Penta Lab Detailed Explanation of Gains Network: Decentralized Synthetic Asset Leverage Trading Protocol

Written by: Penta Lab

Project Overview

Gains Network is a decentralized synthetic asset leverage trading protocol established on Ethereum, with its flagship product being gTrade, a trading platform for synthetic assets that supports high-leverage perpetual contracts for cryptocurrencies, forex, stocks, stock indices, and commodities. The platform supports up to 150x leverage for cryptocurrencies and stocks, and up to 1000x leverage for forex. gTrade is unique because its structure allows it to offer significant leverage across a wide range of assets. It achieves this by utilizing a synthetic asset system, meaning users can trade any asset compatible with the gTrade oracle. The project binds users to its ecosystem through the $GNS token, allowing users to earn APY by staking $GNS, which not only enhances community engagement but also increases the token's utility. Initially launched on Ethereum, Gains Network did not receive an enthusiastic market response, but its business gradually grew after migrating to the Polygon chain, and the market was truly ignited after integrating with the Arbitrum chain.

Market Analysis

Although CeFi still holds an absolute share of the $200 billion trading volume in derivatives, the DeFi derivatives sector is rapidly developing solutions based on decentralization, capital efficiency, liquidity, and user experience. According to Tokeninsight statistics, the top five derivatives exchanges accounted for 96% of the market share in 2023, with Binance leading at 53.4%, followed by OKX at 17.9%, Bybit at 13.3%, Bitget at 8.9%, and KuCoin at 2.4%.

On another note, the DeFi derivatives sector has expanded its TVL to $2 billion after three years of development, with a compound annual growth rate of 132%. As of January 30, 2024, the year-on-year growth rate remains above 40%. In terms of TVL chain distribution, Arbitrum (45%) and Ethereum (23%) are the absolute leaders, with Solana (16%) in third place.

Chart 1: TVL and Year-on-Year Growth in the Derivatives Sector, Source: DefiLlama, Penta Lab

DeFi, especially perpetual contracts, options, synthetic asset platforms, and staking projects, is gaining significant popularity.

Perpetual contracts are futures contracts without an expiration date. Without an expiration date, there is no physical settlement of the underlying asset, so the sole purpose of perpetual futures contracts is to speculate on the price of the asset. Through perpetual contracts, investors can participate in the price fluctuations of the cryptocurrency market and profit from long (bullish) or short (bearish) positions. Additionally, perpetual contracts offer leverage trading, allowing investors to control more assets with less capital. The concept of perpetual futures was first proposed in 1992 as a potential means for the non-liquid asset derivatives market. However, due to the existing liquidity in traditional futures markets, there was insufficient demand for such tools, and the idea failed to gain traction in financial markets. With the emergence of cryptocurrencies, financial innovators found that this model could be adapted to cryptocurrencies through financing models. Compared to the traditional futures markets that developed before the concept of perpetual futures, the cryptocurrency market lacks deep, highly liquid conventional futures markets. As perpetual contracts found a place among cryptocurrency speculators, liquidity was quickly attracted to them. After the launch of Bitcoin futures based on traditional contracts in 2014, the first perpetual futures exchange offering exposure to the BTC/USD currency pair began trading in 2015. Since then, the cryptocurrency futures market has experienced significant expansion, primarily driven by perpetual futures.

We believe that DEX taking market share from CEX is not an easy task, rating it at the 62nd percentile.

Product Revenue

Fee Revenue Breakdown

According to Token Terminal data, Gains Network's 30-day fee revenue ranks 3rd out of 50 in the derivatives sector, placing it in the top tier. From January 2022 to January 31, 2024, the decentralized leverage trading platform gTrade processed a total trading volume of approximately $54.9 billion, with fee revenue of about $34 million, with fee revenue growing smoothly in tandem with trading volume. Daily trading volume and fee revenue fluctuate significantly. On February 17, 2023, Binance announced that it would list GNS in its innovation zone, opening trading pairs GNS/BTC and GNS/USDT, which attracted more users to the gTrade platform for trading and staking, resulting in peaks and continuations in daily trading volume and fee revenue.

Chart 2: Cumulative Trading Fees Rising with Trading Volume, Source: Token Terminal, Penta Lab

Chart 3: Trading Volume Increase Following Binance Listing in February 2023, Source: Token Terminal, Penta Lab

Opening and Closing Fees

Opening and closing fees are industry norms and represent the transaction fees charged by the platform. gTrade's fee structure is consistent with industry standards, with opening and closing fees calculated based on the total position value at the time of opening (leverage x collateral). Different asset types incur different fee rates, with forex having the lowest rates and commodities and cryptocurrencies having the highest.

Opening fees will directly reduce the amount of collateral, affecting the size of the position. For example, if a trader collateralizes 250 DAI and goes long on ETH/USD with 10x leverage, the opening fee will be calculated based on 2,500 DAI. Assuming the fee is 2 DAI, then 248 DAI is the total collateral value for the new position, resulting in a total position size of 2,480 DAI after leverage.

Fixed Spread

gTrade adds a Fixed Spread on top of the oracle quote as the opening price (not considering dynamic spreads). The fixed spread is compensation for the platform's assumption of liquidity risk and is an industry norm. For high market cap and liquid cryptocurrencies like BTC, ETH, forex assets, and US stocks, the fixed spread is relatively low.

Dynamic Spread/Price Impact

The dynamic spread is added to the fixed spread as the final opening price. Its purpose is to eliminate the risk of price manipulation by the oracle's current price, allowing low liquidity long-tail assets to be listed for trading. This is also an advantage of GNS's wide selection of trading pairs, which GMX does not possess. The calculation formula for the dynamic spread is as follows:

The opening price is not only related to the current price of the currency pair but also depends on the open interest of that currency pair. The larger the transaction amount and the higher the open interest in the same direction, the less favorable the final opening price for the trader. This helps to deter whales from dumping and manipulating the market price of low market cap currencies, while also balancing long and short positions to control unilateral trading risks.

Rollover Fee

Unlike opening and closing fees, rollover fees are charged based on the collateral position and are continuously charged during the user's holding period. The holding time is calculated based on the number of blocks created, e.g., 5.5 hours is equivalent to 1,000 blocks created. Assuming the fee per block is 0.00001%, the annualized rate would be approximately 157%. Rollover fees will be directly deducted from the total value of the trade as a loss. The calculation formula is as follows:

The setting of the rollover fee rate is related to the volatility of the asset pair; the higher the volatility, the higher the rate, and the greater the trading losses. This will encourage positions in high-volatility assets to be closed quickly, maintaining reliable risk management for the protocol.

Borrowing Fee

After updating to V6.3.2, gTrade replaced the funding fee used by most platforms with a borrowing fee. The borrowing fee is paid by the side with more open positions (either long or short) to the vaults as borrowers, and the borrowing fee rate is higher for asset pairs with a net open interest, charged based on the total position size of the trade, while the other side does not incur any fees. This helps to balance long and short positions and control unilateral trading risks. At the same time, it gives traders the opportunity (when they have fewer open positions) to open larger positions with high leverage without paying funding fees, improving capital efficiency.

The borrowing fees will all be accounted for in the DAI vault, increasing the liquidity scale of the vault and forming an Over-collateralization Layer, enhancing the safety of liquidity providers' funds.

User Roles and Growth

Currently, users of the gTrade platform can participate in the platform's development and earn rewards through four additional roles beyond the basic trader role:

1. Trader: Earn investment returns by going long or short on asset pairs;
2. Vault Liquidity Provider (LP): Earn DAI rewards by providing liquidity to the DAI vault;
3. Token Holder: Earn DAI rewards by staking their GNS;
4. Liquidity Provider: Earn GNS rewards by providing liquidity to the GNS/DAI pool;
5. Referrals: Participate in the referral program to earn GNS rewards.

Rewards for referrals and liquidity providers are paid in minted GNS tokens, while an equivalent amount of DAI will enter the vault to support collateral.

According to Token Terminal data, as of January 31, in the derivatives sector, Gains Network had 6,121 monthly active users, ranking 4th out of 30, placing it among the top. Recently, Gains Network participated in the Arbitrum STIP program, offering 3.825 million ARB tokens to GNS and gDAI traders and liquidity providers, attracting a large number of users, with active users tripling within a month.

Chart 4: Monthly Active Users Tripling in One Month, Source: Token Terminal, Penta Lab

Product UI/UX

As the main product of Gains Network, the leverage trading platform gTrade serves as the primary interface for users. Over the past two years, Gains Network has been listening to user feedback and improving the user interface. When users first enter the interface, a pop-up provides navigation, and the menu in the upper left corner offers buttons for main functional areas such as trading, portfolio, finance, and statistics, with a clear information structure that allows users to easily find the information and functions they need. The most frequently used trading interface is divided into three main areas: the left side for order placement, offering various options for long/short, market orders, limit orders, and leverage; the center for price charts. Unlike most trading platforms, gTrade does not use an order book to match buy and sell orders; instead, the right side lists all asset trading pairs provided by the platform, rather than current buy and sell orders.

Product Iteration, Innovation, and Market Adaptability

Since its launch, Gains Network has never stopped iterating on its trading platform and expanding trading pairs. By continuously adjusting trading models, addressing vulnerabilities, adopting new oracle mechanisms, and refining product positioning, Gains Network has stabilized its main form, expanding from cryptocurrencies to stocks, forex, and commodities. Gains Network executes all asset pair trades using a single liquidity pool and DAI vault, achieving high liquidity efficiency and offering the widest range of trading pairs and leverage options, currently covering a total of 187 trading pairs, demonstrating strong adaptability and iterative capability.

• In October 2021, the team changed the name from gains.farm to Gains Network, rebranding the derivatives exchange.
• On January 27, 2022, the version was updated to V6, with ongoing minor iterative optimizations. After the LUNA crash, collateral was no longer based on GNS but switched to DAI.
• On May 3, 2022, Gains Network launched three blue-chip stocks AAPL, FB, and GOOGL on the Polygon mainnet, and after successful testing for 6 days, launched another 20 stocks. This was the first time leveraged trading of stock prices could be conducted on-chain (trading synthetic products based on the median aggregated price of selected stocks).
• In September 2023, Gains Network listed 18 new forex pairs. Additionally, Gains Network submitted an application for 7 million ARB tokens and a $100,000 GNS grant matching offer as part of the Arbitrum short-term incentive program.
• On October 1, 2023, gTrade v6.4.1 was launched, involving several changes, including the depreciation of GNS NFTs (in exchange for GNS tokens) and the redistribution of income from the development fund to $GNS stakers, increasing the income of GNS stakers by approximately 70%, with total fees for GNS rising from 30% to 60%.
• On January 27, 2024, Gains Network announced the launch of the new gTrade V7, introducing gETH, gUSDC, and a multi-collateral deposit feature, allowing traders to choose from a range of cryptocurrencies as collateral for their positions, currently including USDC, ETH, or DAI. The V7 update will also introduce liquidity yield tokens gUSDC and gETH.

Based on the above, we rate product revenue at the 90th percentile.

Token Economics

GNS Token

Overview of Total Token Supply

The original token of Gains Network was GFARM2 allocated on Ethereum, with the Development Fund and Governance Fund each accounting for 5% of the token distribution (totaling 10%), and after being bridged to the Polygon chain, it was split into GNS tokens at a ratio of 1:1000. GNS is currently distributed across the Polygon and Arbitrum chains, with an initial supply of 38.5 million and a maximum supply of 100 million. The maximum supply is only used as a fail-safe mechanism and is theoretically not expected to be reached. According to Dune data, as of January 31, the total supply of GNS was 33,942,395, lower than the initial supply, indicating a deflationary state, with the number of tokens minted being less than the number destroyed.

Minting and Burning of GNS

GNS is an application token, and its minting and burning are closely tied to the gToken vaults, maintaining a dynamic balance of collateralization. The vault serves as the counterparty for all trades on the platform, receiving assets staked by liquidity providers, generated trading fees, and losses incurred by traders, while paying profits to profitable traders. gTokens represent ownership shares of the underlying collateral assets in the vault. Currently, Gains Network has introduced three types of collateral: DAI, WETH, and USDC, forming gDAI, gETH, and gUSDC tokens and vaults. The portion of the vault that exceeds the staked assets (corresponding to 100% collateralization) constitutes the Over-collateralization Layer, serving as a buffer between traders and lenders, while the opposite indicates Under-collateralization.

If the vault is over-collateralized, a portion of the trader's losses (represented in collateral, such as DAI, which is income for the vault) will be transferred to a pool for over-the-counter (OTC) trading, allowing users to sell GNS for assets at a time-weighted average price (TWAP) over one hour, and the sold GNS will be burned. The advantage of OTC trading is that it incurs no price slippage and does not affect the GNS price on exchanges. When the GNS price drops rapidly, if the TWAP is higher than the exchange market price, holders will tend to sell GNS for DAI in the OTC market and buy back GNS at market price, forming a price balancing mechanism to some extent. If the vault is under-collateralized, GNS will be minted and sold through OTC trading for assets to replenish the vault. The maximum amount of GNS that can be minted every 24 hours is capped at 0.05% of the total supply, meaning that in the absence of any burning, the maximum annual inflation rate is 18.25%.

Thus, the actual supply of GNS is dynamically changing. When the gTrade trading platform has sufficient fee revenue and the total losses of traders exceed profits, the vault is in an over-collateralized state, and GNS will be sold in the OTC market for burning, leading to a decrease in supply and an increase in token price, effectively distributing profits to token holders. It can be seen that the vault serves as the short-term counterparty for all trades on gTrade, while GNS, through this mechanism, acts as the long-term counterparty.

Gains Network is improving and developing the governance framework of the platform, and GNS has now become the governance token of the platform, with one GNS token equating to one vote. Proposals are discussed and refined in the Discord forum before being transferred to the Snapshot platform for voting by holders.

GNS NFTs

Prior to V6.4.1, NFT bots were responsible for executing all take-profit, stop-loss, and limit orders on gTrade, and only NFT holders could operate these bots and receive a share of platform fees and GNS rewards. Gains Network distributed NFT points to liquidity providers who provided at least 1% of total liquidity, which could be minted into NFTs. Different levels of NFTs (bronze, silver, gold, platinum, and diamond) require different amounts of points, and correspondingly, the benefits that holders can receive also vary. After staking their NFTs, holders could receive a discount of up to 25% on the fixed spread and an increase of up to 10% in GNS staking rewards.

Due to the upgrade, the functions of NFT bots have been taken over by the Chainlink oracle network, and NFTs were deprecated in V6.4.1. Holders can exchange their NFTs for GNS tokens, with different amounts for different levels of NFTs. There are two options for redemption: one is to receive $GNS linearly over 6 months starting from the redemption date (with staking throughout the minting period); the other is to receive $GNS immediately but with a 25% penalty (the penalty will go to the governance fund, decided by the community for strategic use or burning).

Revenue Distribution and Token Value Capture

Taking DAI as an example, the fees collected by the platform are distributed to the governance fund, DAI stakers, GNS stakers, referrals, and the oracle network that executes limit orders in a decentralized manner.

From the perspective of specific fee distribution:

1. All borrowing fees will go into the DAI vault;
2. 18.75% of the opening and closing fees for limit orders will be allocated to the governance fund, 62.5% to GNS stakers, and 18.75% to DAI stakers;
3. 18.75% of the opening and closing fees for market orders will be allocated to the governance fund, 57.5% to GNS stakers, 18.75% to DAI stakers, and 5% to the oracle network;
4. Rollover fees, fixed spreads, and dynamic spreads are collected in a way that directly or indirectly (through opening prices) affects traders' P&L, entering the DAI vault in the form of traders' P&L.

From the perspective of user roles:

1. Rewards earned by staking GNS tokens are paid in the collateral of trades (DAI, WETH, and USDC). According to Gains Network's official data, since about 70% of trades on the platform are market orders, on average, 61% of trading fees from all orders will be allocated to GNS stakers;
2. 18.75% of trading fees from all orders will be allocated to DAI stakers;
3. 18.75% of trading fees from all orders will be allocated to the governance fund;
4. Referral rewards are drawn from the "governance fund" fees, which, according to Gains Network's official explanation, account for approximately 22.5% to 30% of opening fees, with the specific ratio depending on the volume of openings brought to the platform by the ambassador.

Based on the above, we rate token economics at the 96th percentile.

Data Verification

According to DefiLlama data, as of January 28, 2024, Gains Network has been deployed on the Arbitrum and Polygon chains, with TVL accounting for 88% and 12%, respectively.

As of January 30, 2024, the Market Cap/TVL ratio for Gains Network is 3.62, which is relatively low compared to the historical average of 4.84 over the past 24 months.

Chart 5: Gains Network Market Cap/TVL at Historical Low, Source: DefiLlama, Penta Lab

Based on the above, we rate data verification at the 83rd percentile.

Code Assessment

Code Update Frequency

Gains Network has two GitHub project pages: Gains Network and GainsNetwork(Org).

The Gains Network page contains the smart contract portion of Gains Network, divided into three main products: GNS-Token, gTrade, and GNS-ethereum. According to code submission records, GNS-Token has had no code adjustments since its launch, with only two code submissions at the beginning of the project in 2022. gTrade has three versions: v5, v6, and v6.1. The recently released gTrade v7 has no code submission records as of the submission date. GNS-ethereum is the smart contract for GNS Network on Ethereum, which has had no code adjustments since its release in 2023. GainsNetwork(Org) includes other parts of the Gains Network project, such as the nft-bot and component library SDK.

Overall, Gains Network has made a total of 2,721 code submissions in the past year across its two project pages, but the update schedule and detailed records for the smart contract protocol code are relatively opaque, and the workload of updates is not prominently reflected.

Chart 6: Gains Network Code Submission Records in the Past Year, Source: GitHub

Code and Roadmap Alignment

Gains Network's roadmap includes both short-term and long-term aspects. The long-term vision includes new products such as casinos and metaverses, but there has been no related planning in the project code so far. In the short-term vision, Gains Network's goal of building a decentralized leverage trading platform is gradually approaching through multiple iterations of gTrade, and the nft-bot has enhanced the level of automation in trading, with hopes of horizontally expanding to increase more application scenarios.

Technical Innovation: Custom Oracle DON

gTrade's proprietary oracle DON is a customized decentralized oracle network based on Chainlink, used to provide aggregated prices for leverage trading on gTrade.

Chart 7: gTrade Oracle DON Operation Mechanism, Source: Gains Network Official Website

The working principle of the DON is that when a trading contract on gTrade needs to execute an order, it requests the current spot price of the asset from the aggregation contract. At this point, the aggregation contract requests the current price from eight on-demand Chainlink nodes, each of which obtains the median price from the APIs of seven exchanges.

Chart 8: Interaction Interface with Chainlink Oracle Network, Source: GitHub

Chart 9: Callback Function, Source: GitHub

After sending the results to the aggregation contract, the aggregation contract compares them with the corresponding Chainlink price oracles, filtering out normal values that exceed 1.5%. Once at least three answers are received, the aggregation contract takes the median again and sends the final result to the trading contract to execute the order.

The advantage of the DON is that it can update prices in real-time based on user needs, rather than updating every second, saving gas fees, and ensuring price accuracy and security by using Chainlink price oracles as anchors. The DON can support gTrade's multi-asset trading needs, including cryptocurrencies, stocks, and forex.

Based on the above, we rate code assessment at the 77th percentile.

Valuation

Although GNS's TVL is only less than 7% of GMX's, its market cap to TVL ratio is already three times that of GMX, implying market recognition of its lending efficiency, growth potential, and security. Over a six-month horizon, we believe that with the inclusion of gETH and eUSDC and the expansion of new features, TVL has the opportunity to exceed $100 million. Based on the historical average market cap/TVL ratio of 4.84 over the past two years, we estimate a six-month market cap of $484 million.

Major Risks

Liquidity pool management risk, run risk, and attack risk.