Derivatives DEX Battle: Kwenta and Level Surpass GMX in Weekly Trading Volume
Author: Duo Duo, LD Capital
Currently, the competition in the derivatives DEX track is fierce, and the overall market trading volume is declining, with new protocols continuously being launched. In a shrinking market, traders are more sensitive to various incentive measures and yields. New protocols attract existing traders from leading exchanges due to their higher incentives.
Since late March, the trading volume of derivatives DEX has been on a downward trend, with a rebound occurring this week. The cumulative trading volume of six major derivatives DEX protocols in the previous week (from May 15 to 21) was $6.1 billion, while last week (from May 22 to 29) the cumulative trading volume was approximately $6.6 billion, an increase of about 9%.
Over the past month, among the six major derivatives DEX protocols, five have shown a downward trend in trading volume, with only Kwenta experiencing counter-trend growth. Kwenta is a perp front-end built on Synthetix, contributing to over 95% of the trading volume growth and revenue growth of Synthetix. Synthetix is a liquidity provision protocol with over $400 million in TVL, providing liquidity pools for front-ends like Kwenta.
*Figure: Weekly trading volume of major derivatives DEX, Source: * tokenterminal
The data related to this article mainly comes from tokenterminal. Due to different statistical standards, there may be discrepancies between different data platforms.
The order book model of DYDX still occupies nearly half of the entire market's trading volume. However, in the liquidity pool model derivatives DEX, GMX is facing competition from Kwenta and Level. This week, the trading volume of Kwenta and Level surpassed that of GMX.
*Figure: Market share distribution of liquidity pool model derivatives DEX, Source: * Dune Analytics
GMX's trading volume peaked in mid-April and has since shown a continuous downward trend, with the current trading volume level comparable to that at the end of 2022.
*Figure: Weekly trading volume changes of GMX, Source: * tokenterminal
Kwenta is a DEX that started operating at the end of 2022, and it began trading incentive activities in mid-February, resulting in significant trading volume growth. In late April, it started using OP tokens as incentives, and trading volume saw a noticeable increase in May.
*Figure: Weekly trading volume changes of Kwenta, Source: * tokenterminal
Level's trading volume peak also occurred in mid-April, with weekly trading volume reaching $2 billion, followed by a decline. However, there was a rebound in the week of May 22.
*Figure: Weekly trading volume changes of Level, Source: * tokenterminal
Reasons for Trading Volume Growth: More Incentives, Lower Costs
The counter-trend growth of Kwenta's trading volume may primarily benefit from two aspects: first, the strength of Kwenta's trading incentives is significant. In addition to the protocol's own token incentives, starting from April 26, it has been rewarding 130,000 OP tokens weekly; from May 10 to August 30, it will reward 330,000 OP tokens weekly, with a market value of approximately $500,000.
Second, Kwenta's trading fees are relatively lower than GMX, with current trading fees ranging from 0.02% to 0.06%, depending on whether the user is a taker or maker. GMX's trading fee is 0.1%, and borrowing fees are charged based on positions. Excluding users who are fully wash trading, the trading cost for real users entering Kwenta is lower.
*Figure: Kwenta trading incentive rules, Source: * mirror.xyz/kwenta.eth
LEVEL has also implemented trading incentive measures. Users receive 1 LEVEL Loyalty token (lyLVL) for every $1 in trading fees paid. A total of 10,000 LVL is distributed daily, allocated based on the user's lyLVL proportion in the entire platform. The claim period is 24 hours.
In addition to the basic reward measures mentioned above, there is also a Ladder reward mechanism. When the daily platform revenue exceeds a certain threshold, an additional incentive of LVL tokens is added. This reward accumulates and is distributed after one week.
Note: Level n = (Revenue-$100,000)/$50,000, Source: LD Capital
The quantity is determined. Points earned are calculated based on the trader's contribution to the protocol's trading fees, multiplied by (1+boost) to increase points. The boost is determined by the total number of LVL tokens staked by the trader on the platform. For every 1,000 LVL staked, the boost factor increases by 1%.
In the past six months, there have been 46 days where revenue exceeded $100,000, accounting for 25% of all days. Among these, there were 19 days with revenue exceeding $150,000, 8 days exceeding $200,000, and 2 days exceeding $250,000.
*Figure: Level daily revenue situation, Source: * tokenterminal
Additionally, the order book model of DYDX has maintained high trading incentives since its launch. Although the incentive tokens have been reduced twice, there are still approximately 1.58 million DYDX tokens incentivized per epoch, valued at about $3 million at market price, with daily incentives reaching $100,000. This is considered relatively high in the current derivatives DEX model.
It is necessary to consider the impact of trading incentive measures on the selling pressure of protocol tokens and their sustainability.
In Kwenta's incentive measures, the ecological token OP incentives occupy a major part, while the protocol token incentives are gradually decreasing, resulting in less selling pressure on the protocol token. Moreover, Kwenta's trading incentives are obtained on a weekly basis and have a lock-up period; if unlocked early, a portion of the tokens needs to be burned. However, the OP incentives currently last until August 30, and if there are no continuity measures after expiration, trading volume may see a significant decline.
In Level's incentive measures, all are based on protocol tokens, claimed daily, and have no lock-up period, resulting in greater selling pressure on the protocol tokens. Additionally, its ladder incentive measures focus on increasing trading volume, providing high incentives to the top 20 users, far exceeding those for ordinary users. This may also lead to a high concentration issue in its trading volume.
DYDX is also under continuous market observation due to significant token incentives and numerous token unlocks, waiting for the launch of its DYDX chain and modifications to its token mechanism.
Analysis of Real Trading Volume
Due to the existence of trading incentives, it is necessary to analyze the trading volume to understand the approximate situation of real trading. A brief statistical summary of several liquidity pool model derivatives DEX regarding user numbers, trading volume, concentration, and position size is provided.
Table: Quality analysis of trading volume in liquidity pool model derivatives DEX, Source: LD Capital
From the table above, GMX still has 2-3 times more users than other projects, and its position size is also far greater than other projects, being 3 times that of Kwenta and 5 times that of Gains Network.
The average trading volume per user for Kwenta and Level is significantly higher than that of other projects without incentive measures.
Kwenta's average trading volume per user is approximately $120,000, about 2.5 times that of GMX. The top five trading volumes account for 33.35%, indicating a reasonable concentration level. The number of users reached 1,772, which is not far from Gains Network's user count. The position size fluctuates between $40 million and $60 million.
Level's average trading volume per user reached $580,000, about 12 times that of GMX. The trading volume is highly concentrated, with the top five traders accounting for nearly 75% of the trading volume, and the position size is only $2.6 million, with fewer than 400 users, indicating a high proportion of wash trading interactions on the platform.
Overall, Kwenta has more real users and larger real trading volume. Its incentive measures may attract a portion of users and retain them by providing better liquidity depth and lower fees. Level, on the other hand, has a larger proportion of wash trading users and higher inflation.
Recent Development Plans
GMX
According to information gathered from the community, the GMX project team believes that the decline in trading volume and yields is primarily due to the overall market downturn.
GMX's recent focus is still on launching its V2 version. The V2 beta was launched on May 17, allowing users to participate in testing. Major modifications include:
GLP will change from the current comprehensive pool to a single pool for each trading pair. Through isolation, high-risk assets can be added.
There are two types of assets: one type requires native assets like BTC and ETH to support trading pairs, while the other type consists of synthetic asset trading pairs fully supported by USDC. Traders can choose the liquidity of different pools.
Due to the existence of multiple pools, the difficulty for LP participants will increase, requiring analysis of the usage and yield changes of each pool to decide which pool to participate in.
Increased funding rates and price impact factors are introduced to balance the changes between long and short positions.
Additionally, GMX has received approximately 10,000 $ARB tokens as incentives from Arbitrum, but there has not yet been a proposal on how to use these tokens.
Kwenta
Kwenta's development is closely related to Synthetix. Both belong to the same ecosystem, with Synthetix providing good liquidity services and Kwenta offering front-end services to attract users.
On May 25, Synthetix founder Kain Warwick proposed some ideas for the future development of Synthetix, including:
Using SNX for trading incentives, planning to allocate 5 million to 10 million SNX to the incentive program.
Considering increasing passive staking of SNX to expand participation and pool size. Previously, Synthetix used an active staking model, where stakers had to perform better than the entire staking pool to obtain better yields or use hedging tools to mitigate risks. Now, a passive staking pool will be added to maintain basic yields, making it simpler and more convenient for user participation.
Subsidizing front-end costs. The income of front-end operators basically belongs to SNX stakers, which is insufficient for long-term development. For example, Kwenta's protocol income is entirely distributed to SNX stakers. It is suggested to allocate a certain proportion of SNX from the treasury (e.g., 10 million SNX) to subsidize front-end costs. Representing the front end for staking will generate 3-5% of basic fee income.
The above plans consider the relationship between users, funding, and products. If implemented, they could have a significant incentivizing effect on projects built on Synthetix.
Level
Level has voted through the community in May to add a new cross-chain migration to Arbitrum. Currently, liquidity pools for LVL tokens have been deployed on Arbitrum, allowing for trading. Front-end trading operations are expected to be launched in mid-June. Given the large number of active users and capital on Arbitrum, this migration may bring in new users and capital participation.