What are crypto derivatives?
Simply put, derivatives are financial products that derive their value from an underlying asset. Traditional derivatives are pegged to bonds, stocks, commodities, fiat currencies, or interest rates. And the value of crypto derivatives, as you can already guess from the name, is determined by the underlying cryptocurrency. The most popular types of crypto derivatives are options, futures, and perpetual contracts.
Given the high volatility of the crypto market and the complex nature of these financial instruments, crypto derivatives are rather unsuited for inexperienced newcomers. But as we know from investing, high risks bring high rewards, so if you’re willing to put much time and effort into learning crypto trading, your hard work may eventually pay off. Or it may not – DYOR, NFA, you remember, right?
Decentralized crypto derivatives exchanges
Why bother trying some lesser-known DeFi protocols for trading crypto derivatives if Binance, Huobi, and FTX are already there? Plenty of centralized exchanges have a competitive advantage over decentralized exchanges in the form of lower fees, friendlier UI, or more tokens available for trading. However, most of these platforms require KYC verification, making them inaccessible for users coming from sanctioned countries. And those of them that do not require mandatory KYC can still censor or cancel your transactions at will – the recent case with Tornado Cash proved that centralized platforms hold disproportionate power in the crypto industry.
That’s why you may want to explore decentralized perpetual exchanges on Arbitrum. Being the number one Layer 2 protocol on Ethereum in terms of TVL, Arbitrum prides itself on its impressive DeFi ecosystem and significantly lower gas fees compared to Ethereum.
According to DeFi TVL aggregator DefiLlama, Arbitrum currently hosts 99 DeFi protocols, out of which seven offer perpetuals and another seven focus on options trading. Since perpetual contracts are the most popular type of crypto derivatives, this article presents a detailed review of Arbitrum’s largest perpetual exchanges, GMX and Mycelium.
GMX, the largest DApp on Arbitrum
With more than $260 million in total value locked, GMX is Arbitrum’s undisputed leader, followed by cross-chain protocol Stargate at $108 million TVL. This decentralized spot and perpetual exchange boasts low swap fees and deep liquidity, providing a seamless trading experience with zero slippage. Unlike traditional order book models, GMX doesn’t support trading pairs. Instead, its liquidity is supplied by a unique multi-asset pool that earns liquidity providers fees from market making, swap fees, and leverage trading. Users trade against the automated market maker (AMM), which gets prices through Chainlink Oracles and an aggregate of prices from leading volume exchanges.
In order to incentivize users to provide liquidity to the pool, GMX introduced GLP token, which is minted after depositing funds and burnt when money is removed. The token’s price is derived from an index of assets in the pool. GLP stakers receive 70% of the platform fees in ETH and esGMX (Escrowed GMX) tokens, and the latter can be converted to GMX after one year. GMX, the exchange’s governance and utility token, allows stakers to receive 30% of the platform’s revenue, plus multiplier points for GMX.
With the most recent 24-hour daily trading volume of around $250 million and $310,000 in trading fees, GMX is undoubtedly the largest and most liquid DEX on Arbitrum. And its intricate tokenomics is another advantage that keeps GMX ahead of its competitors.
Mycelium, the GMX’s quirky sibling
Brisbane-based Mycelium is a new protocol that offers perpetual swaps on ETH, BTC, LINK, UNI, FXS, BAL, and CRV with up to 30x leverage. Being a fork of GMX, Mycelium retained its friendly UI and token design, quickly climbing to $19 million TVL just weeks after launch.
“Mycelium Perpetual Swaps is inspired by GMX’s Perpetual Exchange, whilst iterating on their code-base with the introduction of more markets, and lower fees for our traders,” the protocol announced.
On August 12, the platform merged with Tracer DAO, a decentralized derivatives platform that was closely collaborating with Mycelium since February 2021. In a near-unanimous decision, over 99% of DAO members agreed to transition to Mycelium, launching a brand-new product titled Mycelium Perpetual Swaps.
The integration with its core service provider will allow Mycelium to further expand its trading platform and develop a “singular best-in-market product.” Mycelium Perpetual Swaps functions alongside Perpetual Pools that uses an innovative model to rebalance long and short positions, protecting traders from liquidations, and unlocking opportunities to trade long-term leveraged positions. The protocol is powered by its native token MYC, an analog of GMX. MYC provides its holders with access to additional benefits, including trading discounts and rewards programs.
A newly established protocol already secured support from Arthur Hayes, Co-Founder of a trading platform BitMEX. The “Father of Perpetual Swaps” will advise and support the Mycelium team, helping them “deliver a new financial product that provides choice to the market.” This sounds quite promising, right?
Both platforms, GMX and Mycelium, provide a similar trading experience due to the resemblance of their UI and token design. However, one of them is an established leader in its niche, and the other is a promising newcomer, aiming to take its market share. Sticking to the time-tested option is always a safer bet, but early adopters of a new protocol can earn big profits if lucky. Except that risks are increasing, too. Once you are able to accurately assess your risk tolerance, you can make an informed choice. Ultimately, the final decision is yours.