Decentralized derivatives exchanges (DEXs) currently capture only about 2% of the trading volume seen on centralized exchanges (CEXs). Following the collapse of FTX, trust in CEXs has eroded, driving more users toward decentralized alternatives. Despite this shift, leading projects like dYdX and GMX have struggled to consistently rank within the top 100 cryptocurrencies by market cap. This underlines the massive growth potential for the DEX derivatives market.
This article compares dYdX and GMX—two of the most prominent players in the decentralized derivatives space—evaluating their strengths, weaknesses, and potential to capture future market share.
Understanding the Two Main Models
DEXs for derivatives primarily operate using one of two models:
- Order Book Model (dYdX): This model relies on professional market makers to provide liquidity. It mimics the experience of traditional CEXs, with price and funding rates that closely align with centralized platforms.
- Liquidity Pool Model (GMX, Gains Network): This method uses oracle-based pricing to enable zero-slippage trades, making it especially attractive for large-volume traders.
We’ll analyze dYdX and GMX across three key dimensions: market conditions, product features, and value capture.
Market Conditions and Performance
Historical data reveals that dYdX and GMX have performed very differently under similar market conditions.
dYdX saw a significant rise in trading volume and open interest (OI) starting in September 2021, coinciding with its token launch and trading rewards program. This growth continued through the end of 2021 but declined afterward, closely tracking broader market trends.
In contrast, GMX demonstrated steady growth after its launch on Arbitrum in August 2021. Its OI increased dramatically starting in June 2022—a bear market period—and its GLP liquidity pool continued to offer yields between 20% and 50%.
Why did GMX thrive during a bear market?
- Layer-2 (L2) Growth and the Ethereum Merge: 2022 was a breakout year for L2 solutions. Events like the Optimism token launch, Ethereum Merge, Arbitrum Odyssey, and Nitro upgrade brought significant attention and users to GMX.
- User and Liquidity Provider (LP) Growth: The bear market’s scarcity of trading opportunities increased speculative behavior. GMX’s model, which some compare to a "casino," attracted users looking to gamble. At the same time, LPs earned fees from trader losses, creating a sustainable yield source even in a down market.
Product Attributes
A platform’s product features heavily influence its ability to attract and retain users. Below, we compare dYdX and GMX across three product attributes.
Liquidity
Liquidity refers to how easily assets can be bought or sold at stable prices. dYdX depends on market makers for liquidity. While this enables efficient order matching, traders still experience slippage—especially with large orders.
GMX uses oracle pricing to offer zero-slippage trading, making it easier to execute large orders near the market price. For this reason, GMX currently offers better liquidity than dYdX.
However, if decentralized derivatives gain broader adoption, dYdX’s order book model could ultimately support higher liquidity. That’s because it doesn’t rely on a liquidity pool with a bonding curve—trades are matched between users and market makers. GMX’s GLP pool, on the other hand, has inherent limitations: LPs earn passive income, but the maximum trade size is constrained by the pool’s available assets.
Price Discovery Mechanisms
Price discovery is the process of determining an asset’s market price through buy and sell interactions.
dYdX uses an order book, which gives it price influence. Most positions are offset, and any imbalance between longs and shorts is reflected in the price—similar to how CEXs operate.
GMX relies entirely on oracles for pricing, meaning it has no independent price discovery. This makes it vulnerable to oracle manipulation attacks. In September 2022, for example, GMX was exploited due to its zero-slippage mechanism.
If GMX were to become the largest derivatives exchange but still depend on external price feeds, it could be regularly targeted by attacks. Even highly liquid assets like BTC or ETH could experience price distortions. dYdX, which doesn’t use oracles, is less susceptible to this risk.
Funding Rates
dYdX uses a funding rate mechanism similar to CEXs. This helps balance long and short positions by incentivizing traders to take the less popular side.
GMX does not use funding rates. Instead, traders either borrow stablecoins (to long) or volatile assets (to short) from the GLP pool. Both sides pay borrowing fees, and neither receives funding payments.
This structure can lead to extreme imbalances. During a strong bull market, for example, most traders go long, and hardly any take short positions. This means the GLP pool—which takes the other side of every trade—could face large, sustained losses. In these conditions, traders may prefer dYdX.
Value Capture and Tokenomics
A platform’s ability to capture value and share it with token holders is crucial for long-term sustainability.
dYdX currently offers no value capture for token holders. All trading fees are retained by the protocol. However, this may change with dYdX V4, which is expected to introduce community governance and potentially share fees with stakers.
GMX offers strong value capture:
- 30% of platform fees are distributed to GMX stakers.
- 70% go to GLP stakers.
GLP stakers typically earn between 20% and 50% APY from two sources:
- Trading fees (denominated in ETH)
- Profits from trader losses
While attractive, this model directs 100% of fees to stakers, leaving the protocol itself with no revenue. Some question whether this is sustainable long-term.
dYdX may address its value capture shortcomings in V4, but GMX already offers compelling rewards for stakers.
Which Platform Is Better Positioned for the Future?
dYdX Holds Advantages in Key Areas
Aside from liquidity, value capture, and decentralization (for now), dYdX outperforms GMX in most categories. However, its use of an order book—while efficient—introduces slippage. GMX’s oracle-based system enables zero slippage but creates vulnerability to manipulation.
GMX’s strong value capture and composability (ability to integrate with other DeFi apps) are advantages, but its casino-like model could struggle in bull markets. dYdX is better positioned if market sentiment improves and new capital enters the space.
The Impact of dYdX V4
dYdX is planning a major upgrade—V4—which will move the protocol to its own blockchain on Cosmos. This should make dYdX fully decentralized, with a community-operated order book and matching engine.
The transition to a proof-of-stake (PoS) chain may also help absorb the sell pressure from token unlocks. Only 14% of dYdX tokens are currently in circulation; the remaining 86% will be unlocked throughout 2023.
Market Outlook and Conclusions
According to analysts from Goldman Sachs and comments from U.S. Treasury Secretary Janet Yellen, the U.S. economy may be headed for a soft landing. 2024 will also bring Bitcoin’s next halving—historically a bullish event.
If macroeconomic conditions improve and crypto enters another bull market, dYdX could emerge as the preferred derivatives DEX. GMX, which excels in bear markets, may see reduced interest as traders shift to platforms better suited for bullish conditions.
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Frequently Asked Questions
What is a decentralized derivatives exchange?
A decentralized derivatives exchange allows users to trade financial derivatives—like futures and options—without relying on a central intermediary. Trades are executed on-chain using smart contracts, enhancing transparency and reducing counterparty risk.
How does dYdX’s order book model work?
dYdX uses an off-chain order book managed by market makers. Orders are matched and settled on-chain. This hybrid approach improves efficiency while maintaining some decentralization.
What are the risks of using GMX?
The main risks include oracle manipulation attacks, large imbalances between long and short positions, and potential liquidity issues during extreme market conditions.
Can dYdX token holders earn staking rewards?
Not currently. However, the upcoming V4 upgrade may introduce staking rewards and fee sharing for token holders.
Which platform is better for large trades?
GMX offers zero slippage, making it better for large orders. dYdX may have lower fees for smaller trades but involves slippage on larger ones.
What is the GLP pool?
GLP is GMX’s liquidity provider token. It consists of a basket of assets and is used to facilitate trading on the platform. GLP stakers earn fees from trades and profits from trader losses.