Intro hook
GNS is a company that instead of shares has tokens, those can be bought on the Polygon network (a Ethereum L2).
I say company because I want to drag you away from the priors and biases that equity investors (if you are reading this, you probably are) have about crypto. We will use Benjamin Graham mental models to explain it.
Although there’s a lot of discussion about the actual, real use case for dapps (Decentralized applications), it is undeniable that DeFi really shines in applying everyday finance concepts, concepts that are well implemented and efficient in the “real” world and strip them out of regulation.
Bitcoin is gold unregulated, outside the control of the government, or at least, that’s the motto. DeFi is finance outside financial regulations, it is the wild west out there.
Business model
GNS is trading platform, we could differentiate between the website(s), which is the UX and the platform behind it that operates with smart contracts on the Polygon blockchain.
Synthetic trading with leverage is a well known business model, in fact it is a quite profitable business model. Traders lose as high leverage implies random movements dictate the outcome instead of anything predictable, like funnymentals. You add a layer of fees and the traders fight an uphill battle. The house wins.
It is so profitable that governments and regulators normally restrict leverage and try to protect the traders (look at CFD regulations in the European Union), sometimes pressure is enough, like with Binance and FTX reducing leverage to x20.
However, traders want the rush and blockchain based dapps can’t be coerced. Here in lies the opportunity for GNS. A trading platform with no KYC, max x150 leverage in crypto and x1000 in FX with stocks coming soon, scam-wick protection, no funding fees and a smart dev in charge of everything.
Economics
This is a company right? Let’s see how it makes money.
Whenever a trader opens a trade, he pays 0.06% (0.08% if a limit order) on the total value of the trade. ie: a $100 long on BTC at x100 leverage pays $10.000 x 0.06% = $6 on fees when it is opened and the same amount when closing the trade.
There are some extra fees that go to bots that execute the limit orders, stop losses and liquidations, but we can ignore them for the sake of simplicity.
What happens to those opening fees?
1/3 goes to the project fund. (Reserves)
1/3 goes to the dev fund. (G&A)
1/6 can be saved if they trader is using a referral link with the other 1/6 goes to the referrer account. (S&M)
It is clear they pay for the operating costs of the business
What happens to those closing fees?
All goes to the Liquidity Providers (COGS and dividends?)
If you don’t know how decentralized exchanges provide liquidity for tokens, check this.
Liquidity providers stake their GNS tokens and their DAI (stablecoin) on Quickswap to provide financial backing for the platform to work.
So far, we have seen that if you own GNS tokens and DAI tokens and stake them on Quickswap, on top of the 0.025% fees on every transaction on the pool that Quickswap offers to reward the stakers, you get whatever amount of closing fees the platform generates.
As of today you get an APR of 53.95%:
This APR depends on the activity of the platform and the number of stakers. It is a nice yield, but you face impermanent loss. (Which is a terrible name for saying that you give up part of the token appreciation upside for that yield)
Ok, ok, this is good, but how about the collateral of the trade?
Nice you ask, I will briefly explain how the platform works.
If we get those $100 levered x100, $6 ($4 with a referral link) go to the opening fees. The other $94 go to the DAI vault.
Before the DAI vault, those $94 were used to buy GNS on the Quickswap pool and burn them (destroy them), when the trader claimed some of the collateral because he wanted to close the trade or the target price/stop loss was hit, the protocol would mint (create) GNS tokens and sell them to provide the DAI for the trader.
If you are a shrewd reader, you have slowly started to realise how the protocol worked (still works but with extra steps). On top of the fees, the negative balance of traders (ie traders losing more than they win on average) becomes a buyback (those Warren Buffett likes and promotes), on the other hand, if traders win on average that gets financed with token issuance (like the ARKK compound). Spoiler, traders lose on average.
Now I have given you the goodies, stay with me for the brief explanation of the platform as it is designed now.
To avoid doing so many operations on the Quickswap pool, which required paying more fees and gas (commissions to Polygon), the DAI vault was envisioned as a cash buffer.
The way it works is people can stake DAI in the vault. When the trader opens the trade, those $94 get poured into the vault, when the traders wins $400/loses $40 it gets drained from the vault. The DAI stakers don’t risk their money (aside from contract risk, which would be a bug on the vault and subsequent hack - you can purchase insurance on it now), if a lot of traders win and we had $1M in the vault, the protocol issues (mints) GNS tokens and sells them to refill the vault. If the vault gets above 110%, the excess is used to buy and buyback (burn) GNS token. For the opportunity cost of staking the DAI, 1/10 of the closing fees gets diverted to them, creating a risk free interest on a stablecoin. As of today it is around 19%.
The collateral of traders that lose (and they lose on average) is pure profit that goes to buyback stock, sorry, tokens in order to shrink the sharec… sorry, the number of tokens.
Although the burning is very high from this recent period of volatility, the inflation (deflation if negative) is of -23.57%. Which puts the protocol on a PER of x4/5. I know, it is not Visa, but doesn’t look expensive.
Of course, the buyback has more impact the lower the token price and viceversa.
In fact this is the historic token supply, there are 29.5M tokens now:
Here; you don’t need to take my word for “traders lose”, so far $4M:
Charts from here
Now that we are up to speed with the structure of the protocol/company, we need to do what we do with stocks. Does it grow? Are customers happy?
I have two KPIs for this part.
24hs volume on the platform:
Daily users:
Looks good!!
Risks
Competition & Valuation:
Crypto is a brutally competitive space.
Trading platforms, as a business, have little barriers to entry and little switching costs. Normally, this kind of trading goes attached to a better/more sticky platform, like brokerages.
This is the case for stocks and crypto alike, with the biggest brokers (spot volume) offer margin trading and massive leverage. For centralized exchanges FTX provides a nice table, as we can see, volumes are massive compared with GNS. I think this figure could be a decent measure of the TAM, penetration is minimal.
If we fine tune to trading platforms on the blockchain, what we could call decentralized trading platforms, we have several, the biggest are DyDx, Perp Protocol, Mango, GMX, CAP and Bonfida.
DyDx is the VC backed gorilla, so far it has raised at least $95M from firms like Andreessen Horowitz and Bain Capital. As of today (1/2/2022) it shows more than 1BN volume. As for valuation and tokenomics, DyDx is an inflationary token (Maybe you recall one of those companies that issue shares to capture capital and build a product). The fully diluted market cap is 6BN, as 1M tokens will be available in the next 4 and a half years. After that it will print 2% share dilution (inflation).
GNS is a $110M market cap and has around $100M volume, max 100M tokens (which is a security mechanism in case traders get extremely lucky for a long time), actual tokens are less than 30M, being a share buyback machine (deflationary), we can think of those 30M as an upper bound. So that’s why I don’t use fully diluted when valuing GNS.
Perp Protocol is a $600M market cap with $53M volume in the last 24hs and $400/500M of volume in the last 7 days.
GMX is a $543M market cap with $80M volume, it varies a lot. Another inflationary token.
I could keep going, if you are really interested check yourself, but even not accounting for the excellent tokenomics and the fact that the protocol pays the dev with the fees (and he is heavily aligned, owning quite some tokens), GNS is undervalued vs peers.
Regulation
I tend to think of it more like an opportunity rather than a threat. If regulations forces down or constraints the centralized exchanges operations, part of that will flow down into the blockchain and decentralized platforms will benefit.
The only non-centralized part of the GNS protocol is the website, it is very easy to replicate with another URL and the dev is trying to fully decentralize that too. Nobody wants a US judge against you, but given the volume of GNS in the big scheme of things, I think it is very unlike anything like that could happen.
This is crypto
There is an inherent higher risk from being crypto, you face contract risk (GNS contracts are audited by Certik, but still, there could be a bug they didn’t spot) getting money in and out of Polygon - or any blockchain really - is a time and fee consuming process, although not terrible, it is not an easy process that can spook potential costumers.
and the best part is when the comp... protocol takes over LP it will create 50% profit margin that will fully convert to fcf and be distributed to owners.. all from recurring fees and paid in dolla.. stablecoin