GMX is a novel cryptocurrency spot and perpetual contract trading platform built first on Arbitrum one – an Ethereum Layer 2 solution and launched later on Avalanche blockchain. GMX is a rebrand from
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Since its launch in September 2021, has released several products aimed at improving cryptocurrency trading and investing.
GMX is a novel cryptocurrency spot and perpetual contract trading platform built first on Arbitrum one – an Ethereum Layer 2 solution and launched later on Avalanche blockchain. GMX is a rebrand from the now deprecated Gambit exchange.
GMX’s decentralized spot trading protocol allows investors to perform seamless cryptocurrency swaps from the comfort of their personal wallets. But, its most popular product is its decentralized perpetual contract trading platform. Perpetual contract traders could use up to 30X leverage on the GMX exchange.
Additional perks of the GMX exchange are an impressive tokenomics and reward system for traders and liquidity providers, low trading and swapping fees, and a superb user experience thanks to the high-throughput blockchain technology and optimized protocols that power the platform.
To better appreciate the rest of this article, a basic understanding of futures contracts, leveraging, and perpetual contracts are required…
Investors take advantage of cryptocurrency’s price fluctuation by betting on the progression or regression of assets through several means.
Futures trading and spot trading are the most common means. In spot trading, an investor buys and holds a crypto asset with the hopes of selling them when its value appreciates. Future trading differs in a number of ways…
By entering a ‘futures contract’, two parties agree to sell or purchase an asset at a pre-determined price and time in the future. In contrast to spot trading, traders in a futures contract are not required to hold the asset. Rather, they can bet on a selected asset using another asset.
The trade is executed at the stated time and not instantly like in spot trading. The asset used in the futures contract is known as collateral. A trader in a futures contract either takes a long or short position.
A long position means that the trader is placing his bets on the future increase in the value of the asset. A short position is a bet on the regression of the asset.
When the asset's value appreciates, the trader in a long position makes profits while the short position loses. The reverse is the case when the asset drops in value. Depending on the extent of the drop or rise in value a future trader gets liquidated if they fail to increase their collateral or close their position to stop their losses.
Leveraging allows futures contract traders to place their bets with amounts higher than their collateral. For instance, a trader who enters a 10X leveraged futures contract position can place a $100 bet on an asset using a $10 collateral.
To exercise this leverage, traders borrow funds from a designated pool and swiftly use the borrowed funds to place their bets. This pool is mostly owned by a single entity (the trading platform in most cases) and controlled by the trading platform.
Perpetual contracts are a special form of futures contracts.
The major difference between perpetual contracts and normal futures contracts is contract expiration. Whilst the traditional form of futures contracts has a stated expiry date after which the contracts can no longer be traded, perpetual contracts have no expiry period. Thus, a trader’s position is valid for as long as they leave it open and maintain it.
Compared to other forms of futures contracts, the price of perpetual contracts is tightly maintained with the spot price of the traded asset. The perpetual contract price could stray away from the spot price in extreme market conditions, but this happens less often than seen in traditional futures contracts.
To further maintain the price of perpetual contracts with that of the spot markets, a funding payment is made. This payment is made between the traders in a contract and is guided by the difference between the Index price (average spot price) and the price of the perpetual contract.
When the price of the perpetual contract is higher than the average price of the asset on spot markets, funding is positive in value, traders in long positions pay traders in short positions. The reverse is the case when the perpetual contract trades lower than the average spot price, which is when funding is negative in value.
The frequency at which this payment is made is known as the funding rate.
Since perpetual contracts have no expiry, the profit or loss will continue to accrue until the trader decides to close the trade or the exchange liquidates the trader’s account in cases of unmaintained losing trades.
