Binary Research｜Interpreting Gains Network, Approaching the Dark Forest of Decentralized Leverage Trading

Author: Xiaona & Bee (Twitter:@llamabee1)
Editor: Ashley & Sarah

"Gains Network was founded on Ethereum and initially did not receive much attention. It later migrated to the Polygon chain and gradually accumulated business. It wasn't until the integration of the Arbitrum chain that the market was ignited. As of now, the platform has accumulated over 870,000 transactions, with a trading volume exceeding $34 billion. Its founder is exceptional, having initially hired only one UI developer, while all other work, from business design to code implementation, was completed by him alone."

gTrade is the first product launched by Gains Network, and it is a decentralized leveraged trading platform currently deployed on Arbitrum and Polygon.

1. Core Features of gTrade

(1) Synthetic Liquidity Pool
The synthetic liquidity pool is crucial for the efficient operation of liquidity pools. Currently, gTrade uses a DAI-based synthetic liquidity pool (gDAI pool) to act as the counterparty for leveraged traders. This liquidity pool design has several features: first, its synthetic mechanism allows for higher capital efficiency.

Second, its synthetic mechanism enables more flexible trading. By using the synthetic liquidity pool, gTrade can offer more leveraged trading pairs, meaning traders can choose trading pairs more flexibly and trade according to market conditions.

Finally, gTrade's synthetic liquidity pool can control risks through different synthetic mechanisms, such as adjusting leverage multiples or limiting the size of the synthetic liquidity pool, thereby reducing risks. This allows both traders and liquidity providers to participate in trading with greater peace of mind.

dydx uses an order book mechanism, which requires storing the order book off-chain and relies on market makers to provide liquidity, resulting in lower decentralization and capital efficiency.

In contrast, gTrade's gDAI pool avoids these issues and does not require setting up a liquidity pool for each trading pair. Compared to GMX, while both use liquidity pools to provide liquidity, gTrade demonstrates extremely high capital efficiency.

For example, in the past 7 days, gTrade's $50 million gDAI pool achieved a trading volume of $913 million, with a Volume/TVL ratio of 18. GMX, on the other hand, achieved a trading volume of $2.2 billion with a $466 million GLP pool TVL, resulting in a Volume/TVL ratio of 4.7. It is evident that during this period, gTrade's capital efficiency was over three times that of GMX.

However, higher capital efficiency also brings some risks, so gTrade has implemented multiple protective measures.

(2) Rich Trading Pairs
Supporting multiple trading pairs and high leverage is another important feature of gTrade. It is currently the only on-chain leveraged trading platform that supports over 91 trading pairs, covering cryptocurrencies, forex, and stocks. The leverage for forex on the gTrade platform can be as high as 1000 times, while the leverage for crypto assets can reach up to 150 times, which GMX currently cannot achieve.

(3) Self-built Oracle
The oracle used by gTrade, DON, is built by the founder using Chainlink as the underlying technology. DON has 8 nodes that obtain prices through APIs from 7 different exchanges, providing real-time price feeds to gTrade. This effectively prevents price manipulation and ensures price accuracy.

Centralized exchanges may experience price manipulation, but this will not happen on gTrade. The data they receive and the subsequent execution are all completed on-chain, and the 7 APIs and 8 nodes minimize the possibility of malicious actions.

(4) Trading Fees and Protection Mechanisms

1. Fixed Spread
   In addition to the basic Opening and Closing fees, gTrade also charges an additional Fixed Spread. For large-cap cryptocurrencies like BTC and ETH, as well as Forex and US stocks, which are relatively difficult to manipulate, gTrade has set a fixed fee.

2. Price Impact
   Price Impact provides good protection for gTrade's safety, which GMX lacks. Because of this, GMX cannot allow users to trade small-cap tokens. If a trade has high Open Interest on the on-chain platform but low liquidity on other off-chain exchanges, this Price Impact may become larger.
   During the Luna incident, the gTrade team adhered to the principle of decentralization and insisted on not intervening in Luna's trading or delisting it, ultimately leading to the market draining the platform's liquidity, putting the project on the brink of collapse.
   After the Luna incident, the platform added many protective mechanisms. In fact, with Price Impact fees in place, the impact of the Luna incident on gTrade was relatively limited because traders had to pay high Impact fees.

3. Rollover Fee
   The Rollover Fee causes users to incur costs while holding positions, and this fee is related to market volatility; the greater the market volatility, the higher the fee. Because greater volatility has a larger impact on gTrade, the ultimate goal is to encourage users to close positions quickly.
   Recently, the team increased the Rollover Fee. The reason is that the team calculated that if some large positions were hedging without raising the Rollover Fee, they could hedge on gTrade at a very low cost and hold positions long-term, resulting in very little Open Interest, making it difficult for others to engage in leveraged trading. Therefore, they raised the fee so that these individuals could not hold positions long-term or hedge on gTrade at very low costs, which is another protective function of the Rollover Fee.

4. Funding Fee
   The biggest difference from GMX lies in the Funding Fee. On GMX, users must pay borrowing fees to GLP liquidity providers when engaging in leveraged trading. In contrast, gTrade uses the Funding Fee to balance the positions of short and long traders, so the side with more positions pays less in fees. It is precisely because of the Funding Fee's method of balancing long and short traders that leveraged trading on gTrade is more balanced and fair.
   Additionally, gTrade has other protective measures, such as a maximum profit of 900%, where a single trade can earn up to 900%, and positions are automatically closed when a 900% profit is achieved; if a user's collateral or principal loss reaches 90%, it will also automatically close the user's position. These protective measures ensure that users do not take on excessive risks when engaging in high-risk leveraged trading.

Ordinary users participating in gTrade can generally use the following functions:

gTrade is a leveraged trading platform that provides a good trading environment for skilled traders. At the same time, it also offers many other DeFi play options. As a groundbreaking platform, you can earn yields by providing liquidity to its liquidity pool.

The gDAI pool has many features; most single-asset collateral leveraged trading platforms often face the risk of losses when traders make significant profits. However, gTrade has implemented various mechanisms to reduce the risk of losses in the gDAI pool, making it nearly zero.
Additionally, Gains Network has its own token, GNS, which is a versatile token that will empower governance functions for the platform in the future.

Currently, holding GNS tokens allows users to deposit them into Gains Network and share in the platform's profits. Furthermore, all types of trades on gTrade are executed through decentralized NFT bots. Therefore, to perform corresponding operations, one must hold the corresponding NFT.

The target users of gTrade are those who wish to trade. If you have the necessary resources, you can also try applying for the Referral Program.

2. gToken Liquidity Pool

Regarding the gToken liquidity pool, gDAI is just its first collateral; in the future, it will also include gETH, gBTC, as well as gFrax, gLUSD, and other collaterals.

The risks associated with USDC have indeed caused some panic, prompting the team to prioritize this demand. They are currently working on launching the next more decentralized liquidity pool, and if the next one is gETH, traders can use ETH as collateral, and liquidity providers can earn ETH as returns.

It is worth noting that the biggest difference from other similar protocols lies in gTrade's settlement method. If you open a position with one Ethereum, and your trading pair increases by 10%, your profit is 10%, calculated in Ethereum. In contrast, GMX's leveraged trading settlement method is based on USD prices, but the profits paid to traders depend on whether they are long or short; if a trader is long, GMX pays profits in the asset they went long on; if a trader is short, GMX pays profits in stablecoins.

The liquidity operation of gToken works like this: if you are a depositor depositing DAI, you receive a receipt in the form of gDAI. You put this DAI in, and you get a receipt (which is actually an ERC20 token that you can use in other DeFi protocols). If you want to withdraw, you take back the gDAI, it burns the gDAI, and you can take out your DAI.

Currently, gTrade only has gDAI as a trading pair, but it is worth noting that even with only $50 million in gDAI, it has already processed 18 times the trading volume. If the team adds more collateral, the trading volume can expand even further, so compared to GMX, gTrade has greater scalability potential.

What is special about gToken?

As mentioned earlier, its gDAI pool acts as the counterparty for traders, meaning that if traders profit, they will take DAI from the gDAI pool; if traders lose, their DAI will enter the liquidity pool.

When users deposit DAI, they can take a receipt gDAI from the pool, which represents the depositor's share in this pool. There are two factors that can affect the price of gDAI: the first factor is the accumulated trading fees, which are the opening and closing fees mentioned earlier; this part will only increase. The second factor is the profits and losses of users as counterparties, but this will only affect the price of gDAI in the case of insufficient collateral, as there is also a buffer protection layer.

The calculation of the gDAI price is relatively simple. Assume that in the initial scenario, the pool has 100 DAI, and its total issuance of gDAI is 100. Now, one gDAI is worth one DAI. If the platform earns $150 in revenue, the gDAI pool will then have 250 DAI, but the issuance of gDAI remains at 100; at this point, one gDAI is worth 2.5 DAI.

So what is the buffer? To explain the buffer, we must understand the collateralization ratio of its gDAI pool, which is influenced by the profits and losses of traders. Each Epoch will settle the profits and losses of traders; as long as the fees earned exceed the expenses of traders' profits and losses, that Epoch will have positive returns.

If we look at their webpage, in the Vault and CR section, pulling down the data will show many numbers, but there are two numbers: one is TVL, and the other is the Collateralization ratio. The difference between these two data points is its buffer, its protection layer. To calculate its CR, you divide the total value of collateral by TVL; this percentage is its buffer.

In Dune Analytics, you can see that below its gDAI pool is the 100% part, and the extra 4% is the buffer; its balance is actually higher than TVL, and its main function is to absorb the impact of traders' profits and losses.

When its collateralization ratio is above 100%, traders' profits and losses have no impact on gDAI; only when the collateralization ratio falls below 100% do traders' profits and losses start to have a short-term impact on gDAI. It must be emphasized that this is a short-term impact. Because at this point, the protocol will start minting GNS and sell it OTC for DAI to cover the losses of the gDAI pool.

The gDAI liquidity pool essentially has three layers of protection. The first layer is the buffer; with the buffer, traders' profits and losses have no impact on gDAI holders. The second layer is its TVL; when the buffer is gone, traders' profits and losses begin to affect the price of gDAI, but at this point, GNS has already started to be minted to cover the losses of the pool. The third layer is that while GNS is being minted, the platform continues to operate normally; on one hand, the protocol has income, and on the other hand, traders may incur losses to replenish the liquidity pool. Ultimately, these three methods bring the pool back to 100%.

The gDAI pool has evolved from the previous DAI pool, and the biggest feature of the gDAI pool compared to the DAI pool is that with gDAI, you can do many things; it becomes an automatically compounding ERC20 token, allowing you to play various Lego combinations in DeFi.

All shares in the gDAI pool share profits and bear losses. Because it is a homogeneous token, there cannot be situations like the previous FTX incident where those who withdrew earlier could leave while those who withdrew later could not, and the latter would bear all the losses.

As mentioned earlier, there are two factors that can affect the price of gDAI. The first factor is the platform's fees, which will never change. It may slightly decrease in the short term under insufficient collateral, but this is temporary. When its pool is replenished and the collateralization ratio returns to above 100%, the profits you earned previously still belong to you.

Then, there is an interesting point regarding the incentive mechanism described in the third line of the image. When the collateralization ratio is insufficient, it provides a very good opportunity to buy gDAI. Why is that? Because at this time, your purchase is actually helping the gDAI pool, so you can earn corresponding returns. Additionally, in the incentive mechanism, there will be a discount. Typically, the collateralization ratio is maintained above 100%, and between 100% and 150%, it decreases linearly. The higher the collateralization ratio, the lower the discount rate. If it reaches 150%, there will be no corresponding discount rate.

gDAI has strong composability. It is an ERC20 token. By locking it up, meaning committing not to exit the pool for a certain period, users can also receive a corresponding discount. However, in this case, the user's position will be represented in the form of an ERC721 token. It is a very high-quality collateral choice because its value steadily increases unless an extremely extreme black swan event occurs.

Additionally, it has a withdrawal time lock; when the collateralization ratio is below 110%, users choosing to withdraw must wait for three Epochs, with one Epoch being 72 hours, which is a total of 9 days.

The Epoch system is actually very secure. One Epoch lasts three days, with the first 48 hours being the only time you can apply for or make withdrawals; the last day will execute the settlement of traders' profits and losses. Therefore, during the entire Epoch, when users withdraw or apply for withdrawal, they actually do not know whether the Epoch protocol is making money or losing money. This prevents behaviors like front-running or cashing out early.

3. Application Scenarios of GNS

GNS is a utility token, and the relationship between GNS and the gDAI pool is very close. When the collateralization ratio of DAI falls below 100%, GNS will start to be minted and then sold to fill the gap in the gDAI pool. When over-collateralized, 5% of the profits and losses of traders will be used to repurchase these GNS.

Additionally, there is another situation that will mint GNS. This situation involves NFT bots and referral programs; why are they willing to participate? Because there are rewards, and these rewards come from the minted GNS. However, these GNS are not minted out of thin air. Their minting is entirely derived from actual profits—specifically, the actual profits of the gTrade platform, which is DAI.

However, the incentivizers receive GNS, not DAI. This means that these DAI will enter the buffer, thereby increasing the buffer's assets and enhancing the protection of the gDAI pool.

In summary, the actual quantity of GNS is entirely dynamic. Its minting volume depends on demand. It will be minted when needed and destroyed when not needed. As long as its destruction volume exceeds its minting volume, GNS will be deflationary. Its minting volume has a daily cap of 0.05%.

Thus, the maximum annual inflation rate is only 18.25%. Unless extreme situations occur, it is unlikely to reach this cap. After all, the collateralization ratio cannot be less than 100% every day. Because the gTrade platform continues to earn money, and traders continue to incur losses, these revenues are calculated daily.

Currently, GNS has a negative inflation rate, indicating that its burning exceeds its minting.

4. NFT Bots

The NFT bots mentioned earlier are used to execute all automated functions on gTrade, including settlement, liquidation, new order placement, take profit, stop loss, and other functions.

Another function is that for large traders, it can reduce the spread fees, which is quite significant, so its NFTs are currently very expensive. If these holders stake GNS, they can enhance their GNS staking rewards.

A wallet can stake up to three NFTs. If you hold Bronze, Silver, and Gold NFTs, you can combine them for a total of 10% (2% + 3% + 5%), meaning if you stake GNS, you can increase your yield by 10%. If you are trading, you will receive a maximum discount of 25%.

5. Protocol Dividends

GNS currently has two sources of income: one comes from Market Orders, and the other comes from Limit Orders. Approximately 70% of the income comes from Market Orders. Calculations show that GNS stakers can receive 36% of the platform's profits, while gDAI liquidity providers can receive 18% of the platform's profits; the remainder is allocated for project development expenses, NFT bots, and alliance rewards. In comparison, GMX stakers can receive 30% of the platform's profits, while liquidity providers can receive 70% of the platform's profits.

For GMX, liquidity providers bear greater risks, as LPs must absorb the impact of traders' profits and losses. However, on Gains Network, the ones bearing the most risk are the GNS stakers, but of course, their rewards are also higher, earning twice as much as liquidity providers.

Conclusion

Gains Network provides users with a brand new liquidity pool solution by introducing the gToken token and has handled a large volume of transactions, demonstrating the efficiency and sustainability of its liquidity solution.

The success of Gains Network lies in its keen perception of user needs and its rapid response to market changes. The platform continuously launches new solutions to meet the diverse needs of users and constantly improves its existing services, providing users with a more comprehensive DeFi experience.

DeFi derivatives represent a sector with greater business opportunities than the spot market. Gains Network has continuously iterated in a bear market environment, growing into a leading player in the decentralized leveraged trading space, gaining recognition in both trading volume and trading experience. With the continuous addition of gToken pools, gTrade is expected to capture a larger market share in the increasingly competitive derivatives space.

Data Sources:
https://dune.com/unionepro/Everthing-Gains-Network
https://gains-network.gitbook.io/docs-home/
https://twitter.com/GainsNetwork_io