Allocating 5% USDC to GLP (20-30% Yield)

Allocate $2M USDC to GLP on Avalanche

Authors
JoeyBaggaShitcoins

Summary
I propose the DAO allocate $2M USDC (<5% of current USDC holdings) to GLP.

Abstract
GLP is the liquidity token of the GMX platform which exists separately on both Arbitrum and Avalanche.
GLP serves as liquidity for leverage traders using the GMX Platform, and earns trade fees ($19M Since June) in the form of ETH and AVAX respectively, as well as realizes traders PNL. This equates to 20-30% non-inflationary yield. The value of GLP fluctuates based on traders PNL and the price of the underlying assets (USDC WBTC WETH WAVAX).
This would return an estimated $500k annually for the DAO to use for buybacks/burns etc. as well as provide some muted exposure to large cap assets.

Motivation
The motivation here is clear: to increase cashflow to the DAO therefore increasing the DAO’s ability to buyback and burn tokens, further decreasing the outstanding supply. I think it’s fair to assume anyone participating in this DAO has a bullish outlook on crypto over a long enough timespan, so taking some risk in terms of exposure to the price of a few of the most established assets seems in line with the DAO’s risk tolerance.
More info on how GLP works can be found here: GLP - GMX
Relevant stats/performance can be found here: GMX analytics

Budget
$2M USDC

Rationale
As mentioned above this proposal aims to generate cashflow for the DAO, in a market where yields are drying up as the majority of yield is either inflationary or based on the demand of borrowers, GMX has proven its ability to generate revenue regardless of market conditions. The Merit Circle DAO has proved similar, after reaching a great milestone of burning 100M tokens. Now it is upon us to work toward burning the next 100M, and this proposal if accepted would help us achieve that goal.

Is this safe? What are the risks?
There a couple of risks to consider.

Market risk
You are taking positions into different underlying crypto assets. Any asset has a risk of going to 0. USDC is the largest position in the pool and should be delta neutral. BTC and ETH make up another large part of the pool. Avax would be the most risky position, an asset with a higher beta. The upside is of course that these assets can go up in value, and with it the value of the position. Given the current sentiment and subsequent low price point of the market, I believe it is not a bad time to indirectly take positions into some of these assets for the DAO.

IL Risk
This is related to the market risk. Since the assets are held in a continuously rebalancing pool, there is added Impermanent loss (IL) risk. However, I believe the incentives and fees should outweigh the longterm impermanent loss compoment.

Smart contract risk
Secondly, as with any pool that utilized smart contract, there is smart contract risk. GMX has been eaditted by ABDK consulting.

Chain/Bridging risk
I think this one is minimal, but worth mentioning for completeness. Since this position would live outside of the Ethereum main chain, it means funds would have to be bridged to Avax chain and held on Avax chain. There is a minimal risk that something could go wrong in the bridging process or with Avax chain at large. On the other hand, it is also an opportunity for the DAO to diversify risks across chains. Avax could be operational in times when ETH is congested.

Are the funds locked?
GLP is locked for the first 15 minutes and after that can be redeemed for the underlying assets at any time. esGMX (part of the rewards) is locked for longer.

What about the GLP pool on Arbitrum?
The Arbitrum GLP pool could be an alternative option. As it stands today, I believe the basket of ETH/AVAX/USDC/WBTC with the current yields will offer a superior Risk/Reward profile over the Arbitrum pool that contains UNI, LINK, ETH, WBTC, FRAX, DAI and USDC.

Copyright
Copyright and related rights waived via Creative Commons CCO

1 Like

Thanks for your proposal @joebags . Interesting.

Can you or the GMX team maybe shed a bit more light on the following topics:

  1. Impermanent loss.
    I see you addressed this as a risk in your proposal. Would the GMX team or you perhaps be able to perhaps offer a bit more context/thoughts/data on how the basket approach with fees will stack up against holding the assets independently without rebalancing or non-continious rebalancing?

  2. Blow up risk
    Related to this. Could the team also shed light on black swan risks, such as AVAX seeing a LUNA like collapse and in that way eating the whole basket. I am not comparing the two chains here and I know there will not be a perfect answer. However, I would be curious to know how you estimate this risk and if it is any way mitigated.

  3. Mult-signature wallet support
    Does GMX on Avax and/or Arbitrum offer multi-signature wallet support?

2 Likes

Good questions @tommyq I’m gonna defer to the experts here. I’ve asked GMX to kindly assist with answering some questions, which they agreed to do.

For the sake of avoiding any conflict of interest I just want to share that I approached them to assist, they didn’t solicit this proposal or anything like that.

As far as impermanent loss I’ll just share this graph which shows the all time historical performance of GLP so folks can have an idea how it has performed in various market cycles. This graph is from GLP on Arbitrum which has different underlying assets but has existed longer so can give a fuller picture than the GLP on Avalanche can.

Hi KR from the GMX Team. Thank you for your proposal, happy to be here.

  1. I think Impermanent Loss(IL) is an interesting topic with regards to the GLP. In short, I do not think GLP experiences impermanent loss, it is more an opportunity cost of investing in assets held with different weights and it is not same way that would with a traditional Uniswap V2 AMM. Let me give you an example in the most basic form of why I think IL is not the same.

let’s say hypothetically… you have a pool consisting of AVAX/USDC as the price of AVAX goes up… your AVAX is constantly being converted to USDC to maintain the balance of the pool

this is where impermanent loss comes from the fact that the LP position is essentially selling your AVAX to USDC on every uptick

now in GLP…

let’s say it’s the same situation and only has AVAX… and USDC, well the price of AVAX goes up… but it’s not converted to USDC as the price goes up

you just have a basket… that has AVAX… and that has USDC

So there is no impermanent loss, this example does not include traders or swaps but merely pointing our how GLP does not act in the standard way that IL normally thought of.

Additionally, there are no locks outside of a 15 minute cool down period, you are able to withdraw any crypto asset within the GLP except for those that are locked for open-position at any time.

You can find more information on how the GLP has performed since inception on GMX analytics

As you can see, the GLP+Fees has outperformed other standard LPs, this graph also does not include our esGMX token rewards are also distributed as an incentive.

  1. Of course, as with any Smart Contract there are risks we have an audit as mentioned in the proposal.

With the composition of the GLP the GMX DAO is highly conservative with the assets it lists, there are certain liquidity requirements that are needed, in addition to considering black swan threats. If it clear there is impending danger with an asset it is possible the DAO can vote to hard-cap any new deposits and restrict the exposure to it’s current GLP weight, thus limiting potential losses for the GLP.

  1. Yes.
1 Like

Hi there, thanks for your post.

I’m personally more in favour of keeping our treasury for future seed deals and scaling up our manpower for in-house projects. Given the number of DeFi hacks or collapsing projects (eg: Luna/Anchor) over the past few months, I feel somewhat skeptical of the overall longevity of these yield farms, the risk from smart contracts, and DeFi in general. esGMX is vested over 12 months. How sure are we that we can reap the rewards in 1+ years? Is this protocol safer than our current MPL pool or a stronger play than merely holding USDC?

If the general DAO considers the risk/reward worth it, I will be happy to reevaluate my position. Being defensive has worked quite well for our treasury this bear, and I believe $2m could be spent more wisely in the coming months.

Best regards,
AS

2 Likes

Thanks for the response, I’ll try to address the concerns mentioned.

First, the LUNA situation. It’s important to differentiate the various types of DeFi protocols. LUNA imploded due to its design, it was the failure of an experimental algorithmic stablecoin. This is very different from what GMX is, so I think it’s worth noting that’s this is a bit of an apples and oranges comparison. While there is smart contract risk, the same could be said for staking MC. We are a crypto based DAO, so to be completely intolerable of risk seems to against that ethos.

As for longevity, I do believe this to be a sustainable source of cashflow. When people think of yield farms they think of things like Sushi and the many forks which pay out rewards in their native token. This causes a negative spiral resulting in the token being sold off, and the APR drying up. To the contrary GMX rewards are paid in AVAX which is generated by the protocols revenue, rather than inflation.
esGMX vests for a year but imo should be viewed as a cherry on top. This is bonus yield, and the majority of the yield would be paid in AVAX which is liquid, and can be converted to other assets, i.e. MC, at any time.

Is GMX safer than Maple?
A complex question, but I think there are a few things to consider. Of course any USDC position is going to be ‘safer’ in terms of price, but in a market that’s retraced 80% or more I think it may be wise to increase exposure to blue chip assets which is nothing new for the DAO and it’s treasury.
Now in terms of safety, both Maple and GMX carry smart contract risk, while Maple also carries the risk of depending on a ‘trusted’ third party. I will let you decide which is ‘safer’.

Now in regards to the use of funds: it’s important to mention that GLP can be exited at any time, so these funds are not being “spent” and being only 5% of the USDC in the treasury (not including the other $60M or so in non-USDC assets) I don’t believe this proposal would put any potential seed deals or the like in jeopardy. If needed the DAO can easily liquidate the position and use the funds for anything else it decides is more prudent.

I hope this will address the concerns mentioned, but of course the decision will be that of the DAO’s and I will gladly accept whatever it decides.

Joey

2 Likes

I really like this proposal and think it would be a very solid way to make use of dormant USDC to gain yield. Thinking of it as a longer term play, it could turn out to be even better than the yield it earns over the course of 1-2 years because if the crypto market has any sort of recovery within that time frame then the value of GLP should rise as well. The risk is that the crypto market absolutely tanks and GLP loses some % in price, but over the course of a 1-2 year time frame that risk should be much less of a factor and the yield is genuinely good.

1 Like

Henlo,

Within the current macro situation, there’s zero need to be overexposed to volatile assets like BTC and ETH, and other high beta assets - all of which are included within the GMX/GLP ecosystem. Our treasury should be used to create strategic value, and should not be used to speculate beyond safe yields and investments that are as anti ponzi as possible.

As @asam0oo mentioned, I think I’d instead push USDC into Seed deals or focus on in-house projects. Hacks are rampant, and I don’t think it’s any different here. Not to mention that most of these projects are incredibly unsustainable in the long run. It is unknown how receiving rewards paid in AVAX is a positive thing considering it slid down for many months as well.

If esGMX is to be considered a ‘cherry on top’, then I’d advise the MC team and the original poster not to shill this as standardized and near-guaranteed yield, as it is clearly not. It’s far from 20-30%, and history will reconfirm this, if the project doesn’t already get hacked by then.

Voting no.

Thanks!

Honey Barrel
Vanquisher of non-Frens
The Freefolk Fellowship

honey-with-wooden-barrel-vectors

2 Likes

Good day Honey,
I think all your points are valid and worthy of consideration.
I dont suspect I’ll change your mind but I’ll just play devil’s advocate for a moment.

First point:

I’d argue having 5% exposure to a basket consisting of more than 50% stablecoins would be a far cry away from “overexposed”. Again this proposal is geared toward longterm. I’m not here to pick bottoms, but I’d argue that we are closer to the bottom than we are the top.

Second:

If passed, this proposal would not hinder our ability to invest in seed rounds. These funds would remain liquid and accessible to the DAO at a moments notice.

Third:

I’m not sure which data you’re referring to here. I can only say that I’ve been actively farming on this platform for quite some time and I can say that the APR while not constant or fixed, has stayed between 20-30% the whole time.
Again I’d just reiterate that this APR does not come from inflation, the majority of it comes from revenue generated by the platform. I.e. if you make a trade that costs $4 in fees, that $4 is used to purchase AVAX or ETH depending on which chain you’re on, and then is distributed 70/30 to GLP and GMX stakers.
As of today the APR on Arbitrum is 27% (100% ETH, 0% esGMX) and on Avalanche it is 25% (60% AVAX, 40% esGMX). As you mentioned “within the current macro situation” this is rather impressive revenue in a low activity environment across De-Fi as a whole.

As I said, I dont expect my counter-points will change your mind, but I think it’s only fair we look at both pros and cons.

Cheers!

Hey Joe,

Thanks for the prop. I do think in the current economic conditions cash is king and would like to see as much cash available as possible to the treasury.

Voting no as well

Regards

2 Likes

Fundamentally, I hope that we don’t consider ourselves a hedge fund and therefore I wouldn’t consider this proposal a mature or approachable one for a DAO such as Merit Circle.

GLP:

  • Has absolutely nothing to do with gaming
  • Brings 0 value to any of our members nor the DAO as a whole
  • Does nothing to help us on our mission of building the future of web3 gaming

This is literally just a bet that we would make that the token price would go up and that we wouldn’t get rektd by IL/depreciation.

Would vote with full-weight, NO.

S

1 Like

Hi @joebags

First and foremost, thanks for the above proposal!

After a thorough discussion period mainly on Telegram and briefly through the comments on the forum, we’ve come to the conclusion that there’s not substantial support for this proposal to consider going the official voting route. We can always re-evaluate in due time, but the outcome of a vote seems evident based on the discourse that happened after the proposal went live.

This topic will simply remain part of the governance section, and anyone is still allowed to share their thoughts. As per the standard forum guidelines, if there is no reply within 30 days, the topic will be locked and thereafter archived.

Thanks for understanding, and thanks again for putting in the time and effort to create this proposal.

2 Likes

I think we should stay away from structural products and make ourselves a pure VC like fund to invest into projects that can bring synergies to our community too. I don’t like this is what we should do after having 3AC as an example.

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