Author: @0x长安 | @RealResearchDAO
Foreword
1.Last year was the first year of the outbreak of the new public chains. The congestion of Ethereum made on-chain derivatives trading less popular in the bull market.
L2's high speed and low gas provide an excellent venue for on-chain derivatives trading, and now L2 has become the main battlefield for trading derivatives.
2.Improper tokenomic models with high leverages in the bull market have made all assets trapped in the stage of releasing bubbles. In the stage of a bear market where value returns, people are more willing to invest in projects that generate real returns.
3.Binance, FTX and other exchanges have listed $GMX, and the on-chain derivatives trading platform has attracted more market attention.
This article will introduce an on-chain derivatives trading platform similar to GMX - Gains Network.
Introduction
1.1 Project Introduction
gTrade is the first product developed by Gains Network, which is a decentralized synthetic leveraged trading platform built on Polygon. Not only can it trade cryptocurrencies, users can also trade stocks and forex. Compared with GMX, gTrade provides higher leverages, i.e. trading cryptocurrencies allows up to 150x leverage, stocks trading allows up to 50x leverage, and forex trading allows up to 1000x leverage.
1.2 Conduct
$DAI is the only currency for all trading pairs on gTrade. Users will need to deposit $DAI in gTrade's $DAI vault in order to trade. When a user opens a long/short position, the vault temporarily locks the user's corresponding amount of deposited $DAI, until the user closes the position and ends the thread. gTrade will use the oracle to calculate the price fluctuation of the target since the position opens, calculate the user's profit and loss, and finally withdraw the corresponding due amount from the $DAI vault.
1.3 The Logic behind Realization
gTrade captures the price of the trading target through the oracle, and then updates the price to the blockchain, which means that whether a user opens a long/short position will not involve the actual buying and selling behavior of the target. Users will refer to the actual price to play the game.
Therefore, the trading behavior of the platform is a game between traders and LPs, and gTrade is also based on the 20%/80% laws of the market: only 20% of traders can make profits, while the 80% lose money.
1.4 Insurance
It can be seen from the above figures that by far, the total profit and loss of realized positions combined is -4.01m $DAI. The only time period where traders profit was from April to May. At other times, traders lose money. The profit realized from April to May was abnormal due to the UST depeg crisis that caused $LUNA to crash, when traders shorted $LUNA and realized high profit. If we see from an extended period of time, traders are losing money.
The crash of $LUNA made Gains Network aware of a loophole in gTrade that could potentially lead to a death spiral of $GNS. To study this vulnerability, we have to mention gTrade's $DAI insurance mechanism.
Since gTrade is a gamble that is played between traders and LPs, the $DAI insurance is less funded when traders are profitable. When traders lose money, LPs make money and the $DAI insurance funds increase.
When the ratio of $DAI insurance balance/DAI insurance TVL is greater than 130%, gTrade will use the excess $DAI to buy back $GNS from the $GNS-$DAI pool and burn them.
Conversely, when the ratio drops lower than 100%, gTrade will mint $GNS and sell them via the $GNS-$DAI pool, and the $DAI obtained will be returned to the $DAI insurance.
gTrade sees risk from $LUNA. The team believes that this black swan event will lead to abnormally large profits.
If within this short time period traders have made large profits - LPs will withdraw funds (they don’t want to lose more money) - $DAI insurance balance/$DAI insurance TVL will drop lower than 100% - leading to a constantly increasing $GNS supply - triggering a death spiral.
Therefore, the gTrade team revised the buyback ratio of $GNS. The original ratio was greater than 110%, and was later revised to 130%. The purpose is to keep the funds of the $DAI insurance in a sufficient state for a long time, reducing the possibility of a large profit for traders when the incidents happen again, resulting in the death spiral of $GNS.
In order to prevent LPs from suddenly making profits when traders, or LPs suddenly withdrawing all staked $DAI due to evildoing, the $DAI insurance limits LPs to only withdraw 25% of the maximum position funds every 24 hours, which means that the fastest withdrawal of all funds can only be conducted in 4 days.
3. Economic Model
Supply cap: 100,000,000 $GNS
Initial Supply: 38,500,000 $GNS
Amount in circulation: 28,972,366 $GNS
In addition to the over-collateralization rate of less than 100% where $GNS will be minted, there are three other ways of minting $GNS:
1.$GNS rewards for providing liquidity in GNS/DAI pools
2.Earn $GNS by participating in the referral program
3.Hold Gains NFT and run a bot that executes limit orders and liquidates on gTrade in exchange for $GNS
Every time $GNS is minted as a reward to a user, an equal amount of $DAI goes into the insurance. Therefore, $DAI becomes the value support behind every $GNS. gTrade uses the real demand created by its own platform to endow $GNS with more value. Users do not have to worry that $GNS will be as inflated as most of the tokens in the market.
As of now, 25% of the initial supply tokens have been burned. Even if the limit of supply is 100 million, it will never be reached in theory, because traders are all losing money in a longer time period. The number of tokens will also be deflationary, and $GNS will also increase in value since the supply decreases.
3.1 $GNS staking mechanism:
"Real Yield" is a popular term recently, referring to those DeFi protocols that can clearly capture value, generate real demand, and create value from demand.
gTrade is one of the representative product that can generate Real Yield. In order to avoid the problems of early DeFi projects and to pursue the real income of the platform, gTrade shares the income of the platform with the holders of $GNS, so users who stake $GNS will be rewarded with $DAI.
All rewards come from the platform's business income, which are:
·40% of the market order fee (0.08%)
·15% of the limit order fee (0.08%)
·40% of transaction closing fee (0.06%)
70% of orders on gTrade are market orders, which means that nearly 33% of platform revenue goes to $GNS stakers.
3.3 NFT combined with DeFi
Another interesting point is that gTrade integrates NFTs into DeFi products to explore the deeper value of NFTs. For a long time, NFTs have been popular as social media profile pictures. But as more and more exquisite NFTs are released, people are gradually exhausted of such NFTs. Protocols began to explore the practicality and value support of NFT.
gTrade has produced an answer sheet on the next generation of NFTs. Gains Network NFTs are available in five tiers: Bronze, Silver, Gold, Platinum, and Diamond. A total of 1500 pieces in total is in the collection. Gains Network endows NFT with more use value, so as to give NFT more value support.
·Spreads are reduced when trading.
·Run bots to earn rewards for executing liquidation and limit orders.
·Stake up to three NFTs to boost your LP rewards.
The transaction fee reduction allows high-frequency traders and quantitative robots to save more transaction fees. This transaction fee can be easily calculated. As long as the transaction fee that can be saved is greater than the price of NFT, traders will buy it. The value of NFTs is also backed by the needs of traders.
Therefore, from $GNS to Gains Network NFT, the underlying logic of Gains Network is to create actual value support.
4. Market competition
Since the product implementation mechanism of GMX and Gains Network is similar, and the fact that Gains Network will soon be launched on Arbitrum too, this section will majorly compare GMX and Gains Network.
4.1. GMX is more popular with mass traders
The entry barrier of gTrade is high, the position size cannot be less than 1500 $DAI, Retail investors with small transaction amount are blocked to trade on gTrade. This vacancy will be occupied by other leveraged trading platforms, and GMX will be more favored by retail traders than gTrade.
4.2. gTrade has more trading assets
gTrade allows not only cryptocurrencies, but also forex and stocks. At present, GMX has fewer tradable assets, which may not meet the needs of most people.
4.3. gTrade allows higher leverages
gTrade's allows leverage up to 150X for cryptocurrencies, while GMX provides up to 30X. Higher leverage means higher risk and higher capital efficiency, which is actually better for derivatives trading platforms under this type of mechanism.
4.4. gTrade can better meet the needs of professional traders
gTrade has a stop-loss function that is not currently available in on-chain leveraged trading platforms. It is impossible for traders to look at the market fluctuations all day long, and the stop loss function can effectively help traders execute their trading strategies.
4.5. A Comparison of daily users over the past 60 days:
GMX: average 700 daily users
Gains Network: average 100 daily users
4.6. A Comparison of new users:
The average daily number of new users of gTrade is 20
The average daily number of new users of GMX is 700
4.7. A Comparison of transaction volume
In terms of transaction volume, even though gTrade has far fewer users than GMX, the gap in transaction volume is not as big as the gap between users on both sides.
4.8. A Comparison of transaction fees
gTrade charges 0.06% for market orders, 0.08% for limit orders for all cryptocurrencies, and 0.006% - 0.008% for forex. This fee is charged when opening and closing positions.
GMX charges 0.1% of the trading position size as a handling fee for opening and closing positions.
5.Summary
The product concept of gTrade revolves around the words “'Real Yield'", and investors prefer to invest in such protocols that continuously generate income, rather than rely on the income generated by liquidity mining. "Real Yield" also secures that the value of the product is sustainable.
Secondly, the core of the Gains Network lies in $DAI, and the risk will also come from $DAI. gTrade relies on $DAI too heavily that if $DAI faces unknown risks, it may lead to the collapse of Gains Network.
The development of on-chain derivatives is subject to the performance of the public chain. At present, with the emergence of Layer 2, high-performance public chains, and the improvement of sharding technology, the development of on-chain derivatives will also accelerate.
In a bear market, I am more at ease buying these types of products that generate ''Real Yield'' and share business income with stakers, not by increasing circulating supply. Such assets are better for calculating income, and most traders lose money in a bear market, Gains Network will have more business income than other products when the entire crypto market is bearish. And the $GNS token will deflate as the $DAI insurance grows.
References
Gains Network Medium
Gains Network White Paper