Adding ESGMX Liquidity

ESGMX Liquidity

Introduction:

My name’s Crypto_Joe, have worked with the Bancor DAO, and run the telegram channel @CryptoJoe100 with 1.5k members – A strong proponent and supporter of GMX.

I see a lot of potential with ESGMX that isn’t currently being utilised, with over $60m in ESGMX collateral, a lot of which isn’t being vested or staked, and simply lost. This, in my view, is capital inefficiency which a somewhat liquid market could solve and generate significant extra revenue for the protocol.

Current suggestion:

Create an option for liquidity provider to swap ESGMX for GMX 10:1.

Issues:

  • Arbitrary nature of 10:1 swap ratio (Not market driven)
  • Uses up protocol liquidity to burn esgmx
  • Creates short term negative price pressure on GMX

Altered suggestion:

Offer an OTC market for ESGMX swaps, allow the market to decide the price, and issue a significant tax levy (2-5%) on ESGMX sell swaps which are then burnt. The levy could be constructed in a multiple of different ways, this is just a suggestion.

Pros:

  • Incentivises Long term liquidity, and shakes out short term liquidity
  • Burns ESGMX, less in supply
  • No short term price pressure on GMX
  • Creates extra revenue through swap fees, and volume
  • Unlocks significant capital efficiency which otherwise would’ve been lost.

Incentivising long term liquidity

Longevity of the protocol liquidity is crucial to long term success. The current ESGMX staking rewards are an attractive incentive for long term liquidity providers, but will end in June. This is not an immediate issue, however, it will cause short term liquidity to exit, and could be detrimental to the protocol. By offering an OTC ESGMX market, it allows long term liquidity providers to access more esgmx, thereby incentivising long term liquidity provision through the vesting process. On top of this, short term liquidity providers are incentivised to reduce their ESGMX holdings, burning ESGMX in the process. Ultimately, by creating an OTC market, it solidifies, and incentivises long term liquidity provision.

As much as having protocol liquidity ‘lost’ seems like a good thing on the surface, it disincentivises long term GLP holders, and locks in capital which could be used to the advantage of the protocol far more effectively. On top of that, it can be designed in such a way that isn’t too difficult to implement.

Burn ESGMX

Here is a very crude model assuming that 1.5% of ESGMX trades a day, with increasing volume as the ESGMX that gets minted increases, and the protocol increases (if you’d like me to share the model, please ask and I’ll send it). Assumes a 5% tax on ESGMX sells.

It estimates that by June we could’ve burnt 53,290 ESGMX. This is just a minor feature of ESGMX, and will help reduce inflation in the long term. The other points mentioned in this proposal are more primary benefits of an OTC market.

On top of that, by the end of the year over 202,000 ESGMX could’ve been burnt this way (over 10% of the final supply). Reducing inflation, and one huge long term benefit of enabling an OTC market.

No short term price pressure

While swapping ESGMX for GMX would be a good start, that creates short term price pressure on GMX. Since those selling ESGMX are unlikely to be long term holders, and wish to exit, they are also more likely to sell their GMX, and is more inflationary in the short term.

The alternate suggestion allows users to buy ESGMX with any product, USD/ETH, and allow more long term capital enter into GMX at a discount, thereby incentivising long term holders of GMX and GLP.

Conclusion

In conclusion, creating an OTC market unlocks a lot of potential advantages from burning, to long term price appreciation, reduced inflation, and unlocks significant capital for the protocol. On top of that, it’s something that users definitely want, and can be designed in such a way that maximises benefits to the protocol. This proposal also points to a broader potential issue in ESGMX rewards ending. Whether or not they ought to be extended is a different question, and one I don’t want to get diluted through this thread.

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a great proposal, this actually made me change my rigid stance against sellable esGMX,
however, I would add instead of burning it, to be used for the next expansion (FTM)

Obviously saying this without diving deep into the technical difficulties

Interesting idea…it seems it is more focused on burning esGMX than it is on providing long term liquidity (for what ends exactly? esGMX liquidity? It constricts the supply and makes liquidity stagnant; if for the ends of GMX liquidity…I’m not sure there’s any long term issue with it)

I implore OP and @z-dev to check out a portion of a proposal made labeled OMPB4 “Off-Shore Mining”

"Give the options to users to select a 25% or 50% shorter vesting period at a 25% or 50% tax of their esGMX; esGMX which has been taxed due to expedited vesting will be held accumulated from Jan 01 FY to Dec 31 FY and withheld from circulation or “shored up”; on Jan 01 of the following Fiscal Year, the esGMX collected the year prior will be distributed to staked GMX as esGMX. The FPF is currently an inefficient use of capital and will not even reach a $2 backing of GMX within a meaningful timeframe. By constantly off-setting esGMX for a year, buy pressure from expedited vestning is mitigated in the long term, and allows longer term holders to mine the taxed-offset esGMX."

X and others have commented on increasing the tax penalty so it makes more sense as a game-theoretic binary decision: vest normally, or discount your vest (at a tax on your esGMX)

Commented on another proposal with a similar thought.

I’ve spent considerable time on the problem of esGMX liquidity and have been left after many discussions wondering is it actually a problem? Does it need to be solved?

At this stage it seems esGMX conversions to GMX are relatively limited. The fact that esGMX cannot be immediately monetised does limit a certain category of investor (hot money) from participating in GLP (despite the fact that the ETH/AVAX rewards are already quite significant). Is this a problem? Patient money will be attracted to GLP and will become the long term owners of the protocol as a result.

If you want to be in the business of perpetuals and DeFi infastructure this stable approach makes lots of sense.

Having said all this we should still evaluate if there is a way to move value from inpatient to patient capital, and ideas of a 1-10 is definitely an interesting one. Credegar proposal of Off-Shore mining is another. Can add a few more ideas, utilziing an auction mechanism to undertake the buybacks this way on regular intervals supply is taken off the market at the lowest possible price. If we go down this path the ‘buybacks’ or accelarated conversion should not lead to a trading market for esGMX it should be designed to basically burn them for the benefit of all GMX holders thus rewarding the patient.

The other approach is to find partners similar to what Yearn has done with Curve, creating some more advanced vault strategies that incorporate esGMX, GMX and GLP in innovative ways that make more sense for short term investors.

Thank you for taking the time to read the proposal.

I don’t think at any point this has been posed as a ‘problem’, I think quite emphatically I’ve emphasised the fact it’s more of an opportunity.

On creating value and incentivising change of hands from impatient to patient, this is directly what this proposal is meant to do, for the benefit of long term holders.

Those who don’t have the capital, and those who have a long term belief in GMX can purchase esgmx at a discount to GMX. There doesn’t need to be a super liquid trading market for it, but some form of changing hands would facilitate this.

This allows long term GLP providers to solidify and accumulate esgmx, and shakes out ‘hot money’. On this basis it’s beneficial for anyone and everyone who’s willing to hold esgmx and vest over the course of a year. Isn’t that the exact definition of rewarding long term holders?

On burn backs, why implement this as opposed to directly allowing those with less capital, and long term proponents to buy the long term liquidity of GMX? This is a huge opportunity to reward long term stakers, and I urge everyone to realise this!

“ Having said all this we should still evaluate if there is a way to move value from inpatient to patient capital”

This proposal is directly designed to do that, and that ought to be the aim by unlocking millions in locked capital to the benefit of long term holders.

Hi Crypto_Joe, thank you for this proposal

I think it could make sense, some thoughts I had

  • If we have it as a 10:1 conversion then it could be seen as a burn for an early exit, however, if we have a market where there is a price, then we might want to display the esGMX APR based on that price. I’m not sure if that would be a net positive, because for new users they could view this APR as less attractive. It may lead to a situation where short term holders / farmers reduce the displayed APR for others unnecessarily and that could be harmful to the project in the long term

  • While a 10:1 conversion could lead to some sell pressure, an esGMX market could also lead to less buy pressure, long term holders could opt for esGMX purchases, which might have a heavy supply from short term farmers, with less buy pressure, ironically, having more long term holders could lead to an underperformance in the long run

  • The technical part of this is also a bit complicated I think, because the conditions for esGMX vesting are currently per account, e.g. if you earned 100 esGMX, that is the maximum amount you can vest, and if you used 1000 GLP to earn that esGMX then you would have to lock in that ratio to vest, having a market doesn’t really fit into this well, it could lead to gaming where someone sells esGMX to themselves to vest for a lower ratio then originally needed

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Mr X Dev, thank you for your work.

I was aware of some of these points, particularly point 3, which seemed rather difficult for me to solve. There definitely needs to be some flexibility with esGMX, so the discussion is important. Perhaps an alternative suggestion.

Rather than being entirely burned, what if some part of ‘burned’ ESGMX (say 50%) was set aside to re-distribute to long-term holders? This could be implemented by a minimum term time for staking. Or more simply re-distribute some of the burned esGMX to those who haven’t yet initiated any burns (I think this is pretty cool).

My thesis for this being it could extend the longevity of esGMX past June (or alternatively increase APY), which would be more attractive for longer-term protocol liquidity. As well as incentivizing long-term holders.

Thank you for the suggestion, re-distributing the burnt esGMX is a great idea, leaning more towards lengthening the duration of rewards, cos I think that would be more long term aligned.

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That would be fantastic sir.

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