# HMX Analysis By [Pepsinated | Pep Ruckpanich](https://paragraph.com/@pepsinated) · 2023-07-06 --- I will assume you already have basic understanding of how decentralized perpetual exchanges work (if not, start [here](https://academy.binance.com/en/articles/what-are-decentralized-derivatives-and-how-do-they-work-in-defi)) ### **Market opportunity: Rise of Derivative DEXs** As it stands, crypto derivatives are in their early boom period. Just like equities, we expect the total addressable market (TAM) size of crypto derivatives to be well above that of crypto spot trading over the years. Furthermore, perps have become the most popular derivative for trading cryptocurrencies. With the downfall of FTX, regulatory crackdown on Binance & Coinbase, and mass panic among investors when rumors around popular CEXs (centralized exchanges) like [Gate.io](http://gate.io/) emerge on Twitter, DEXs (decentralized exchanges) should continue to gain market share relative to CEXs over the long run due to improved transparency and elimination of the [principal-agent problem](https://www.investopedia.com/terms/p/principal-agent-problem.asp). Earlier iterations of on-chain derivative DEXs have failed to attract traders; however, Layer 2 (L2) like Arbitrum and OP have recently allowed this category to become economically and technically feasible due to lower oracle fees, improved UI/UX, and extremely low gas fees ([approximately 5-10% of Ethereum Mainnet](https://l2fees.info/)). Arbitrum and OP have also attracted enough user traction and capital ([$2.5 billion and $1 billion](https://defillama.com/chains) on-chain, respectively) for native L2 dApps like GMX and Kwenta to operate and grow their user base. ### Derivative DEXs Dominate DeFi Protocol Fees **7 of the top 25 (28%) dApps in terms of Protocol Fee over the past 6 months are Derivative DEXs** including newcomers like [Level Finance](https://level.finance/). Derivative DEXs protocols also have the highest [fee/TVL](https://tokenterminal.com/) ratio; lending protocols required large amount of capital to facilitate borrowing & lending while spot DEXs need to attract enough liquidity to facilitate low slippage trades. They should be able to bootstrap the necessary liquidity at a much lower cost and provide less token incentives in the medium term. ![](https://storage.googleapis.com/papyrus_images/892a4b08b3d83ee93eb083063cdd6fe3cab6f2b6882bf1755e0528711a5b3692.png) What the market needs is a protocol that combines the user experience of CeFi with the self-custody of DeFi. **Enter** [**HMX**](https://hmx.org/)**.** Product **Highlights** ====================== HMX’s trading platform focuses on 3 key features: * **Leveraged trading with cross-margin & multi-collateral support -** allowing for flexible position and risk management. * **Support for Crypto, US Equities, FX & Commodities on one platform -** HMX is the only DEX with crypto, equities, FX and commodities listed. With the crypto bear market, more and more traders are looking to trade non-crypto assets; HMX allows traders to keep their collateral on one platform which is important for ability to leverage and manage/monitor risk. * **Leveraged Market Making** - allows GLP LPs to restake their GLP tokens in the HLP Vault and earn trading fees from both platforms. HLP vault is built on top of GMX’s GLP token (target HLP pool allocation: 95% GLP & 5% USDC) When we combine all these features together, the result is one of the most user-friendly, feature-rich and flexible trading platform in DeFi. HMX’s user experience is tailored to provide traders and degens with a streamlined and intuitive interface to the world of crypto, equities, FX and commodities. ### Key Innovation #1 - Cross-Margin Collateral Management Cross-margin collateral management is one of the key differentiating features of HMX and it is currently the **only pool-based Perp DEX** **that offer this feature**. Traders can use multiple types of assets (BTC, ETH, GLP, USDC, USDT & DAI) as collateral and share margin balances across multiple positions. In other words: **universal cross-margined accounts**. Capital efficiency is maximized as universally margined trading accounts enables: **reduced initial margin requirements, improved risk-reward optimization** and **better risk management**. Ability to trade equities on HMX also eliminate the need for traders to have multiple margin accounts across many trading platforms (ie 1 for equities on E-Trade and 1 for crypto on Binance). Traders no longer have to convert their holdings into specific assets they want to trade. To further illustrate, with GMX v1, if traders have ETH and want to long/short BTC, they first have to convert their ETH into BTC, deposit as collateral then buy BTC perpetual futures. This feature is usually reserved for CEXs due to its complexity and it should open up many new trading strategies for on-chain traders. However, traders can still opt-in to use isolated margin using HMX’s sub account feature. ### Key Innovation #2 - “Velocity-based funding fee” and “Adaptive Pricing” Oracle-based DEXs especially one that offer zero slippage like GMX cut out arbitrageurs. While some see this as a benefit, arbitrageurs are often some of the most active traders and they can bring significant trading volume to the platform. HMX is introducing 2 novel mechanisms that should attract sophisticated traders looking to arbitrage: “**Velocity-based Funding Fee**” and “**Adaptive Pricing**” Instead of updating funding fee at regular intervals and all at once (every 8 hours for Binance) or based on pool’s asset utilization (GMX), HMX’s Velocity-based funding fee will **gradually increase or decrease based on the market skew**. Delta-neutral positions & funding rate arbitrage are a major source of crypto returns; on HMX, arbitrageurs will be able to leverage the gradually increase or decrease funding rate to earn more profit even when their trades completely eliminate the skew. (TracerDAO coined the term “[skew farming](https://www.tracer.finance/radar/skew-farming-explained/)” and has a guide on their [official website](https://www.tracer.finance/radar/skew-farming-guide/).) Official HMX funding fee rate calculator can be found [here](https://docs.google.com/spreadsheets/d/1_9kVXdEJsSwJ-_K6T4V74ey60g_YcWdAL5w1FwdhAaM/edit#gid=843857334) [Adaptive pricing](https://docs.hmx.org/hmx/about-hmx-exchange/our-products/leveraged-trading-cross-margin-multi-collateral-management#adaptive-pricing-mechanism) gives premium or discount on top of oracle price to traders when opening positions in order to help balance long/short OI. This means that the final price of the trade will be different than the oracle price and traders can leverage discounts on assets with more short than long OI. For example, if BTC is trading at $30,300, Long OI = $1k, Short OI = $100k then traders final price for 1 BTC will be $30,297 which represents a $3 or 0.01% discount. Official HMX Adaptive Pricing Calculator can be found [here](https://docs.google.com/spreadsheets/d/1_9kVXdEJsSwJ-_K6T4V74ey60g_YcWdAL5w1FwdhAaM/edit#gid=0) These 2 mechanisms also serve as a **risk management tool for HLP LPs** as they incentivize traders to make trades that contribute to neutralizing market skew and actively restore balance. ### Key Innovation #3 - Leverage Market Making "Leverage Market Making" enables LPs to **earn fees from both GMX and HMX** by acting as a counterparty. HLP’s APY have the potential to one of the highest “real yield” in DeFi, as LPs receive a combination of: 1. 65% of fees on HMX (trading fee, funding rate, HLP deposit & withdrawal fee, liquidation fee) 2. Normal GLP yield ([YTD est. 10-40% APR](https://stats.gmx.io/arbitrum)) While this may seem like a typical leveraged DeFi yield play, it is crucial to HMX's plan to attract liquidity to its platform early on and creates a unique product that is hard to replicate in HLP. UVP for Traders and LPs ----------------------- ### Traders The ability to trade equities (**up to 50X**), crypto (**up to 100X**), commodities (up to 100X), and FX (up to 1,000X) on a single trading platform with shared leverage (cross-collateral) should be the biggest draw for traders. On top of “velocity-based funding fee”, “adaptive pricing” and multi-asset listing mentioned above, HMX has also brought significant improvements to the UI/UX and trading experience on DEXs. Traders on DEXs understand the **pain of having to confirm every trade on their wallet**. HMX has implemented Ethereum's new [Account Abstraction](https://metamask.io/news/latest/account-abstraction-past-present-future/) feature ([EIP-4337](https://eips.ethereum.org/EIPS/eip-4337)) on its native trading platform. This allows users to make **"1-click" trades without having to interact with their web3 wallets**. This feature make it practical for users to trade on their mobile devices because once their accounts are set up, they no longer have to interact with the “typically buggy” web3 wallet mobile apps. To summarize, users can trade multiple asset classes including large cap US equities with up to 1,000X leverage, deposit BTC, ETH, GLP or major stablecoins as collateral for a cross-margin account and capture arbitrageurs opportunities created by HMX’s funding rate and price “slippage”. ### Bootstrapping Liquidity via GLP and Leverage Market Making As we can see from the chart below, GMX and its GLP pool (act as counterparty to traders) have been one of the biggest winners of 2022 & 2023 and TVL in GLP pool now sits at [around $525mln.](https://dune.com/shogun/gmx-analytics-arbitrum) ![](https://storage.googleapis.com/papyrus_images/7b88815f150de6aa62dd90b544e7da60de56dbcafa36ae1722de062401f12be6.png) HMX will allow LPs currently in the GLP pool to “rehypothecate” (restake) their GLP token into the HLP vault and act as a counterparty to HMX traders. This means that HLP stakers who deposit via GLP will earn fees from both GMX and HMX when traders make losing trades and vice versa. HMX only need to attract 10-20% of capital (est $50-$100mln) currently sitting in the GLP pool in order to provide ample of liquidity to traders on GMX. This Leverage Market Making mechanism should allow HMX to quickly bootstrap liquidity and gain awareness from current users of GMX. This feature can also turn against LPs if global PnL of HMX and GMX traders stay positive for an extended period of time. However, as we can see from GMX and other trading platforms, most traders end up making a loss and market makers (GLP and HLP holders in this case) often profit in the long run especially when factoring in other rewards like trading and borrowing fee. We can look at GMX’s traders 2-year historical PnL chart below: ![source: https://stats.gmx.io/arbitrum](https://storage.googleapis.com/papyrus_images/557e4a1b5cc99369586ea299e68d92385bc86b3ef64b5c3ffc9c660cb698fe37.png) source: https://stats.gmx.io/arbitrum Of course there is no free lunch and HMX’s method of sourcing liquidity comes with some cons First, HLP LPs will naturally have price exposure to assets in the GLP pool (BTC, ETH, LINK, UNI, USDC, USDT, DAI, FRAX). While GLP pool hold a basket of these assets (target: 50% crypto 50% stablecoins), it doesn’t mean that they are exposed to asset prices according to the target or actual weights since the liquidity (and upside) is rented out to traders. (visit this [link](https://mirror.xyz/0x1e35A719f1d68da02DEf39Bde510c9cc4efDC84B/1WbTXj5CjB4CU0W083p8MDj_wfkwzDVzbCZmLHcDxr4) to learn more). Additionally, there is a chance that GLP pool will dry up and pull HMX’s liquidity along with it. This [article](https://tokeninsight.com/en/research/analysts-pick/could-gmx-collapse-in-a-bull-market-a-deep-dive.) by TokenInsight explains some ways this can happen including the illustration below. ![](https://storage.googleapis.com/papyrus_images/618207f3cd634a6077dbe6e3bd4691daa3cfe0994c4792ad920f9feb4c366f53.png) If HMX is successful is bringing in traders, HLP should become one of the most exciting opportunity for DeFi yield farmers; it has a unique risk-reward profile while playing into the “real yield” narrative. ### Project Catalysts ![](https://storage.googleapis.com/papyrus_images/242df39e09310e592b7b59b133c997020ada05df56cbc3a0c5a6df1dba1445d9.jpg) HMX launched its trading platform in the Public Beta stage on June 22nd 2023 and will be launching multiple marketing and incentive campaigns over the next few weeks: * [Zealy Airdrop Campaign](https://zealy.io/c/hmxorg/questboard) (live) - incentivize potential and early users to learn more about HMX product and tokens, engage and share social media posts, attract airdrop farmers that might convert into users * Lowest Fee for BTC/USD and ETH/USD perpetual futures - **0.04% trading fee for highest volume pairs** in crypto and the promotional campaign will run until October 31st 2023 * “HLP Surge” - **5% of HMX tokens** will be **rewarded to HLP LPs** who provide the first $10mln worth of liquidity to the pool and will linearly vest over 12 months * Trading Airdrop Campaign (live) - **up to 2% of HMX tokens** will be airdropped to traders based on total trading volume on the platform. This campaign combined with [HMX’s Referral Program](https://docs.hmx.org/hmx/about-hmx-exchange/referral-program) should incentivize traders to refer their colleagues to the platform. H**MX Overview** ================ ### **Team** The founder and engineering lead co-founded a blockchain development studio that has worked with leading financial institutions in TradFi and DeFi projects. Their Biz Dev & Marketing team also had experience working at a top management consulting firm prior to joining HMX. They currently have 13 full time staff (8 devs and 5 operations + mods) and from reading all of their docs, it seems like they have had extensive experience working together. ### **Summary of HMX’s Ecosystem Tokens** ![Tokens in HMX's ecosystem and their functions](https://storage.googleapis.com/papyrus_images/b15c2fac1d40fa3abf63dc0e09a1b29a52d4f48a024be66d9acf3bf3ae99547b.png) Tokens in HMX's ecosystem and their functions H**MX Valuation & Token Sale (LBP)** ==================================== ### $5-20mln FDV & Token Sale HMX conducted its **Private Sale (6.4% of total supply) at $5mln valuation** to 7 investors: Coral Defi, Compound Capital, Guildfi, CryptoMind, Albert Castellana, Micah Spruill and Ivan Brightly. HMX will be conducting its **token sales via** [**Balancer’s Liquidity Bootstrapping Pool (LBP)**](https://help.fjordfoundry.com/fjord-foundry-docs/welcome-info/what-is-a-liquidity-bootstrapping-pool-lbp-+-features) **on** [**Fjord Foundry**](https://fjordfoundry.com/). This process should prevent sniper bots, provide equal opportunities to buyers, and allow investors to do a proper price discovery. The **starting valuation will be $20mln FDV and if there are no buyers, the valuation will go down to $5mln FDV over 72 hours**. ![](https://storage.googleapis.com/papyrus_images/087fe5d0213823df5de8e57a10679d57064b5abdac1a10171bdb5fb63f35aaf7.png) If you are not familiar with LBP’s mechanism, you can learn more [here](https://help.fjordfoundry.com/fjord-foundry-docs/welcome-info/what-is-a-liquidity-bootstrapping-pool-lbp-+-features) and I have also created a free tool you can use to create different scenarios for HMX’s LBP and the price of the token. [https://docs.google.com/spreadsheets/d/1v2CaZeEdhvKJwAzApfBCa7sQTy71uRbyfQNh-0sA0cg/edit#gid=2115830440](https://docs.google.com/spreadsheets/d/1v2CaZeEdhvKJwAzApfBCa7sQTy71uRbyfQNh-0sA0cg/edit#gid=2115830440) > **Fund usage:** 50% of the $ collected will be used to seed the $HMX liquidity pool. The remaining 50% will be allocated to development fund. ### Compared to GMX YTD, margin trading fee contribute to the majority of GMX’s protocol revenue at 84% or $355k/day while liquidation fee, swap fee and mint/burn GLP fee make up the rest of the 16% or $70k/day . Because of this and the unpredictability of pool’s premium & discount, we will further analyze the margin trading activities. GMX has on average 1,268 daily unique traders generating around $200mln volume per day or $155k daily trading volume per user. ![](https://storage.googleapis.com/papyrus_images/366efe93ef5927ba68de96de58bcb3774b913634cd3e9fbc5e89ccdbfe6379a8.png) ![](https://storage.googleapis.com/papyrus_images/02a3809180fd91be0f5845bf4d5549d02bfc1255f25f79ac4473737b86f0ae5e.png) GMX’s projected annual trading fee/FDV is around 18% ($129mln/$726mln) and based off this metric and HMX’s fee structure, HMX would **only need to attract around 300 traders doing similar volume across the platform** (crypto, equities, FX & commodities) to justify its $20mln valuation (FDV). ### **GMX Token Supply & Distribution** What’s notable in HMX’s token roadmap is that there will only be **943,360 tokens in circulation when the HMX token launches**. This can lead to a supply squeeze as new and LBP investors look to increase their positions and earn a portion of protocol revenue. HMX doesn’t simply incentivize users and stakeholders with HMX tokens and immediately inflate its supply, instead it rewards them esHMX, DP and TLC. Even though all 3 types of reward will reduce the yield of current HMX stakers, esHMX is the only one that dilutes existing token holders and even then, users need to wait for 1 year for their HMX to fully vest (similar to esGMX). The mechanics of vesting and staking requirement to earn DP should ease the sell pressure on HMX token. ![](https://storage.googleapis.com/papyrus_images/4c08e7a62127352ecd4dd25cda313e8c67f794bdd7a6acbe114d632426c266b0.png) **Major Protocol-specific Risks** --------------------------------- ### Lack of Liquidity in HLP Pool HMX have implemented various strategies to avoid this distressing situation from happening, namely: max utilization limit per trading pair, Auto Deleverage (ADL) and platform-wide profit reserve buffer. Max utilization limit, [ADL](https://learn.bybit.com/trading/what-is-auto-deleveraging-adl/) and OI limit per trading pair are pretty common safety measures implemented across the industry (both CeFi and DeFi). Using GLP as the main source of liquidity for the platform introduces a new set of risks for traders since the price of GLP is also volatile and can significantly move based on GMX’s traders PnL. To address this HMX calculates the price of GLP with the formula AUM/GLP supply where AUM takes free liquidity + guaranteed USD + shortPnL and when the protocol risk monitoring program detects that global PnL hits the 20% threshold relative to HLP’s TVL (profit reserve buffer) and traders may no longer be able to redeem their profits, the protocol will automatically force close traders positions starting with the most profitable trades. ### HLP runs out of USDC Will traders accept their trading profits as GLP if HLP vault runs out of USDC? The team’s plan to bootstrap liquidity via GLP can be a double-edged sword: on one hand, it allows HMX to have a much easier time attracting LPs and facilitate large volume trades right out of the gate. On the other hand, with the target weight of 95% GLP and 5% USDC, we can foresee a situation where all of the USDC in HLP pool get depleted (from profitable traders redeeming their profits in USDC) and traders are forced to redeem their profits with GLP. The trader will then have to choose which asset they want while factoring in varying fee depending on the asset (ETH, BTC, LINK, UNI, stables) balance in GLP pool which can range from 0% to 0.73%\* ### Oracle Risks with Pyth Network Chainlink is currently the leading oracle network for DeFi with over [9bln on-chain data points delivered and 997 nodes](https://data.chain.link/). However, multiple platforms with significant TVL including [Synthetix/Kwenta](https://sips.synthetix.io/sips/sip-285/) ($350mln), [Venus](https://www.businesswire.com/news/home/20220530005465/en/Pyth-Network-Deploys-on-BNB-Chain-and-Partners-With-Decentralized-Lending-Protocol-Venus) ($1.2bln) and [Alpaca Finance](https://pyth.network/consumers) ($219mln) have recently integrated [Pyth Network](https://pyth.network/) oracles with the latest version of their products and Pyth. After [the BTC’s price error on Solana in Sep 2021](https://cryptoslate.com/bitcoin-crashes-to-5400-on-solana-based-oracle-pyth-network-after-glitch/) incident caused by Pyth, the team has addressed the issue by adding new price Publishers which now sits above 80. According to Shu, HMX’s lead developer, Pyth Network is crucial to the platform and provides “ultra-low latency price feeds, consistent price intervals across each chain, and its architecture allows HMX to optimize the oracle adapter at the bit level, making HMX’s cross-margin, multi-collateral perpetual DEX gas efficient enough to run on EVM-based chains.” Another important data point to note is that the 4 equities (asset class with least Publishers on Pyth) initially listed on HMX ([AAPL](https://pyth.network/price-feeds/equity-us-aapl-usd), TSLA, MSFT & [AMZN](https://pyth.network/price-feeds/equity-us-amzn-usd)) have over 8 price Publishers. ### **Smart contract risks** Operating on Arbitrum exposes HMX to smart contract risks, such as contract bugs or hacks. On the bright side, HMX recently went through an audit from [Foobar](https://twitter.com/0xfoobar) and [WatchPug](https://github.com/HMXOrg/v2-evm/blob/main/audits/HMX_Audit_Report_by_WatchPug.pdf) and have addressed all of the vulnerabilities identified by both parties. **Disclaimer:** This guide is for informational purposes only and constitutes neither investment advice nor an offer of securities --- *Originally published on [Pepsinated | Pep Ruckpanich](https://paragraph.com/@pepsinated/hmx-analysis)*