January 24, 2023
Dopex Essentials: GMX and Perpetual ContractsDopex-EssentialsDopex-Papers
It is no secret that Dopex’s next suite of Atlantic Products will be directly integrated into GMX, featuring tools such as liquidation protection for leveraged perps (Atlantic Perp Protection) and leveraged non-liquidable $GLP farming.
But what is GMX, what is a leveraged perp, and what is $GLP?
Allow the CEO to take you on a short little journey into this interesting protocol.
Perpetual contracts are financial instruments that allow users to deposit collateral to take leveraged exposure on the price of a specified asset. There are a few key parameters that are chosen when taking such a position:
- Collateral: Tokens (e.g. USDC, ETH, wBTC) that the trader deposits into GMX to trade against.
- Target Asset: This is the token the user receives price exposure to.
- Directionality: Profit occurs when the price goes up (“long” position) or down (“short” position). Loss occurs if price moves in the other direction.
- Leverage: The amount of price exposure you get to the Target Asset.
- Liquidation Price: The price that the target asset can reach before the user’s collateral is fully lost and their position is closed; the higher the leverage the smaller the difference between current price and liquidation price meaning smaller price changes can trigger a liquidation.
Let’s look at a quick example to see how this works using our brilliant CEO as an example. Here he deposits 1 ETH worth of USDC (currently $1.5k) and takes a 10x leveraged long position on ETH. Let’s see two possible outcomes:
- If the price of ETH increases to $1,650 (i.e. 10% increase) CEO has a profit of 100% ([$1,650 - $1,500] x 10 = $1,500). CEO’s position is now worth $3,000 which is a 100% gain from his original collateral.
- If the price of ETH decreases to $1,350 (i.e. 10% decrease), CEO has a loss of 100%. ([$1,350 - $1,500] x 10 = - $1,500). At this point, the CEO’s position will be automatically liquidated since all his collateral has been lost.
In this example, an ETH price of $1,350 at 10x leverage is the point at which the CEO’s loss would equal his collateral amount, hence his liquidation price is $1,350. To reduce the chance of being liquidated, you can add additional collateral that will decrease the leverage and hence improve the liquidation price (this is the mechanism for our Atlantic Perp Protection).
Our good friends GMX are building a perpetual exchange which is fully decentralized and conveniently on Arbitrum, the greatest chain in the world and also our native chain. As a DeFi protocol, the funds required to enable the use of perpetual contracts is provided by other users. Let’s take at the two key tokens of GMX and how they fit in.
As a brief overview, $GLP is:
- GMX’s liquidity provider token
- Represents an index of roughly 50% stablecoins, 25% ETH, 25% wBTC (does have small holdings in other tokens like $LINK)
- Can be staked to receive 70% of protocol fees
- APY is at least 25% (if share of platform fees < 25% APY the difference is paid in esGMX)
$GLP acts as a counterparty for traders’ leveraged positions. Let’s take a look at what happens when a trader builds a position, turns a profit or loss, and how this affects $GLP.
- If a trader deposits USDC to go long on ETH, they are borrowing ETH from the $GLP pool and paying a funding rate to the protocol (nice juicy fees for distribution)
- If a trader makes a loss, their collateral is given to the protocol in the form of liquidation fees (nice juicy fees for distribution)
- If a trader makes a profit, this is taken from the $GLP reserves which means $GLP holders may end up losing some of their value ($GLP holders in disbelief)
Now you might look at the final point and think “wow, $GLP is not as safe as I thought”. It’s true, in a universe where traders are outperforming the market, $GLP holders may lose some value. However, over a longer time frame, traders historically lose more money than they gain, meaning more money to $GLP holders.
As a brief overview, $GMX is:
- GMX’s governance and fee-share token
- Can be staked to receive 30% of protocol fees
There’s really not that much more to it than that - it is really a nice and simple token design. It should also be noted that Dopex also provides $GMX Put SSOVs that allows $GMX holders to hedge their position.
The Dopex Tie-In
The intriguing way that GMX has been designed has allowed everyone’s favorite DeFi team (Dopex) to begin developing two excellent products that will bring a new experience to this quaint little exchange.
Dopex will integrate Atlantic Options, an interesting little product that allows option buyers to borrow the underlying collateral for specified purposes.
Leveraged Perpetual Traders
The biggest danger to a leveraged trader is liquidation, the point of no return where a traders’ position is closed and their collateral fully lost.
As a brief overview of how Atlantic Perp Protection will work:
- Buy OTM Atlantic Puts slightly above liquidation price
- When the price of the leveraged asset approaches liquidation price, the Atlantic Put’s stablecoin collateral will move from Dopex contracts to top up the trader’s GMX collateral account
- This will deleverage the user’s position so the liquidation price is zero (i.e. asset must reach zero dollars for position to be liquidated)
Don’t worry about those one-tick liquidations again - keep your position open and live to trade another day using Atlantic Perp Protection.
Dopex, you have done it again!
$GLP is a quaint little asset that gives users ~25% APY. But to our silly bean readers, what if 25% APY is just not enough?
Let’s see how Atlantic $GLP Farming can help you out:
- Buy OTM $GLP Atlantic Puts
- Borrow underlying stablecoins to purchase $GLP which is then staked to earn its share of protocol revenue
The cool thing about this is that the Atlantic Put acts as a hedge against $GLP price action - if the price decreases below the strike price, you earn the difference in settlement fees. If the price of $GLP goes up, you maintain your price exposure to $GLP and pocket the capital gain.
Another game changer by our dear Dopex!
Wow. Thank you, Mr. Ex-El Presidente
Until next time, my loyal students
CEO (Chief Education Officer; not to be confused with Nutoro, our Chief Executive Officer)
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Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner.
Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.
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