Bixin Ventures: Is the GMX ecosystem a nested doll or a clever combination of DeFi Legos?
A GLP War Guide.Original Title: "The complete guide to GLP wars"
Authors: Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong, Bixin Ventures
Real Yield is considered the purest form of yield that can be found on-chain. It does not rely on excessive token emissions but rather on the fees and revenues generated from actual transactions of the protocol. If the protocol chooses to share profits with users, this sustainable yield is highly attractive to DeFi farmers.
GMX is a representative project that generates real yield. As a popular perpetual trading platform, GMX uses GLP as liquidity for trading, with 70% of the losses incurred by user trades and platform fees distributed to LPs and GMX Token holders in the form of ETH or AVAX. In other words, as one of the largest fee generators in DeFi protocols, GMX allocates most of its fee income to stakeholders.
Figure 1: Fees generated by DeFi protocols on February 11
Since GMX's launch, the demand for GLP has surged. Currently, the total value of assets locked in GMX exceeds $500 million and continues to grow, while the narrative of real yield sparked by GMX has gained increasing popularity, leading developers to start building projects on top of GMX and attracting GLP shares, thus giving rise to the GLP War.
Figure 2: GMX's TVL
Causes of the GLP War
Before understanding the GLP War, let's briefly outline GMX and GLP.
GLP is a liquidity pool for LPs similar to Uniswap, composed of a basket of tokens as shown in the figure below, with 48% being stablecoins and 52% consisting of other cryptocurrencies. Due to the price volatility of BTC, ETH, and other tokens, the overall value will fluctuate accordingly. Users are incentivized to stake GLP to profit from traders' losses while also earning esGMX and sharing 70% of the platform's trading fees.
Figure 3: GMX's GLP composition
Due to market risks, GLP stakers may experience losses while earning yields. The figure below compares the returns and yields of GLP. Since its inception, GLP has had a return rate of -13%.
Additionally, GLP yields are paid to users in ETH or AVAX, and users must manually claim rewards and reinvest. Although fees on Arbitrum and Avalanche are low, manual reinvestment multiple times inevitably incurs corresponding transaction fees.
The Beginning
Various protocols have noticed the issues with GLP and proposed solutions, such as what would happen if the risk exposure of GLP were hedged? What if the yield were leveraged? What if the yield could be automatically reinvested? What if GLP could be used as collateral? Developers began to search for breakthroughs, leading to the GLP War.
Figure 5: Proportions of GLP holdings across various protocols
GMX Ecosystem
PlutusDAO
PlutusDAO is a yield aggregator that governs the protocol through its native token PLS. It provides liquidity staking for veAssets such as veJones, veDPX, or veSPA. After integrating GLP, users can deposit GLP to unlock greater functionalities with plvGLP.
With plvGLP, ETH rewards are automatically calculated every 8 hours. Due to automatic reinvestment, the value of plvGLP increases, allowing holders to earn higher APY. PLS tokens are also distributed as liquidity mining rewards to plvGLP stakers. Plutus charges a 10% fee on GLP yields.
plvGLP also unlocks composability with other protocols. Regular GLP can only be staked on GMX and cannot be integrated with other protocols, while plvGLP addresses this issue by collaborating with various lending and asset management protocols. Through Lodestar Finance and Vendor Finance, users can borrow or collateralize using plvGLP, allowing them to devise better strategies, such as holding leveraged long or short positions or executing delta-neutral strategies by borrowing BTC and ETH. @0xBobdbldr elaborated on related strategies here.
Recently, Plutus also partnered with FactorDAO to achieve asset management. Factor strategists can utilize Plutus products and create new use cases, one potential use case being the Plutus index vault, which aggregates all plsAssets and diversifies yield sources. They are also exploring further integration opportunities with RodeoDolomite and other companies.
Mugen Finance
Mugen Finance is one of the earliest projects on GMX. Mugen is a cross-chain yield aggregator built on LayerZero. Users can earn yields from multiple protocols across multiple chains, akin to Yearn Finance on LayerZero. Currently, their platform has only one strategy, the GLP strategy.
The GLP strategy is executed by Mugen's treasury based on the whitelisted amount of funds for that strategy, with the treasury earning yields by minting and staking GLP. Users depositing funds into Mugen will mint the native token MGN, and Mugen staked in the form of xMugen will earn ETH yields from the treasury. Users can choose to automatically reinvest their ETH yields to purchase MGN and collateralize it. This helps to increase APY, as automatic reinvestment occurs more frequently than manual reinvestment.
Although Mugen's strategy is relatively basic, it provides farmers with diversified options and automatic reinvestment of yields. In the future, Mugen will integrate more protocols, allowing users to earn yields from multiple sources and chains simply by staking MGN.
Figure 6: Simplified workflow of Mugen Finance
Vesta Finance
Vesta Finance is a collateral debt platform where users can lock collateral and mint Vesta's stablecoin VST. GLP is one of the accepted collateral types, adding a new use case for GLP. Users can deposit GLP to borrow VST, maximizing capital efficiency.
VST can be staked in Vesta's mining pools, earning stablecoin yields of 10-40% depending on the lock-up period. At a collateralization ratio of 150%, the yield on VST will be 6.7%-26.7%. Overall, without any direct exposure, the yield on GLP can be increased to around 46.7%.
Vesta also allows for leveraged operations on GLP yields. Similar to Degenbox, users can deposit GLP to obtain VST loans, which can then be used to purchase more GLP. Repeating this process multiple times can achieve larger leveraged positions. At a 120% collateralization ratio, a 6x leveraged position is possible, with APY reaching nearly 120%.
Figure 7: Illustration of leveraged operations on GLP yields
However, this strategy may be affected by the price volatility of assets like BTC and ETH, leading to liquidation risks. Risk DAO has a great article discussing the risks of Vesta Finance and the safety of its current configuration.
Unstoppable Finance
Unstoppable Finance offers completely free automatic reinvestors for GLP holders. Unlike other protocols that charge a certain percentage fee based on yields or deposits, using the automatic reinvestor incurs no fees, allowing users to save on gas costs. The protocol's treasury is built using the ERC-4626 tokenized treasury standard, allowing anyone to build on top of its treasury.
They also have a new mechanism called TriGLP that is still under development. This mechanism tokenizes GLP into stableGLP and cryptoGLP, earning different amounts of yield based on the risks they carry. Their goal is to create a position similar to a delta-neutral stablecoin with an annual interest rate of about 10%, unaffected by volatility, and a position similar to cryptocurrency with an annual interest rate of about 30%, while maintaining full ETH/BTC exposure.
Figure 8: Illustration of the TriGLP mechanism
GMD Protocol
GMD Protocol is another yield aggregator that provides additional functionalities, mitigating the direct exposure issues of GLP through a pseudo-delta-neutral strategy.
GMD offers single-staking vaults for BTC, ETH, and USDC, with deposit limits based on the relative ratios of GLP to USDC, ETH, and BTC. The assets in the vault are used to mint GLP and earn yields. This allows users to maintain pseudo delta neutrality on their deposited assets. For example, users who want to earn yields in USDC without touching BTC, ETH, or other tokens in GLP can deposit funds into GMD's USDC vault to gain partial GLP yields. This pseudo delta-neutral strategy uses a ratio composed of USDC, ETH, and BTC based on GLP.
Over time, the amounts allocated to the three vaults on GMD need to be manually rebalanced weekly to adjust to the new GLP ratios. The GMD protocol does not rebalance user funds, but it will allocate 5-15% of the maximum total value to Delta-Neutral Vaults for rebalancing. This helps alleviate low reserve issues since the protocol itself has liquidity available for withdrawal.
To further reduce the volatility risk of smaller assets like Uniswap within GLP, GMD provides a protocol reserve, with the value of GLP contained within being 5%-15% of the total TVL. This protocol reserve is funded by the treasury and will compensate users when the value of their assets falls below the value of GLP. GMD believes that, in the long run, the protocol reserve will only grow, as it can derive value from the losses of GMX traders.
Figure 9: GMD Working Mechanism
In terms of actual performance, the yields of the three vaults ranged from 2.6% to 2.9% between December 11, 2022, and February 12, 2023. Based on these results, the APY is estimated to be around 16.6% - 18.7%, slightly lower than the advertised 20%-26% APY.
Figure 10: GMD Vault Performance
While GMD attempts to maintain delta neutrality, it has no short exposure to achieve true delta neutrality. The protocol itself requires reserves to support against impermanent loss. This limits GMD's scalability, as the vault cannot grow too large without sufficient reserves (i.e., 5%-15% of TVL). They can only scale based on the performance of the protocol reserves. So far, the GLP reserves are at breakeven, and GMD's expansion of the vault will be limited.
Figure 11: GMD Reserve Performance
Yield Yak
Yield Yak is an automatic reinvestor based on Avalanche. Each user can receive compounded rewards in AVAX with just a click to reinvest, providing an incentive for users.
Thanks to Avalanche's $180 million incentive program, Avalanche Rush, Yield Yak can offer more rewards to depositors. GLP strategy depositors will receive up to $300,000 in AVAX from Avalanche Rush. Additionally, users can maximize GLP rewards by permanently staking esGMX in Yield Yak. To optimize GLP, Yield Yak has also upgraded Yak Swap. Yak Swap can automatically select the best path to swap assets into GLP, helping to rebalance GLP to the expected index weight. This reduces users' slippage while helping GMX maintain the appropriate asset ratio.
Rage Trade
Rage Trade is a perpetual trading platform on Arbitrum that utilizes LayerZero's underlying technology. They are the first project to launch a dual-vault system to minimize direct market risks, featuring a Risk-Off Vault and a Risk-On Vault that operate on Aave and Uniswap to minimize exposure to BTC and ETH risks.
Users deposit sGLP or USDC into the Risk-On Vault, which borrows BTC and ETH through flash loans on Balancer and sells them for USDC on Uniswap. The USDC obtained from the sale, along with USDC from the Risk-Off Vault, is deposited into AAVE to borrow BTC and ETH, which are then used to repay the flash loan on Balancer. These operations create a short position on AAVE, as the Risk-On Vault now borrows BTC and ETH.
Another important feature of the Risk-Off Vault is to provide collateral for the Risk-On Vault, which will be used to maintain a healthy borrowing ratio of 1.5 on AAVE. Every 12 hours, this position will reopen to collect fees and rebalance the PnL between the AAVE and GLP collateral short positions, adjusting the hedge based on the composition of GLP deposits.
Figure 12: Risk-On Vault Mechanism
Figure 13: Risk-Off Vault Mechanism
Comparing the performance of the Risk-On Vault with GLP returns, theoretically, its profit return rate is about 25%, while GLP is -13%.
Figure 14: Vault Yield Performance Comparison
However, the current return rate of the Risk-On Vault is -1.2%, with the loss in GLP value primarily due to the high costs of hedging direct exposure and traders' profits. After Rage Trade completes its second audit and increases its deposit limits, they will be able to significantly reduce hedging costs. To hedge traders' PnL, Rage Trade will offer options to partially or fully hedge traders' PnL. If users are willing, these will be available for users to deposit in separate vaults.
Jones DAO
Jones DAO is a yield, strategy, and liquidity protocol aimed at improving capital efficiency. Relying on a dual-vault mechanism to provide leveraged yields, the jGLP vault of Jones DAO allows deposits of GLP and any assets within GLP, while the jUSDC vault accepts USDC deposits.
USDC from the jUSDC vault can be used to mint more GLP and gain leveraged positions in GLP, after which GLP rewards will be distributed between jGLP and jUSDC depositors, who will receive annualized yields of 33% and 11.3%, respectively. The jGLP vault will automatically balance its leverage to prevent liquidation, and users can also choose automatic reinvestment.
Figure 14: Mechanism of Jones DAO
The fee structure of Jones DAO is as follows; they have established a unique fee structure for long-term growth, where users who continue to stake will be charged fees from users who withdraw, encouraging users to continue staking in Jones DAO.
The more USDC deposited in the jUSDC vault, the more GLP can be purchased, leading to higher leverage. The figure below shows the relationship between jUSDC APY and vault utilization, where the GLP yield is 35%, and due to leverage, the jUSDC yield can rise to nearly 20%.
Figure 16: Relationship between jUSDC APY and Vault Utilization
In terms of return performance, jGLP does not hedge market risks and actually amplifies risks. This means that the actual performance of the jGLP vault depends on market conditions. Backtesting for a 0% GLP yield and 80% utilization indicates that jGLP outperforms ETH. Including GLP yield may yield even better results.
Figure 17: Performance of jUSDC and jGLP against ETH
Abracadabra
Abracadabra is a lending platform with its own stablecoin MIM, which can be borrowed using interest-bearing collateral. It introduces magicGLP, an automatic reinvestor for GLP tokens. The ETH yields from GLP will be used to purchase more GLP, which will then be converted into magicGLP. Using MIM on the platform, users can choose to leverage their positions by 4% to achieve up to 84% APY on their GLP.
Steadefi
Steadefi is a platform that provides automated yield leveraging strategies, currently offering a vault that can provide 3x leveraged positions on GLP.
For every dollar a user deposits into the vault, $2 will be borrowed from the lending pool to mint GLP. This effectively creates a 3x leveraged position that will automatically reinvest over time and rebalance as needed.
In terms of performance, GLP's PnL is 12.3%, while Steadefi's vault outperforms GLP with a PnL of 89.8%, yielding 7 times higher returns.
Figure 19: Comparison of Steadefi and GLP Performance
Comparison of Key Protocol Metrics
|-------------------------|-----------|---------|---------------|-------------|----------|----------------| | Protocol | Public Chain | Type | APY | GLP TVL | Launch Date | Fees | | PlutusDAO | Arbitrum | Aggregator | 61.4% | $8.2M | 29/8/22 | Exit: 2% -10% Yield | | Mugen Finance | Arbitrum | Aggregator | 19.6% | $3.4M | 8/9/22 | 10% Yield | | Vesta Finance | Arbitrum | CDP | 19.6% - 120% | $2.9M | 13/9/22 | 20% Yield | | Unstoppable Finance| Arbitrum | Auto Reinvest | 19.6% | $57.5K | 22/9/22 | - | | GMD Protocol | Arbitrum | Delta Neutral | 20% - 26% | $5.9M | 5/11/22 | Staking: 0.5% | | Yield Yak | Avalanche | Auto Reinvest | 124% | $12M | 18/11/22 | 10% Yield | | Rage Trade | Arbitrum | Delta Neutral | 9.26% / 5.56% | $7.4M | 12/12/22 | 18.5% Yield | | Jones DAO | Arbitrum | Leveraged Vault | 33% / 11.3% | $13.5M | 28/1/22 | Exit: 1%-3% | | Abracadabra | Arbitrum | Leveraged Vault | 21.4% - 84% | $20.6M | 31/1/22 | 1% Yield |
Note: GLP FDV data is as of February 16.
Potential New Entrants
Umami Finance
Umami Finance is expected to launch its v2 version of the GLP vault, which will provide an algorithmic hedging strategy. Currently, Umami is still conducting backend testing and optimizing their vault, with recent test results showing an annualized yield of 26.7%.
Figure 18: Umami Test Results
Yama Finance
Yama Finance is building a full-chain stablecoin optimized for maximum capital efficiency, speed, and security, and has not yet launched its GLP yield leveraging product on Arbitrum.
Yama can provide up to 101x leverage, offering better yield acquisition opportunities. For GLP, they limit it to 17x, achieving an APY of 333% (assuming a GLP yield of 19.6%). Currently, Yama has not detailed its mechanism for leveraging GLP liquidity yield acquisition. This may involve borrowers using GLP as collateral to borrow YAMA and gain leveraged positions for higher yields.
The Future of the GLP War
It is evident that numerous developers have built many protocols based on GMX, with several protocols gathering millions of dollars in TVL, indicating a clear market demand for GLP-based products.
Due to the composability of DeFi, this Lego-like construction allows GLP to play roles across various protocols, including yield leveraging, automatic reinvestment, and lending. As the GMX ecosystem continues to grow, it is expected that more protocols will integrate GLP into their frameworks. Of course, there is also the risk that GLP could be completely depleted as traders profit from trading and withdraw assets from GLP, so many protocols may attempt to hedge traders' PnL in the future to mitigate risks.
Disclaimer: The above information does not constitute investment advice. Additionally, the project mentioned above, Rage Trade, is one of our portfolio investments, and you can read more about our research.
