As the cryptocurrency market matures, emerging decentralized derivatives exchanges like GMX v2, Vertex Protocol, Hyperliquid, and Apex Protocol are gradually coming to the forefront. These platforms are not only challenging GMX's leadership position but also signaling a significant transformation in the decentralized finance (DeFi) space. This Bing Ventures research article will use GMX v2 as a starting point to discuss the competitive landscape evolution and future trends of the decentralized derivatives market, focusing on GMX and its main competitors.

The Scale of the Decentralized Derivatives Market

Source: Coingecko

The table above shows the average daily trading volume data for spot and derivatives from decentralized and centralized exchanges in 2023. It reveals that the spot trading volume for decentralized exchanges is $1.84B, slightly higher than the derivatives trading volume of $1.44B. In contrast, the derivatives trading volume for centralized exchanges is $64.74B, far exceeding the spot trading volume of $19.18B.

From this data, we can see that the market for centralized exchanges is larger than that of decentralized exchanges in both spot and derivatives trading, with the derivatives market being particularly prominent. Despite the FTX incident and a series of collapses of centralized institutions, centralized exchanges still seem to be the preferred choice for the public. Moreover, the derivatives trading volume of centralized exchanges has a significantly higher ratio compared to the spot market, indicating that the activity level of the derivatives market on centralized exchanges far surpasses that of the spot market.

Source: DefiLlama

GMX v2 and Its Competitors

GMX v2: The Disruptive New Contender

We analyzed the market changes since the official launch of GMX v2. The early market was still dominated by GMX v1 and dYdX, with Mux Protocol and Apex Protocol trailing far behind in terms of TVL, while GMX v2 was just getting started with a negligible TVL. However, as of November 5, 2023, GMX v2 has evolved in less than four months to a point where it can be compared to Mux Protocol and Apex Protocol, even surpassing the TVL of the latter two (GMX v2: $89.27m; Mux Protocol: $57.71m; Apex Protocol: $45.51m). Along with the growth of GMX v2, the TVL of GMX v1 has also seen a decline. We believe this is due to users migrating from v1 to v2, as v2 indeed addresses many of the shortcomings of v1, leading to the current situation.

Source: Dune Analytics @gmx-io

Since its launch, GMX v2 has seen a rapid increase in average daily trading volume, marking a positive market response to its new features and improvements. The growth of TVL in v2 compared to v1 reflects the effectiveness of its optimization strategies, particularly in enhancing trading efficiency and reducing user costs. The increase in GMX v2's TVL not only indicates an influx of funds but also suggests a deeper shift: the migration of users from the old protocol and the onboarding of new users. This growth is accompanied by challenges, especially in how to sustain this momentum and attractiveness. The future of GMX v2 depends on its ability to maintain this growth trend while ensuring the platform's stability and security.

Source: Dune Analytics @gmx-io

From the above chart, we can see that the daily user count of v2 has caught up with v1. However, for GMX v2, the sources of user growth are more diversified, including migrating users from v1 and entirely new DeFi participants. The user growth reflects recognition of GMX v2's optimized trading experience and higher capital efficiency, attracting a broad user base. In terms of fees, the revenue from v1's fees still exceeds that of v2, reflecting the differences in their fee structures. The influx of users indicates GMX v2's success in market promotion and user education. However, the rapid growth of new users also brings challenges, particularly in converting these new users into long-term loyal users, which GMX v2 needs to address. We believe that GMX v2's future strategy should focus on continuous improvement of user experience and deeper community engagement to solidify its market position.

At the same time, to promote a balance between long and short positions and improve capital efficiency, GMX V2 has adjusted its fee structure. Specific adjustments include:

• Lowering opening/closing fees: The original 0.1% fee rate has been reduced to 0.05% or 0.07%. This rate depends on whether the opening position helps balance the market; if it does, a lower fee will be charged.
• Introducing funding fees: The stronger side in the long-short comparison needs to pay a funding rate to the weaker side. This rate is not fixed but is adjusted in segments based on the position ratio. For example, if the total long position exceeds the short position, the funding rate that longs need to pay to shorts will gradually increase until the difference between the two falls below a specific threshold or reaches a certain cap; once the funding rate reaches the cap, it will remain unchanged. The reverse is also true. This dynamic segmented fee mechanism can increase arbitrage opportunities, attracting arbitrage capital and promoting balance between long and short forces in the market.

In summary, we believe one of the biggest challenges GMX v2 faces is how to maintain the platform's security and stability while experiencing rapid growth. In the DeFi space, security incidents are frequent, and GMX v2 must ensure its platform is protected from such risks. Another challenge is how to continue to maintain its advantage in a fiercely competitive market, especially when facing competition from other emerging protocols. GMX v2 also needs to focus on continuous innovation to keep its products and services attractive. Ultimately, GMX v2's success will depend on how well it balances growth with stability, innovation with security.

Source: DefiLlama

At the same time, we compared the monthly TVL change rates of the top 15 derivatives protocols as of November 6, 2023. The increases of dYdX and GMX are not particularly impressive, while the dark horses are Vertex Protocol, Hyperliquid, and Apex Protocol, with TVL increases of 63.22%, 30.69%, and 25.49% respectively over the past month. Therefore, we will explore these three protocols one by one in the following sections, analyzing the narratives or main drivers behind their increases.

Vertex Protocol: Competitive Edge Through Low-Cost Operations

Vertex Protocol is a decentralized exchange that integrates spot trading, perpetual contracts, and money markets. The protocol uniquely combines a centralized limit order book (CLOB) and an automated market maker (AMM) to ensure enhanced liquidity, thereby transforming the user trading experience.

The protocol is built on the second layer (L2) of Arbitrum, aiming to reduce gas fees and combat miner extractable value (MEV), promoting efficient and cost-effective trading in the decentralized space. Vertex Protocol has three main pillars: an off-chain sequencer, an on-chain AMM, and a robust on-chain risk engine. The order book and AMM collectively accumulate liquidity, not only from API market makers but also from on-chain contributors. Its risk engine ensures rapid liquidation, while the dual liquidity sources allow traders to achieve better prices. The growing trading volume on Vertex is a testament to the success of this unique model.

Vertex Protocol's cross-margin system allows both skilled and novice traders to use it easily, significantly lowering margin requirements. For example, if a trader has a long position in spot ETH with leverage and a short position in ETH perpetual contracts, the combined margin requirement may be lower than the margin required to open two positions separately using independent accounts. By introducing the concept of portfolio margin, this system allows traders to adjust the leverage levels of different positions to meet their personalized risk preferences. If the value of the long ETH spot leveraged position declines, the excess margin from the short-term ETH perpetual contract (unrealized gains) can be used to maintain the required margin level, preventing the long ETH spot leveraged position from being forcibly liquidated. This shows that Vertex's approach maximizes capital efficiency.

Project Performance

Since the project's inception, the TVL and derivatives trading volume of Vertex Protocol have shown a steady upward trend.

Total Locked Value

Although Vertex Protocol offers an innovative trading experience, its TVL still falls short compared to GMX. This is mainly because its lending products are not yet fully matured, currently supporting only a limited number of mainstream tokens, such as wBTC, wETH, USDC, etc., totaling five. This limits its ability to attract more locked value. Additionally, as of the time of writing, its native token VRTX has not yet been officially launched, thus lacking the functionality for users to earn interest through staking, which is another reason for the current low TVL.

Derivatives Trading Volume

In the fiercely competitive decentralized exchange market, Vertex Protocol has notably captured 15-30% of the daily trading volume, demonstrating outstanding performance even compared to industry giants like GMX, Gains, and Kwenta. Particularly, Vertex shows a clear lead in trading volume compared to GMX. For an emerging project to surpass the trading volume of other leaders in a short time is a strong indication that its unique project design has successfully attracted users within the industry.

Trading Fees and Revenue

GMX's Fees; Source: DefiLlama

Vertex Protocol's Fees; Source: DefiLlama

Compared to Vertex Protocol, GMX charges higher trading fees. Vertex Protocol implements a zero-fee policy for makers and offers very low fees for takers on major trading pairs (2 basis points for stablecoin pairs, 2-3 basis points for core markets, and 4 basis points for non-core markets). In contrast, GMX v1 charges a fee of 0.1% for opening and closing positions (reduced to 0.05% or 0.07% in v2), and if the trade involves a swap, it can incur additional fees of up to 0.2% to 0.8%. This advantage in fee structure makes Vertex Protocol more attractive in the market, although its lower trading fees may lead to revenue growth not being as significant as trading volume growth.

We believe that Vertex Protocol has rapidly established its position in the market by offering a highly competitive low-fee structure. This low-fee strategy has attracted a large number of cost-conscious traders, especially under current market conditions where users are increasingly focused on trading costs. However, in the long run, this strategy may face challenges in profitability, particularly in maintaining high-quality services and platform operations.

Therefore, Vertex Protocol needs to explore other value-added services and revenue models while attracting users with low costs to ensure long-term sustainability. Although GMX's daily trading fee revenue was once very high, it has recently dropped to a level similar to that of Vertex Protocol (around $100K). Combined with Vertex Protocol's growing trading volume, its future revenue has the potential to exceed GMX.

Hyperliquid: On-Chain Order Book DEX on Its Own L1

Hyperliquid is a decentralized exchange for perpetual futures based on an order book model. This DEX operates on the Hyperliquid chain, a first-layer blockchain built on Tendermint. One key reason for Hyperliquid's rapid development is its own layer network. This allows the Hyperliquid team to flexibly adjust gas fees, MEV, slippage, etc., to achieve the fastest and most efficient trading experience. Its performance is powerful enough to support 20,000 operations per second.

Having its own layer network also enables them to develop an on-chain order book that ensures complete transparency for every executed trade, which is particularly necessary in the market following the FTX incident. Hyperliquid L1 allows them to build the platform as decentralized, trustless, and permissionless as possible.

On Hyperliquid, the treasury provides liquidity for on-chain trading strategies. The treasury can be automated or managed by individual traders. Anyone who deposits tokens into the treasury can earn profit sharing, whether they are a DAO, protocol, institution, or individual. Treasury owners can receive 10% of the total profits. Hyperliquid is also the first exchange to list perpetual contracts for the friend.tech index. Initially based on TVL, it was changed to the median price of 20 mainstream accounts after it became clear that the definition of TVL could be manipulated, considering the growing number of open contracts.

Project Performance

The project's TVL has also shown a steady increase, similar to Vertex Protocol, with monthly derivatives trading volume approaching $1.5B since its launch, peaking at $8B, although on average, Vertex Protocol still performs better.

Total Locked Value

Although Hyperliquid's total locked value (TVL) cannot be compared to GMX, when compared to Vertex Protocol, its TVL has been slightly lacking except for September. The low TVL is mainly due to the limitations of its staking and deposit functions. The project primarily locks funds through Vaults, where users deposit tokens to earn profit sharing from the treasury. However, this imitation trading approach inevitably involves certain risks, as the profit and loss of trades depend entirely on the trading skills of the Vault Leader. Therefore, this does not provide much assurance for investors and is less attractive.

For example, the above chart shows the performance of Hyperliquidity Provider (HLP), which is the protocol's own treasury, primarily engaged in market making, liquidation, and earning a portion of trading fees. We can see that the return on investment is negative (-2.41%), and the profit-loss ratio continues to decline, indicating that depositing funds into the Vault may not be a wise choice for users.

Derivatives Trading Volume

Source: Dune Analytic @shogun, as of Nov 5, 2023

Although it does not have the significant market share of Vertex Protocol, as an emerging protocol, it has about 6% market share, which is decent, but the trading volume has declined in the past month, failing to maintain previous traffic.

Trading Fees and Revenue

Hyperliquid's trading fee structure is as follows:

• Takers pay a fixed fee of 2.5 basis points, while makers receive a rebate of 0.2 basis points. Referrers earn 10% from the trading fees of the takers they referred (i.e., 0.25 basis points). The remaining fees flow to the insurance fund and HLP (approximately 2.05 basis points).
• Compared to Vertex, the team or insiders holding a large number of tokens are the main beneficiaries of the fees, whereas in Hyperliquid, the fees are directly allocated to the community: 40% goes to the insurance fund, and 60% goes to HLP.

Hyperliquid's fee structure particularly emphasizes distributing more returns to the community. In contrast, Vertex Protocol offers zero fees for makers and very low fees for takers on major trading pairs, with part of its trading fees supporting its Vaults and liquidity providers. This difference shows that Hyperliquid is more inclined to reward community members who directly support network operations and risk management in its fee distribution.

ApeX Protocol: Multi-Chain Exchange Empowered by ZK Rollup

ApeX Pro is built using StarkWare's Layer2 scaling engine StarkEx, employing an order book model to provide cross-margin perpetual contract trading, achieving a secure, efficient, and user-friendly experience. At the same time, it is non-custodial, meaning that traders' assets are entirely on-chain and controlled by the traders themselves through their private keys. The use of ZK Rollup scaling solutions enhances the security of trades and protects user privacy. Compared to similar products like dYdX and GMX, ApeX offers more favorable trading rates. Its staking rewards, token buyback rewards, and referral reward mechanisms also increase its attractiveness.

The main attractions of ApeX's staking mechanism for users include:

• No fixed term or schedule. Users can start or cancel staking at any time. The longer users stake, the greater their rewards.
• Staking rewards not only consider the staked assets but also increase based on users' trading activities. The staking reward formula takes into account the score of "T2E" activities, bringing additional earnings to staked users.

Project Performance

The TVL of Apex Protocol has also steadily increased since the project's launch. Its monthly derivatives trading volume has remained stable at around $1.7B, similar to the previous two protocols.

Total Locked Value

Apex Protocol's TVL is significantly higher than the previous two, with its two main revenue features, Smart Liquidity Pool and Apex Staking Pool, playing a significant role in accumulating TVL, with past participation being very enthusiastic. The staking on the platform offers an annualized yield of up to 56.31%, while the Smart Liquidity Pool also provides decent returns for users providing liquidity for its market-making strategies, with a 7-day annualized yield of 13.03%.

Derivatives Trading Volume

Source: DefiLlama

Compared to the other two protocols, Apex Protocol's trading volume data shows a more stable growth trend, indicating a steady increase in its user base and engagement.

Trading Fees and Revenue

Apex shows a similar growth trend in fee revenue compared to Vertex. We believe that Hyperliquid and Apex Protocol have established their market positions by focusing on specific market segments and user groups. This strategy of concentrating on specific niches allows them to meet the unique needs of these markets more effectively. Hyperliquid's innovation in providing an on-chain order book has built its reputation among specific user groups. Apex Protocol has gained recognition among users through its cross-chain capabilities and efficient trade execution.

Comprehensive Comparison

Based on the existing data, we have scored the four protocols (GMX v2, Vertex Protocol, Hyperliquid, and ApeX Protocol) across five aspects: total locked value (TVL), trading volume, user growth trends, fee structures, and market distribution, to provide an overall comparison of their strength and robustness. Some of the scoring results are shown in the chart below.

Source: Bing Ventures

As the current market leader, GMX v2 performs well on most metrics, particularly in TVL and trading volume. It also excels in innovation, user experience, and community engagement, but regulatory compliance may be an area for future improvement.

Vertex Protocol stands out in its fee structure, reflecting its competitive advantage in the market. Although it slightly lags behind GMX v2 in TVL and trading volume, it shows potential in user growth and community engagement.

As a relatively new platform, Hyperliquid scores lower across all dimensions, reflecting the challenges faced by emerging platforms. We believe it has the potential to catch up in terms of security and user experience.

ApeX Protocol is similar to Vertex Protocol in most metrics but slightly excels in community engagement and user experience.

Future Trends in the Decentralized Derivatives Market

In summary, we believe that GMX's position in the decentralized derivatives exchange market is indeed being challenged by emerging protocols, particularly Vertex Protocol. With its advantages in trading fee structures, it has begun to capture more market share. This competitive landscape indicates that even in this relatively mature market, innovation and user-friendly pricing strategies remain effective means to attract users and increase market share.

From the perspective of total locked value (TVL), the current performance of these three emerging projects is not sufficient to compare with GMX. This reflects a real issue: users remain cautious about staking large amounts of assets on these new platforms. This is due to factors such as insufficient trust in new platforms, immature product features, or a lack of market awareness. Therefore, for these emerging protocols, attracting user capital and increasing TVL will be a significant challenge they face.

In addition to market competition, the future development of these protocols will also be influenced by various factors such as market demand, technological advancements, and regulatory environments. We believe the following ten trends will shape the future of the decentralized derivatives market. Recognizing and responding to these trends will be crucial for both existing and new platforms.

1. Market Reconstruction

The decentralized derivatives market is undergoing an unprecedented reconstruction. Emerging platforms like GMX v2 and Vertex Protocol represent not just technological iterations but fundamental shifts in market demand and user expectations. This shift is not merely about adding features but is a comprehensive revolution in user trading experience, capital efficiency, and market transparency. We foresee this leading to a significant reshaping of the market landscape, where old leaders may be replaced by new, more agile platforms that better meet market demands.

2. Acceleration of Technological Innovation

Technological innovation is at the core of driving new platform development. We expect to see more innovative trading mechanisms in the future, such as more efficient liquidity pools and improved risk management tools, all aimed at addressing the unique volatility and liquidity challenges of the crypto market. Smart contracts will also undergo further optimization, not only in terms of security but also in how to implement more complex and efficient financial strategies through smart contracts. This ongoing technological innovation will be key for platforms to maintain competitiveness.

3. Rise of Cross-Chain Operations

As the crypto market matures, users increasingly need to conduct seamless transactions across different blockchains. The development of cross-chain functionality not only enhances asset liquidity but also provides users with broader trading opportunities. We anticipate that platforms supporting multi-chain operations will gain a competitive advantage due to their enhanced interoperability.

4. Increased Regulatory Adaptability Requirements

As the global regulatory environment evolves, platforms that can flexibly adapt and operate in compliance while maintaining decentralized characteristics will have an advantage. This means that platforms must not only focus on technological development but also closely monitor international regulatory dynamics and adjust their operations to comply with legal requirements in different regions. This regulatory adaptability will become an important standard for distinguishing between platforms in the future.

5. Comprehensive User Experience Revolution

User experience will be a key differentiator among platforms. As the user base of decentralized finance expands, simplifying user interfaces and trading processes, and lowering technical barriers will be crucial for attracting a broad user base. This is not just a matter of interface design but a rethinking of the entire trading process. How to provide a user experience that rivals or even surpasses centralized exchanges while maintaining decentralized characteristics will be the primary issue that each platform needs to address.

6. Smart Contract Security Remains Important

Smart contracts are the cornerstone of decentralized finance, and their security directly affects the platform's reputation and asset safety. Therefore, strengthening security measures for smart contracts, such as conducting stricter code audits and establishing bug bounty programs, will be important means to enhance platform credibility. This is not only to prevent financial losses but also to build user trust in the platform.

7. Financial Tool Innovation Leads to Improved Capital Efficiency

Decentralized platforms face significant challenges in capital utilization. Traditional financial markets have mature tools and strategies to improve capital efficiency, while this area still has considerable room for development in the crypto market. Innovative financial tools and complex trading strategies will be key focuses for the future development of decentralized platforms. This will test market participants' understanding of the market and their ability to innovate financially.

8. Deepening Decentralized Governance

Decentralized governance is one of the core characteristics of blockchain technology. Effective community participation and transparent decision-making processes will enhance the platform's credibility and user engagement. We expect that future platforms will place greater emphasis on community opinions and incorporate community participation as an important part of the decision-making process. This will not only help enhance user loyalty but is also a key step towards achieving true decentralization.

9. More Diverse Synthetic Assets and Derivatives

As the market develops, users' demand for diversified investment tools is growing. Synthetic assets and various types of derivatives will be key to meeting this demand. We anticipate that future decentralized platforms will offer a wider variety of derivatives, including options, futures, and various composite financial products. A more diverse product offering will attract a broader investor base and significantly enhance market depth and liquidity.

10. Liquidity Mining and Incentive Mechanisms

To attract and retain users, new liquidity mining and incentive mechanisms may be created and implemented. These mechanisms must not only attract user participation but also maintain user activity over the long term. We expect that future incentive mechanisms will be more diversified and sustainable, not just simple token rewards but also long-term rewards based on user loyalty and engagement.