Background:
Over the past 30 days, GMX’s buyback has yielded impressive results:
- Total GMX Bought Back: 103,764 GMX (5% of circulating supply)
- Total Value: $3,341,200
While favorable market conditions make it challenging to attribute short-term performance solely to the buyback, it’s undeniable that a fundamental shift in supply and demand will have a significant long-term impact.
Current GMX Fee Allocation:
- Fees Generated Last 30 days: $9.432m
- Allocated for Buybacks: $3.344m
- Fee Coverage in Value Retention: 30% for GMX V1 and 27% for GMX V2
The value retention rate is estimated at 1 - 8,949 / 103,764 = 91.38%, meaning that this percentage of GMX stakers choose to hold rather than sell.
Remaining 73% of Fees Allocation in GMX V2:
- GMX Treasury: 10% (used for essential expenses like tech development, operations, audits, and bug bounties which are most settled in USDC)
- GM Pools (GM LP): 63% (auto-compounded)
Given the critical nature of the GMX Treasury’s expenses, we only focus on discussing the possibility of using the 63% of fees allocated to the GM LP for Buyback & Distribute (BB&D).
Current GMX LP Structure
- GMX V1 (GLP):
• Rewards are obtained similarly to staked GMX.
• A proposal was approved to convert ETH/AVAX rewards into GMX rewards. - GMX V2 (GM LP):
• Uses an auto-compound method.
• Fee earnings are directly added to the GM Pool.
• Advantages include simplicity, easy integration, and tax benefits (no income tax issues from claiming rewards).
Proposed Solution to Expand BB&D to GMX V2
- Technical Implementation Steps:
• Reduce GM LP’s fee distribution from 63% to 0%.
• Increase GMX Treasury’s fee distribution from 10% to 73%.
( Note: This is a proportional adjustment requiring minimal technical development.)
• GMX Treasury uses the additional 63% of fees to execute buybacks through the existing buyback contract.
• GMX Treasury airdrops the bought-back GMX to GM LPs.
( Note: Similar to the ARB incentives program; tools for this distribution already exist.)
This is a technical solution with minimal implementation costs for understanding purposes which does not represent the final implementation plan.
Pros
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Significant Increase in Buyback ( estimated on last 30 days fee):
• Fee Coverage Increase: From 27% to 90% (a 3.33x increase).
• Estimated Buyback Value: From $3.344m to $8.489m monthly.
• Estimated Buyback Amount: From 103,764 GMX to 345,534 GMX monthly. -
Enhanced Value Retention:
• The value retention ratio among GMX stakers is already high (91.38%).
• Applying BB&D to GM LPs could further increase overall value retention.
• Theoretically, it can be demonstrated that this adjustment, like BB&D, has a strictly positive impact on value retention. -
Market Stability and Risk Mitigation:
• Continuous buybacks provide a strong safety net against large sell-offs.
• E.g., if a top 5 whale liquidates 100,000 GMX (black swan moment), the negative impact can be hedged within a month under the current BB&D coverage but only 12 days under the optimized BB&D coverage. -
Predictable and Gradual Market Influence:
• Buybacks offer gradual changes based on business data, unlike unpredictable whale movements.
Cons
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Tax Structure Issues:
• Concern: Changing from auto-compound to claimable rewards may result in additional income tax liabilities for some GM LPs. E.g., a 30% income tax could reduce actual earnings.
• Potential Solution (proposed by community contributor Jayski): Deconstruct GM into Two Tokens. GM represents assets within the GM Pool, affected by trading profits/losses and asset value changes. feeGM accumulates fee earnings over time, with an initial value of zero. This solution can help LPs avoid additional income tax.
• Considerations: Despite a 30% tax cut for certain LPs, GMX remains one of the most competitive platforms for on-chain real yield, as evidenced by the latest screenshot showcasing its leading position among on-chain protocols. However, this proposed solution increases complexity and may delay implementation. If a simpler method cannot be identified, it may be better to proceed without this adjustment. If the impact on some LPs is unavoidable, we will further explore and address these potential effects.
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Rewards in High Volatility:
• Concern: LPs might find earnings less attractive if rewards are paid in GMX due to its volatility.
• Mitigation:
For liquidity impact: GMX’s liquidity can handle the scale of LPs swapping GMX back to Pool Assets with minimal price impact. E.g., the largest LP in GMX V2 is in the Single-Sided BTC Pool, holding 10,248,906 GM, worth nearly $15 million. At an APR of 20%, the annual fee earnings are about $3 million, equating to weekly earnings of $57,534. If an LP is sensitive to fees and swaps the $57,534 from GMX back to BTC weekly.
Volatility Impact: Given GMX’s good liquidity, its volatility isn’t excessively high. The volatility applied to $57,534 is negligible relative to the total value of $15 million.
User Acceptance: GMX stakers, as crypto users, are highly accustomed to converting between assets like GMX, ETH, and AVAX within similar liquidity scales, supporting this approach. -
Impact on Downstream Integrations:
• Concern: Changes might affect downstream integrations relying on the current structure.
• Mitigation: Since the underlying structure remains the same, integrations that managed during the ARB incentives period can adapt to GMX rewards similarly. -
Other Potential Impacts on LPs:
• Return Rates: Auto-compounding yields higher returns due to APR vs. APY differences.
• Pool Liquidity: Auto-compounding keeps fees within the pools, enhancing liquidity.
• Consideration: The benefits of increased BB&D coverage may outweigh these concerns, given the potential for higher value retention and market stability.
Game Theory Scenario
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Assumption
A 30% LP withdrawal due to tax concerns.
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Analysis
Since this affects the LP side and not the trader side, even if 30% of liquidity is withdrawn, our current utilization has enough elasticity to handle traders’ needs. With trader demand maintained, the withdrawal of 30% of existing LPs would increase APR, attracting new LPs and reaching an equilibrium. GMX also has the historical performance of GLP as evidence that BB&D is feasible for LPs.
Using the SS ETH Pool as an example, the current TVL is $58.76m, the liquidity cap is $31.23m, and the APY is 33.82%. Additionally, the TVL is rapidly increasing, which means we can assume that a 33.82% APY is an extremely attractive real yield for ETH in the market.
In an extreme scenario where 30% of LPs withdraw, the TVL would drop to $41.13m, the liquidity cap would remain at $31.23m, and the APY would rise to 43.97%. This would inevitably attract GM LPs to supply more ETH to the SS ETH Pool, bringing the APY back down to the minimum level of 33.82%.Of course, this is a dynamic process. As long as utilization is not at 100%, we have sufficient flexibility to allow GM LPs to iterate and adjust. If utilization becomes very high or even reaches 100%, capital efficiency will be pushed to the limit, and more GM LPs will flow into this specific pool.
Through this game theory scenario, we can effectively alleviate concerns about certain LPs withdrawing liquidity. To further understand this, a counterexample could be provided: directly doubling the trading fees. Theoretically, this would double the returns, but in reality, it would result in a significant loss of traders, creating a lose-lose-lose situation for traders, LPs, and GMX alike.
Conclusion
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From the LP’s perspective, this proposal seeks to optimize the method of value retention without altering the economic model, aiming to increase the fee coverage of Buyback & Distribute (BB&D) from 27% to 90% without affecting the overall earnings of LPs.
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From the GMX holder’s perspective, a symmetrical option is also presented to the community for consideration—directly adjusting the fee distribution percentage. However, it’s important to note that any changes to the economic model could potentially have long-term impacts on GMX’s price performance. The benefits of an increased percentage and the negative effects of altering the economic model would ultimately be borne entirely by GMX holders.
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Overall, LPs and GMX holders have a mutually dependent relationship. The success of LPs and GMX holders is interconnected. If LPs consider the interests of GMX holders, better performance of GMX would result in greater benefits for LPs. Conversely, if GMX holders consider the interests of LPs, the protocol will achieve more stable growth, and traders will enjoy a better experience. If both sides refrain from making decisions solely based on maximizing their own interests, it’s very likely that a win-win balance can be achieved.
Voting Option
- Option 1: Keep the fee distribution to GMX:GM LP at 27:63 unchanged, expanding BB&D’s fee coverage from 27% to 90%.
- Option 2: Adjust the fee distribution to GMX:GM LP from 27:63 to 40:50, adjust BB&D’s fee coverage to corresponding 40%.
- Option 3: Oppose both options above.
This might be one of the most impactful and important proposals in GMX’s history.
You matter. Your vote matters. Let’s make GMX greater together!