Gains Network’s Revamped Design: A Look into its Sustainability

Gains Network’s gTrade has undergone fundamental protocol changes since the last time we covered it in September 2022 as the protocol developers build towards sustainability while driving ‘real-yield’ to GNS token stakers and DAI LPs. Systemic flaws were uncovered in the original gTrade design when Terra collapsed in May 2022, and the protocol has since been altered to overcome its previous shortcomings. Additionally, gTrade was launched on Arbitrum to complement the Polygon deployment at the end of 2022, which has proved to be wildly successful thus far. However, it has yet to be seen if gTrade’s new design is enough to prevent an LP-driven bank run and subsequent death spiral akin to the one experienced in the LUNA, UST, and Anchor saga.

gTrade’s Revamped Design

gTrade is a DEX that enables high-leverage trading on a variety of asset classes through synthetic leverage and is being built by the team behind Gains Network; a platform on Polygon and Arbitrum that looks to scale horizontally by funding external development teams to build products that accrue value to the GNS token. The amount of leverage offered to traders reaches 1000x on certain asset classes, but traders’ gains are capped at 900%, with maximum position sizes constantly updated and enforced by the core development team to reduce the likelihood of wiping out DAI LPs.

gDAI Vault

All trades maintain DAI as collateral and DAI vault LPs are the counterparty to traders and thus exposed to trader PnL. The first iteration of the DAI vault allowed LPs to deposit DAI to earn trading fees and trader PnL. The only restriction on pulling liquidity was a limit of 25% of their total deposit each day. When the DAI vault reached a collateralization ratio above 130%, in other words, the amount of DAI backing the collateral being used for open positions reached a multiple of 1.3x, excess DAI from the vault would be used to buy and burn GNS. When the DAI vault became undercollateralized, GNS was minted and market sold for DAI in order to recollateralize the vault.

This is where the PTSD from the Terra ecosystem collapse sets in: When the DAI vault became undercollateralized, it created an incentive to be the first LP to withdraw DAI from the vault, which led to further under collateralization and subsequent GNS minting, which then put downward pressure on the price of GNS, which then required more units of GNS to be minted to recollateralize the vault. The cycle would continue until the GNS token went to 0, and the last LPs standing were stuck with the protocol’s bad debt. This is very similar to the classic death spiral experienced in the Terra meltdown when Anchor LPs providing UST for an unsustainable 20% APR spurred a bank run that transformed LUNA from a historically deflationary asset into a hyperinflationary one. Some other problems with the initial design included savvy on-chain users front-running GNS market buys and burns, as well as a lack of utility for DAI LP’s positions.

The new DAI vault, now referred to as the ‘gDAI Vault’, operates under the ERC-4626 tokenized vault standard, designed to support increased composability across DeFi in an easy way for developers and users. gDAI, an ERC-20 token, is an LP’s liquid representation of the DAI being provided. The exchange rate between gDAI and DAI algorithmically changes as trading fees and trader PnL accrues to LPs. This means that LPs no longer bear the burden of claiming rewards and restaking them, but instead auto-compound into the price of gDAI which leads to the gradual increase of collateral available for users to trade against.