Before we get started, this is not a recommendation or endorsement to buy any token mentioned.
Last week, we covered the rise of “real yield” in DeFi. The flagship protocol for this trend among builders is the decentralized spot and perpetuals exchange GMX, live on both the Ethereum L2 Arbitrum as well as the L1 Avalanche. Trading on GMX is supported by a multi-asset pool that earns liquidity providers fees from market making, swap fees, and leverage trading. The pricing on GMX exchange is supported by Chainlink oracles and an aggregate of prices from leading volume exchanges. Ownership of this multi-asset pool is represented by buying the token GLP. GMX uses a two-token system whereby GLP holders earn 70% of trading fees in WETH + esGMX rewards and GMX stakers earn 30% of trading fees denominated in WETH + esGMX (vesting linearly, every second, over 1 year). See below how much GMX and GLP holders earned over the past week.
LPs can mint/buy GLP tokens, which represent shares in the GLP pool, by depositing any of the index assets below. They can redeem for any index asset by burning their GLP holdings as well. The fees associated with buying GLP vary depending on which of the GLP index assets are currently underweight or overweight. If an index asset is underweight (ie ETH, WBTC, UNI, USDT), one is incentivized to mint the GLP by depositing this asset for lower fees vs if an index asset is overweight in the pool (ie LINK, USDC, DAI, FRAX), then one is disincentivized to mint GLP with these assets due to higher fees.
See fees estimated for minting/buying GLP with index assets
However, you’ll notice the fees flip when one wishes to burn their GLP to get back to any of the underlying tokens, incentivizing you to withdraw overweight tokens for lesser fees (ie LINK, USDC, DAI, FRAX) and disincentivizing you from withdrawing underweight tokens for higher fees (ie ETH, WBTC, UNI, USDT).
See different fees for burning/selling GLP for index assets
Beyond the sustained GMX weekly trading fees, what’s really clever about their Escrowed GMX (esGMX) token rewards is they can only be converted into GMX tokens through vesting, which requires continually staking the same amount of GMX or GLP tokens used to earn the esGMX rewards. This means the platform continually incentivizes long term LPs to remain in GLP, with the same amount of liquidity as originally provided to earn their rewards, while waiting for their esGMX rewards to fully vest. However, in doing so, you’re continually earning more vested rewards, thereby dangling a carrot in front of you to keep providing liquidity, keep earning trading fees, and keep earning GMX tokens that can later be claimed and staked.
For example, if you had staked 1000 GMX and earned 100 esGMX tokens, then to vest 100 esGMX tokens, you’d be required to keep staking 1000 GMX tokens or else esGMX tokens that have been unstaked and deposited for vesting will not earn rewards. Once vesting is initiated, your esGMX tokens will be converted into GMX every second and will fully vest over 365 days. esGMX tokens that have been converted into GMX are claimable at any time. TLDR on this is, you earn rewards, which vest linearly over a year, but those rewards will not vest if you quit being a liquidity provider who holds GLP. Given I covered more of this in relation…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
