In Jordi Alexander’s recent Twitter Space, AlgodTrading joins Jordi to discuss the popular GMX DEX design and if it can be sustainable.
As per agreement, Jordi deleted the twitter space after 24 hours, and it currently is unavailable.
Read our notes below to learn what was discussed.
Jordi
Good time to have discussions around CEXs and look into what’s sustainable.
Recently wrote a thread against oracle-based exchanges and in favor of order book exchanges.
Algod
Gives a disclaimer he is one of the top holders of $GMX and got interested in $GMX because of the tokenomics.
Likes the idea of not having an order book in a DEX.
Agrees with the idea that GMX needs to take measures to scale and thinks it’s possible.
Having liquidity on order books is incredibly expensive.
dYdX is a good example of what happens to a DEX when they run out of incentives.
Jordi
Jordi’s firm Selini Capital are large market makers on dYdX and other venues.
The best exchange is the one that has good liquidity, and the ability to get a size in without a lot of slippage.
Derivative markets are usually bigger than spot markets in terms of volume because they allow for more capital efficiency with leverage and are much more liquid in general.
Perpetual contracts have a funding rate based on the spot price oracle.
GMX uses derivatives price oracles from exchanges like Binance and it becomes unstable like the 2008 Big Short with Credit Default Swaps where you put too many bricks on top of each other.
Algod
Says he’s not affiliated with GMX and he could be wrong but GMX bases their price based upon spot market oracles.
There has been a maximum Open interest of $200m, one could open between $30m to $50m position size on Bitcoin at the moment.
It will be very expensive to attack GLP.
Quite easy for GMX to take measures to ensure they are not exploited.
Jordi
Agrees with Algod that there are ways to limit the damage by restricting how much people can trade but that is a scalability problem.
GMX is like a casino that takes money from losing retail players but characters like Avi Eisenberg are going around trying to exploit protocols and give them bad debt just using the weakness in the code.
Algod
GLP should be seen as a market marker and GLP does have directional exposure.
Even if GLP takes a small hit, it will be a net positive.
Jordi
If an institution puts $500m into the $GLP pool, then it will dilute the yield as there will be less dollar value trading against the pool.
Market makers need to be smart as their orders can be hit anytime, which could be costly.
GLP-like models can work to a certain extent, but they cannot be the future of DeFi.
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Algod
Hopes hedge funds enter the $GLP pool.
What people are most worried about with GMX exchange is the manipulation that could happen.
Doesn’t think there’s a big difference in sustainability between the order book and the GMX model.
Jordi
dYdX with an order book incentivizes market participants to reverse perps price to spot market price by changing the funding rate and there’s not much to exploit there.
But with GMX using spot market oracles, exploiters could create bad debt for the protocol.
Orderbook-based model and Oracle-based model scale very differently.
Algod
GLP could take a small hit as many market makers take in the market.
GMX is profitable being the counterparty to unprofitable traders.
GMX won’t be able to overtake Binance in terms of Open Interest and liquidity.
Jordi
It is better to have different forks of GMX than trying to scale GMX to get liquidity like Binance.
Uniswap is like Binance because it has liquidity and lesser slippage.
Algod
GMX brings in a lot of fees unlike GMX forks and GMX has the first-mover advantage.
Undoxxed team vs Doxxed Team
Algod
Doxing doesn’t prove any legitimacy, the past year has proven this.
GMX backend will work even if the govt tries to catch the team.
dYdX blocking wallets sanctioned by OFAC is not decentralization.
Orderbook and the Cost of Market Making
Algod
dYdX airdropped the tokens and bootstrapped very inorganically as liquidity was unsustainable.
$dYdX is highly inflationary as a lot of tokens will come become unlocked and they should focus on sustainability instead of giving out incentivize market makers' liquidity.
Jordi
dYdX incentive model is a very standard one as even CME has to create an environment where there’s good liquidity and allows better execution for the traders.
Retail thinking dYdX is bad because of the down-only price action is stupid.
Q&A
Q: GMX cannot be compared to other forks because the forks like Gains Network which is a bucket shop (has enough in stablecoins to pay traders when they win)
A: Jordi: Thinks both won’t be scalable and there is no difference because there is no liquidity that separates the protocols. Doesn’t think one is superior and both have different weaknesses. Thinks forks just need marketing and incentives to get traders to trade on the fork.
Algod: Prefers GMX as it has better safety to the upside, GMX innovates much quicker.
Q: What could GMX do to attract more GLP participants?
A: Jordi: Would take the $GMX bet because it has more upside and if there’s an exploit both $GMX and $GLP are going to zero.
Algod: 20% yield is attractive and it is fine to have directional exposure.
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TODAY’S EDITION IS BROUGHT TO YOU BY TOOLS FOR CRYPTO
Between wallets, portfolio trackers, analytics dashboards, & more, keeping up with all the tools in crypto is a task in and of itself. Luckily, Tools for Crypto provides informative newsletters and tweets, helping you make the most of the many tools in crypto.
The tools you use to interface with the Web3 world are important - don’t neglect them.
Act now, click the link below to optimize your crypto efficiency.