon closing their traders, making GLP a PvP-like asset. Luckily for them, statistics show that traders lose money in the long run, which means GLP holders are likely to benefit eventually.
Another important risk to note would be the potential bank run risk around GLP. During a black swan event, 10% of GLP holders would not be able to exit their positions until all open positions on GMX have been closed or liquidated.
Gain Network uses a similar model with certain differentiating factors to GMX. Currently, the protocol only has one product - gTrade, which runs on the Polygon network.
It operates a synthetic asset model with single-asset collateral where users simply deposit DAI into their vaults to start trading. This allows for significant trading flexibility and a wide range of options compared to other platforms. This could also be attractive to those who prefer a one-stop shop for leveraged trading.
gTrade replaces the typical order book model which we see with most leveraged exchanges. The DAI vault and GNS/DAI pool provide liquidity for all synthetic assets listed. The team has also created a custom pricing model which uses a hybrid Chainlink oracle and Decentralised Oracle Network (DON) structure.
The platform boasts the most capital-efficient model in the market, which explains how such high levels of leverage are possible on low-volume traded assets. Their unique approach easily allows any synthetic assets to be listed in the future.
The volume on gTrade exploded in March 2022, surging to all-time highs of $312 million in a single day. Currently, gTrade averages around $20 million of trading volume on quiet days to over $100 million on busy days.
The max supply of GNS is capped at 100 million GNS. It is said that the cap is used as a failsafe mechanism that should never be reached.
GNS is similar to GLP which is crucial to gTrade and its synthetic structure. Currently, GNS is a single utility token that is meant to capture the PnL of traders and drive that value back to token holders.
GNS tokens are minted when traders profit from their trades and burnt when they make a loss. The supply of GNS has been deflationary since its launch in November 2021 but has recently increased due to the increase in winning trades.
Similar to GLP, GNS holders are exposed to the risk of traders’ performance. This allows them to earn the upside of losing trades while the token supply contracts but also risk losing big from profitable trades while the token supply expands from minting and dumping.
The current lack of additional incentives to trade on gTrade limits growth vs another platform like dYdX that uses its token for liquidity mining. There are trading competitions with rewards mainly from Polygon ecosystem funds.
There are also limits on how much collateral can be borrowed for higher value trades which will definitely drive whales away. Trading volume will remain limited until the pools expand which will cause the GNS/DAI pool APR to drop if the volume does not increase along with the price of GNS.
Ultimately, if APR drops low enough, users may prefer to just hold GNS in their wallet, which limits the platform’s ability to grow and service high-value trades or greater volume. Not to mention the impermanent loss that could occur if you deposit the token to the GNS/DAI pool.
DeFi perpetual futures have the potential to disrupt a large market. There are a number of protocols currently available that balance user experience, decentralization, and risk in various ways.
While each model has its pros and cons, they serve different purposes on individual blockchains. CLOB models like dYdX offer high performance but sacrifice full composability. On the other hand, AMM models like GMX are fully on-chain and composable but are limited due to the lack of adoption on EVM-compatible layer 2 networks. I believe the first successful multichain combination of these protocols would likely take up a huge portion of perps market share.
On a side note, Uniswap v3 appears to be gaining popularity as an execution layer among on-chain perps protocols such as Rage Trade. This could trigger the next wave of protocols launching on top of Uniswap, making way for potential new primitives in the perps market.
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