DeFi traders are betting big as crypto markets rally.
Gains Network, a leveraged trading platform, hit an all-time high of over $200,000 in daily fees generated on Jan. 25, according to a Dune Analytics dashboard.
Seven-day average trading volume also crossed $100M for the first time on Jan. 17 and stands at $166M as of Jan. 30. The platform surpassed 10,000 cumulative users on Jan. 23.
Forex Trading Picks Up
Gains Network offers up to 1000x leverage on crypto assets, foreign exchange pairs, and selected stocks. Notably, volume has shifted from crypto trades to forex, which contributed over 50% of volume every week in December, according to a Dune query.
Aave, DeFi’s largest lending protocol, has also indicated an interest in enabling forex trading.
Forex is a massive market for any DeFi protocol to tap into— a survey from the Bank of International Settlements (BIS), an organization which serves to coordinate the 63 central banks which make up its membership, found that Forex trading volume reached $7.5T a day in 2022.
With Gains’ forex offerings, the protocol further blends the DeFi sector with the traditional financial industry. And getting a piece of the trillions of dollars in daily forex volume is certainly appealing to stakeholders in the Gains ecosystem, many of whom receive a share of trading fees from trades opened on the platform.
Of course, to generate hundreds of millions in volume — a sum reached only by the largest decentralized exchanges for spot trading — traders are using leverage. They do this by depositing the DAI stablecoin as collateral for their trades. The traders’ deposits serve as the first layer of assets to be liquidated in the case of a margin call.
Gains is built on the assumption that most traders lose money on average, according to a Reddit post from the team. So far, this has been the case — traders’ are cumulatively down almost $6M, according to a Dune query.
In this way, Gains functions as “the house” — the protocol and those who deposit money in its backstops are the counterparty to traders on the platform.
As traders’ positions are larger than their collateral, Gains need further layers of assets to bolster the protocol. This next layer is owned by the protocol, and stands at over $5M, according to a post put out by the Gains team.
The layer grows when traders close out losing trades but also pays out winning trades. If traders lose more than they win, the second layer remains intact.
The collapse of UST, the stablecoin of the Luna ecosystem, depleted the second layer of Gains’ defenses, according to the same post from the leverage protocol’s team.
Gains weathered the volatility of FTX’s collapse much better, and is even positioning itself as a decentralized replacement to the defunct exchange, Ishan Bhaidani, a Gains contributor, told The Defiant.
Of course, traders can hit a hot streak, which merits a third layer of defense — called the gDAI vault, into which anyone can deposit DAI.
In order to attract deposits, the gDAI vault pays a yield (currently over 21%), which comes from trading fees. The gDAI token is a liquid asset, meaning that it can be put to work in DeFi while still accruing yield, similar to liquid staking derivatives (LSDs).
More vaults, which would take deposits of ETH or BTC, for example, are expected to launch soon.
Users can also stake Gains’ GNS token in order to backstop the gDAI layer and receive a portion of trading fees.
Mirroring the momentum of the platform, GNS has been on a tear this month, hitting an all-time high of $6.80 on Jan. 29 after more than doubling since Jan. 1.
Gains initially launched on the Polygon blockchain, but a deployment on Arbitrum, a Layer 2 scaling solution for Ethereum, on Dec. 31, proved to be a catalyst for its recent growth.
Bhaidani said that the protocol’s oracle network also played a significant role in the recent momentum. The project uses customized Chainlink oracles, which provide pricing data for on- and off-chain assets.
Gains touts its oracle architecture as being able to prevent “scam wicks,” which are momentary instances of faulty price data which can cause unexpected liquidations.
The protocol isn’t operating in a field clear of competitors, however. GMX, another leveraged trading platform, is the clear leader on Arbitrum, with over 10 times more users and platform fees than Gains, according to a Dune dashboard.
Other projects have also been making the jump to Arbitrum — Trader Joe, the leading decentralized exchange (DEX) by volume on the Avalanche blockchain, launched on the network earlier this month. Trader Joe also announced a partnership with Gains on Jan. 12.
Fully Circulating Supply
Notably, there are no GNS tokens temporarily locked up which will be later issued to venture investors, the Gains team, or any other player in the ecosystem.
This circumstance, which is when an asset’s market capitalization is the same as its fully diluted value (FDV), is generally appealing to investors as it means that early insiders don’t have the chance to dump their cheaply-acquired tokens on retail investors.
That said, the GNS supply does expand if the gDAI vault becomes undercollateralized, an event which triggers the opportunity to mint new GNS for DAI via what is called the OTC buy window.
GNS’ supply also increases through a referral program that rewards users who attract new traders to the protocol, and to pay users who run bots which execute limit orders for the platform.
Conversely, the token’s supply contracts when the gDAI vault is overcollateralized — this also happens through the OTC window, except in reverse — users are able to sell their GNS for DAI, at which point the GNS tokens are burned.
Gains’ idea is that, if traders lose more than they win, over time, GNS will become deflationary.