It has always been said that the cheapest way to learn is through the mistakes of others and we are witnessing these mistakes with names and surnames, where large and (presumably) reputable CeFi companies, which move millions of dollars with certain solvency thanks to large agreements and of course thanks to the knowledge and experience they have in investment, are today on the verge of liquidation due to poor management, excessive leverage and their lack of ability to understand how a crypto winter behaves to properly measure the risks. It is a danger and recklessness to leverage yourself in a sector as volatile as this, put your capital in chains with very low LTV in DeFi and promise/assure high returns.
I leave you, as an educational note, some concepts that you must have clear if you are going to manage capital and want to be successful in DeFi:
How market cycles work.
Due diligence, read the T&C of the protocols/platforms.
Risk management and operational security.
Macro environment (being risk assets).
Understand well the tokenomic/utility of the token you provide liquidity for.
Well, going to the topic of today’s article, I like nothing more in a bear market than to investigate and detect financial products in DEFI through protocols that bring innovation, that are able to generate cash flows per use and that connect money from different networks. In this aspect has caught my attention the decentralized exchange GMX (https://gmx.io/), which is powered by Avalanche and Arbitrum, two great networks that in the medium term will give a lot of play when it comes to bringing to the table real alternatives to all the power of creation and execution that the ethereum network has.
The first thing to do is to see its basic financial metrics, since being an exchange it is easy to detect or predict how good its business model is and how it is driving, being able from there to obtain an estimate of whether it has upward trajectory based on the growth by adoption that it may have. The protocol currently earns 16 million dollars a year in fees (exactly in just 10 months of life and remembering that we are in full bear market, not any protocol can or has the ability to generate income), that is, and to understand us, it already has income as a traditional company.
With this data, we can compare GMX with other exchanges in the same sector, the perpetual derivatives, to know if we are below or above competition, and detect if we are undervalued or overvalued based on the P/E. The lower this P/E is, the better chance we have to detect a possible gem and ride the wave of its growth, because once they become successful in the industry, this P/E shoots to higher values losing all the interest of opportunity.
P/E = Fully diluted market cup / Annualized protocol revenue
P/E = 236,000,000 / 16,000,000
P/E = 14.75X
Its direct competition which is Synthetix (SNX) which has a P/E = 8.85X.
The most interesting functionality for a portfolio manager or profitability producer in decentralized finance is not precisely the buy/sell (which can be done, and for traders in an excellent option to work this type of operations with leverage and in different networks at very low cost), for me it is a more innovative and interesting function as it helps to develop strategies based on objectives and risk diversification, by providing liquidity in GMX, since in that way they are able to create and offer market to traders or users who are looking for new platform to operate. In return we will receive a proportional part of fees, and we will be generating passive income just like a bank does when it lends money and charges interest or commissions for providing liquidity to the other party.
To begin with and to give logic to its business model, DEX has 2 tokens:
1) GMX which is a utility and governance token, with mixed use to generate turnover and provide voting to the holder.
2) GLP, which is a special token that provides liquidity to the DEX.
Therefore, we are dealing with 2 well identified assets, separated and packaged in one purpose. Simplicity is something that overwhelms me and I value above all, and this is the genius and difference of GMX against other DEX in the sector, since to provide liquidity we do not have to create pools, nor divide our contribution 50% in 2 different assets, nor work complex price ranges to capture value, We simply buy the GLP token and put it in stake, and we provide liquidity to the protocol, and depending on the network you choose you will get an annual APR or another, specifically a liability with an annual interest rate of 34% in the avalanche network or 37% in the arbitrum network.
The GLP token is an index and depending on the network with which we connect it will be composed of some assets or others (this must sound like the S&P 500 index, one of the most important stock market indexes in the United States, as it is composed of the market capitalization of the best 500 companies), in avalanche it is composed of BTC, ETH, AVAX, USDC.e and USDC, therefore its price fluctuates in ratio as do the prices of the underlying assets that compose it.
At this point, it is important to understand that 63% of the composition of this index is in stable currency, so it is well designed to withstand a bear market due to the overexposure of the GLP token to stable currency, which acts as protection, providing it with a stable behavior, an interesting attribute for the design of medium-long term strategies.
The protocol at the time of composing the index has clear the target composition it wants for this, for example in the avalanche network as shown in the image, they want to provide the index with 12.5% of AVAX, 12.5% of ETH, 25% in BTC, 33% in USDC.e and 16% in USDC. As we can currently see it also tells us what percentage each asset is at in the index, where AVAX is at 7,19%, ETH is at 12,35%, BTC is at 21,01%, USDC.e is at 42.16% and USDC is at 17,26%.
All this is very interesting due to the fact that;
1) we can buy the GLP index with any of the tokens that compose it, but if you do it with those in which the composition is low, you have the incentive that you will not be charged any fee, therefore, everything you invested is transmitted to the purchase directly.
2) We can staking this token automatically when you buy it (you don’t have to do anything, you don’t spend anything in fees) with an APR of 38.15%. The returns will be paid to us 31.26% in AVAX and 6.89% in the utility token of the platform, GMX.
3) The GMX token yields themselves will automatically compound interest as we receive them, with an annual interest rate of 30.65% per annum.
I end by remarking how interesting this new type of value construction and market generation is, to capture more and more sophisticated capital, also because this protocol is currently ranked No. 1 in the network of arbitrum by TVL, well ahead of CURVE, SUSHISWAP or UNISWAP, for the large number of users, and for the excellent product that gives us to work and manage efficiently a bear market. Once a correct planning has been prepared, I am already preparing my monitoring template to see how it behaves from now on and to be able to see (as I imagine it will be) an excellent catalyst of good results for absorption and conversion.