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MLP Capital Appreciation
MLP holders primarily income from two sources. The MLP earns income from fees, and also from any (potential) capital gains from their long exposure to the basket of assets in the MLP.
Note that MLP holders will profit when leveraged traders make a loss and vice versa.
The MLP Capital Appreciation is a factor of two sources:
The MLP earns income from borrowing interest charged to levered traders. Borrowing interest is a function of both base asset utilisation and stablecoin utilisation. The following table displays the annualised borrowing interest yield for a given level of base asset (and stablecoin) utilisation. As you can see in the following table, as the utilisation of the base asset increases, the borrowing interest yield increases. Similarly, as the utilisation of the stablecoin increases, the borrowing interest yield also increases.
This table assumes a pool split of 60% base asset and 40% stablecoins
The MLP (potentially) earns a capital gain from their long exposure to the base asset(s). The MLP's long exposure is a function of both base asset utilisation and stablecoin utilisation. The following table displays the weighting of the portfolio which is long-exposed. As you can see, as the utilisation of the base asset increases, the MLP's long exposure decreases. However, as the stablecoin utilisation increases, the MLP's long exposure increases! This may seem counterintuitive, but this occurs because stablecoins are utilised to market make short positions (meaning that the MLP pool absorbs the opposite long position).
To demonstrate how the MLP return profile works in more detail, the following will demonstrate an example scenario payoff. In the following example, we highlight the (annualised) return profile for an MLP assuming that there is only one base asset (ETH), and the base asset's price has increased by 5%.
Fee Returns
Firstly, the LP will profit from any assets being lent out. We have found empirically that the borrowing fee makes up ~15% of GMX's fee income (as there are also other fees which are generated and directed to the MLP). These include traders' entry and exit fees, LPs' entry and exit fees, liquidation fees, and spot swap fees. The following table normalises this to produce the aggregate fee return.
Long Exposure Return
Secondly, since the base asset has appreciated, the MLP pool will have a capital appreciation. In the following table, the return is calculated as the MLP's long Exposure multiplied by the base asset's price appreciation.
Total Return
By summing up the fee returns and the return from the long exposure, we can see the total return in the following table. We anticipate the total return to be somewhere in the range of 26% - 96%!
N/B: Note that this analysis does not take into account any profits (or losses) the LPs will make from betting against traders.
Last modified 7mo ago