A Detailed Explanation of the Operating Mechanism of the Newcomer in the Derivatives Track, Gains Network

Written by: ChainCatcher

With the rise of GMX, derivative projects based on Real Yield have become the focus of market attention, and related concept projects like Gains Network are appearing more frequently in public discussions.

Gains Network is a decentralized derivatives trading platform based on Polygon, and it is currently the highest TVL derivative protocol on Polygon, with a total TVL of nearly $20 million.

Through gTrade, Gains Network aims to attract perpetual contract traders via a decentralized platform that maximizes their profits while allowing users to retain full custody of their assets. Perpetual contract traders also hope to benefit from gTrade's low fee structure and zero fees on leveraged loans.

Since its launch, the project has served over 6,000 independent traders with more than 450,000 transactions, generating $13 million in fees.

Below is ChainCatcher's compilation of the article "Gains Network (GNS): A DeFi Leveraged Trading Platform" from CoinGecko, to help readers better understand the operational mechanism of Gains Network.

How Does gTrade Work in Gains Network?

Currently, leveraged trading platforms are affected by excessive centralization and leverage limits. On the gTrade platform, traders can start trading by depositing funds without needing to create an account using personal information.

Users only need a simple Web3 wallet connection to start trading on the gTrade platform. Traders' funds remain in their wallets and are only transferred with the wallet owner's authorization. These processes are controlled by smart contracts. The asset prices on the platform are provided by a modified version of the Chainlink decentralized oracle network (DON).

gTrade also offers a range of tradable assets for traders to access. On the platform, users can trade cryptocurrencies, company stocks, and foreign exchange. gTrade provides traders with up to 150x leverage on crypto assets, 100x leverage on stocks, and 1000x leverage on forex trading.

Platform users contribute to a liquidity pool that provides leverage. This liquidity pool aims to generate profits for contributors as part of an additional incentive and yield program.

To enable gTrade to operate in this way, Gains Network has introduced four synergistic "tools":

1) Decentralized vaults and liquidity pools.
2) Multi-functional tokens.
3) Protocols that aggregate other facilities and control their functions (composed of algorithmic contracts deployed on the blockchain network).
4) gTrade also features unique NFTs that provide certain rights and incentives to holders on the platform.

The DAI Vault of gTrade

The DAI vault is the core of gTrade's operations. It acts as a liquidity pool for traders to borrow funds to execute higher capital trades. The DAI vault is contributed by stakers. Stakers deposit DAI into the vault in exchange for interest, which depends on the vault's profits. The vault is over-collateralized and decentralized.

Regardless of the asset being traded, traders must use DAI to trade on gTrade by depositing DAI into the DAI vault. The vault is over-collateralized and provided by the traders.

Over-collateralization ensures that traders have sufficient funds, and any slight deficits are easily managed, maintaining platform stability. To achieve this, the vault's over-collateralization is set at 30%. If it falls below this level, measures will be taken to return to this collateralization level.

One such measure is to exchange GNS tokens for more DAI to replenish the vault. Since the Gains Network team believes this is unsustainable under extreme conditions, they have abandoned this measure in search of better methods. Current measures include increasing vault collateralization and limiting DAI inflows to only negative trade PNLs.

Traders actively provide DAI through their usual trading activities. However, the structure of the DAI vault is designed to profit from losses and shrink as traders' profits exceed their losses. Profits from winning trades are paid to traders through the DAI vault. As traders incur losses and their negative PNL is paid into the vault, the amount of DAI in the vault increases.

In the event that this collateralization level is significantly exceeded, additional DAI will be used to buy back and burn GNS tokens.

The amount of DAI in the vault grows with the trading success of traders. This structure is developed based on the fact that most derivative trades end in losses. So far, this strategy has been effective for the GNS team, and over $17 million is currently locked in the DAI vault.

GNS: Multi-Functional Token

The GNS token is the native token of the gTrade platform and the Gains Network ecosystem. GNS is a utility token, serving as a store of value within the ecosystem and will play an additional role when decentralized governance for Gains Network goes live.

The GNS token was renamed from the Gfarm token. Under the rebranding scheme, old Gfarm token holders received GNS tokens at a ratio of 1:1000. That is, for every Gfarm token held, holders receive one thousand GNS tokens.

GNS tokens are used to incentivize the GNS/DAI pool, providing additional support for the DAI vault and general liquidity on the gTrade platform. The GNS/DAI pool currently holds over $5 million in locked assets. This provides strong support and stable liquidity for traders using the leveraged trading platform or swapping GNS and DAI on QuickSwap.

The Gains Network team also claims to be working on establishing a DAO driven by GNS tokens. GNS token holders will form the DAO and will be able to contribute to platform governance by voting on improvement proposals. According to community consensus, GNS tokens will function like other governance tokens. GNS holders will stake their tokens to receive veGNS, which can be used for voting on proposals.

GNS NFT

Gains Network has issued 1,500 GNS NFTs that can be used on the platform. The NFTs cover five categories and unlock various empowerments and privileges for holders. GNS NFT holders will receive additional staking rewards based on the category of NFT they hold. Diamond GNS NFT holders may see their liquidity staking rewards increase by up to 13%, while the minimum reward increase for NFT holders is currently 2% for bronze NFT holders.

Traders holding NFTs will also enjoy lower spreads when trading. The reduced percentage depends on the type of NFT held. Gold GNS NFT holders will enjoy a spread reduction of up to 35%.

These benefits are cumulative for investors holding multiple NFTs of any category or a combination of categories. If users are interested in any of these, they can purchase GNS NFTs on OpenSea.

How Secure is Gains Network?

As of now, Gains Network's leveraged trading contracts have been running for about 5 months and have processed over 460,000 transactions. Current reports indicate that these transactions have been executed securely, and users have not reported any wallet breaches traceable to the Gains Network platform. Gains Network also claims that its contracts are safe to use and have been audited.

A report from Certik confirms this claim but hints at minor vulnerabilities and centralization threats. The contents of this report have been acknowledged by the Gains Network team. However, it is important to note that smart contract protocols are advanced computational commands and are susceptible to vulnerabilities that can be exploited in various ways. With this in mind, users are advised to conduct their own research and take measures to ensure the safety of their funds and to act promptly to cut losses in the event of unforeseen incidents.

GNS vs. GMX

Like GNS, GMX also offers decentralized derivatives trading services with impressive leverage and trading protocols. Both have many similarities, and here are their differences and similarities:

Conclusion

For Gains Network, a decentralized trading platform allows traders to have complete control over their assets, and blockchain technology ensures that this freedom is not abused. Centralized trading platforms have many drawbacks, some of which Gains Network and similar projects are addressing. The zero-fee loan structure is a great attraction for users, and high leverage is an added bonus.

More broadly, Gains Network and other decentralized derivatives trading platforms represent how decentralized technology is revolutionizing centralized applications, providing users with efficient and stable services.

If these solutions deliver on their promises, traders will gain a safer trading method and the opportunity to maximize profits from each trade. Nevertheless, it is still important to understand the basics of leveraged trading, especially when it comes to profits and losses. Generally, caution is advised when interacting with smart contract platforms, and conducting one's own research before investing in volatile assets like cryptocurrencies is essential.