Gains Network might be cryptocurrencies’ next Cinderella story. Their product, the gTrade platform, offers decentralized leveraged trading with insane multipliers. Besides crypto, it synthetically hosts a variety of products including forex trading pairs and high demand US stocks like Tesla, Amazon, and Apple. Gains Network pitches gTrade by claiming it’s decentralized, but that’s not entirely true, yet. In the following article, we’ll analyze the leveraged trading platform to determine if it comes with inherent risks.
In any case, gTrade simplifies matters by relying on a single liquidity pool. It offers an unbeatable product in leverage terms: 50x on stocks, 150x for crypto, and up to 1000x on forex trades. The Gains Network product also pays liquidity providers a yield that oscillates between 15% and 50% APY. Those earnings come from liquidations and trading fees, not from liquidity mining or the Gains Network inflating the $GNS utility token. Which makes all the difference.
The main concept behind gTrade is the certainty that traders will lose more than they’ll win, which sounds about right. The problem is that the system is dependent on that fact, and that seems to pose a systemic risk. It's a vulnerability, and those can be exploited and attacked in ways still unimagined.The Gains Network’s gTrade relies on a central DAI vault, which acts as the counterparty to trades on the network. $GNS is their native token - stakers currently earn a percentage of trading fees and in the future will operate the protocol through decentralized governance. The system incentivizes users to keep their funds in the GNS/DAI LP, DAI vault, and GNS staking pool through #RealYield shared with them from the platform’s revenue.
The Gains Network official site defines what the company does as delivering “innovative DeFi ecosystem of products on Polygon,” and that’s the other key element in the equation. The Ethereum layer 2 solution offers many advantages, low gas fees being one of them. However, Polygon is not perfect, and the blockchain has stopped producing blocks before. For hours. An outage like that could give a leveraged trader a heart attack. And it implies a centralizing force at the blockchain level, which is not ideal. Recently, Gains Network announced that they’ll soon be launching on Arbitrum, which has received considerable attention from decentralized trading enthusiasts.
What is gTrade and what can I do with it?
According to Gains Network, gTrade is a “decentralized leveraged trading platform” that’s “liquidity-efficient, powerful, and user-friendly.” The characteristic that sets it apart is its “synthetic architecture.” That means, the user never takes ownership of the asset or borrows funds to access, leverage and multiply potential returns. All trades are over-collateralized. None of the trades impact the asset’s overall price. Users trade straight from their own wallets and don’t go through KYC identification procedures.
According to Gains, “The protocol revolves around the ecosystem's ERC20 utility token (GNS) and ERC721 utility token (NFTs). GNS and the NFTs are designed to be actively used within the platform (utility) and to allow ownership of the protocol through revenue capture & governance (soon).” The Gains Network has sold 1500 NFTs in various categories. The NFTs “offer increasing levels of boost to the LP rewards and Single Sided Staking.
Without an NFT, the APY (or the APR if compounding daily) you see displayed on the staking page will be the average APY you receive based on the previous week of rewards. With an NFT, you get a bigger share of rewards with the same capital.”
In the future, the Gains Network wants gTrade to become “the most adopted decentralized leveraged trading platform.” They plan for the organization to transition into a DAO and for $GNS to transform into a governance token. That DAO’s goal would be “to create great DeFi products that bring revenue that can be distributed in a $GNS staking pool.” So, holders will make bank if everything goes right.
It’s a big “if,” but, if it does, Gains plans “new products like its own casino and metaverse.” And users will be able to “create governance proposals to receive funding from the governance and create cutting-edge products.” The product’s early adopters have been greatly compensated so far, and it seems like they’re a big part of the Gains Network’s future plans.
Last but not least, as mentioned above, Gains plans on deploying gTrade in Arbitrum soon. For those keeping score, that’s another Ethereum L2 solution that’s also gaining ground against most of its competition, with several cool DeFi projects running on it.
$GNS, A Utility Token That Wants To Be More
The $GNS is the central element in the Gains Network contraption. To present it to us, they offer a history lesson. The $GNS “started initially as the $GFARM2 token on Ethereum, which was fairly distributed in an ETH pool and a GFARM2/ETH LP pool. The dev fund and the gov fund had a 5% share of the token distribution (10% total). It was later bridged to Polygon, and had a 1:1000 split to $GNS.” And they really want you to know that “over its lifetime it has been net deflationary.”
The idea behind the gTrade platform is similar to that of an algorithmic stablecoin like the ill-fated UST. In Do Kwon’s contraption, the Luna token was the $UST counterpart. The system maintained equilibrium by burning Luna to create $UST and viceversa. In the Gains Network’s leverage trading version, the system uses $GNS and $DAI. And it does a similar balancing act with the prizes for the winners and the penalties from the losers. As they explain it:
“When you win, it is taken out from our DAI trading vault. When you lose it is used to buy $GNS and burn it when the trading vault is overcollateralized (over 110% full). A 100% full vault is a vault that has the full balance that users deposited. When trades are opened, the vault balance rises.”
The difference is, $GNS is no longer minted when the DAI vault is undercollateralized - their system was reworked after seeing the fallout of UST. The theoretical supply cap for $GNS is 100,000,000. The number is a failsafe mechanism and should never be reached. The initial supply was 38,500,000 GNS and that number has been decreasing since the protocol’s inception. However, the issuance schedule depends exclusively on the gTrade platform’s users performance.
How Does gTrade Work?
As we already established, gTrade uses synthetic assets and the only liquidity is a $GNS and $DAI liquidity pool. A typical trade in the platform would go like this:
1. Open a $500 short on $ETH using 20x leverage.
2. The system consults the oracles, determines the price, and asks for the required collateral in $DAI. The oracles consult at least 7 exchanges to filter out distortion.
3. Since you’re a winner, let’s say $ETH tanked a little and you were wise enough to close the short at a 20% lower price.
4. gTrade calculates your earnings and pays you in $DAI from the vault.
By using such a system, the user never buys the asset nor does the user borrow funds to create the leveraged trade. As the traders lose, and most will, the $DAI vault gets to a point in which it’s necessary to put the money to work and use the extra $DAI to buy $GNS and then burn it. In the end, the $GNS token dilutes if users win too much and deflates when traders lose. And that’s the main reason that the Gains Network gets to claim that “over its lifetime” their token “has been net deflationary.”
Trading fees fund the liquidity pool rewards that keep people’s $DAI in the system. NFT bots, affiliate programs, and others also get paid from the protocol’s revenue. In fact, the system uses approximately half of the fees that the gTrade platform generates to pay for rewards of various kinds.
Comparison to Luna’s Architecture
The way gTrade works is similar to an algorithmic stablecoin, but the question is, does it carry the same systematic risks? In a medium post about the Luna subject, the Gains Network framed the situation in an interesting and surprising way:
“It’s been a very tough week for most people in the space, between LUNA going to 0, $UST depegging, $USDT risking a depeg, and the bloodbath in the markets. But you probably already know. This has created unprecedented conditions which allowed slightly more than $1m in profit to be realized on the LUNA/USD pair on gTrade.”
In the same breath, the Gains Network admits to a concerning level of centralization. The Luna situation and the downturn in the bitcoin market at the same time, created “a slight panic in the community, which could have led to a negative feedback loop if we hadn’t acted immediately.” The Gains Network’s actions were to pause “minting of the $GNS token by the DAI vault.” They also “more than tripled the APR on the DAI vault, giving everyone time to digest what happened.”
That cushion time sounds good, but it screams of centralization. And the Gains Network’s reasoning behind the decision revealed an unexpected vulnerability in the system: “some of the altcoins we were offering were unprofitable to the protocol, as they weren’t liquid enough and therefore gave a significant edge to traders, which was higher than the fees generated from the volume.” Could this happen again on a larger scale? Gains Network delisted more than a few coins to prevent this in the future:
“We have delisted $LUNA, $AAVE, $EOS, $YFI, $CRV, $DASH, $NEO, $THETA, $TRX, $ZRX, $XMR, $FTM, $APE, $SHIB, $BAT, $CHZ, $AXS, $COMP, $ZEC, and $ICP. Please note that they can be relisted in the future if they respect our listing requirements again. Most were delisted because the market downturn reduced their liquidity and market cap significantly.”
In the same post, the Gains Network admits to further vulnerabilities, even more centralization, and to tinkering with the product:
“It is also now clear that we cannot rely on minting $GNS to collateralize the vault, as it can start a potential death spiral every time.”
“The solution is not to rely on $GNS, but to rely on additional $DAI, which we were already doing, but not enough due to relying on minting. This means increasing the overcollateralization ratio to at least 130% so that we can easily stomach 30% drawdowns.”
“This is real collateralization because the DAI is there and we can use it. It is an insurance fund against drawdowns.”
The gTrade architecture was at this time (May 2022) comparable to the Luna model, but they’ve since made changes to address those vulnerabilities (as seen above). Unfortunately, these changes weren’t made in a decentralized manner, as their DAO governance is not yet live. The overall sentiment toward gTrade’s swift action during the UST situation was positive, but for some it was a concerning indicator of centralization.
Buy / No Buy Recommendation
Trading derivatives with leverage is not going to go out of style. This is a product with infinite demand and the Gains Network has treated its early investors very well so far. However, the gTrade platform is at a delicate balance and comes with perpetual risk. People are willing to take the counterparty risk because they’re well incentivized, and gTrade offers an unbeatable product. Just as long as everything goes the way it’s supposed to.
It’s a risky proposition, but now you know what you’re dealing with. If your risk appetite is strong and decentralized leverage appeals to you, consider using the Gains Network’s services.