A New Way to Gear Up Your DeFi Rewards | TKX Weekly

5 min readOct 29, 2022

Part I. Gearbox

Traditionally, DeFi leverage involves flash loans or revolving loans, which results in most of the assets being locked in a single protocol. The new DeFi protocol Gearbox is trying to solve the problem. The project recently started its Liquidity Mining Program, which brings hype on Twitter. If you are wondering what is Gearbox and how it works, here is it.

Overview

Gearbox calls itself a “generalized leverage protocol.” It allows anyone to take DeFi-native leverage and then use it across various (DeFi & more) protocols to earn leveraged yields, enabling you to compose your position as you want. Users can include leverage with Gearbox into their strategies and use it on DeFi protocols like Uniswap, Curve, Convex, Lido, etc. Assets can be borrowed to trade or farm with 10x leverage at most. Composability is at the heart of Gearbox Protocol’s ethos as well as its modular architecture. Its core vision is to become a leverage middle layer.

Background

Gearbox came to life at the MarketMake Hackathon by ETH Global in January 2021. The core developer of Gearbox is Mikael Lazarev, who is the technical lead. Mikael has more than 10 years of experience in software development. He has won hackathons organized by Coinlist, Wrike, and Nucypher, and was a finalist in ETHGlobal.

Now, Gearbox is a DAO, run by various contributors and teams. Gearbox aims to be a highly decentralized protocol and founding members have been progressively transferring the core code to DAO, aiming to be completely driven by the community like Yearn.

Mechanisms

Gearbox, as a leverage lending protocol, the core theory is no different from other DeFi lending protocols. There are two main roles:

Lenders: liquidity providers who seek passive yield and are risk-averse. It is similar to providing liquidity to lending protocols like Compound and Aave. LPs’ assets are utilized/lent by others and compensated by APY.
Borrowers: can be traders, farmers, and protocols who wish to increase their position by borrowing liquidity from the protocol at multiples of their collateral. Borrowers will take the risk of DeFi protocols and pay the interest.

Credit Account

The key aspect of Gearbox is credit accounts and credit managers, which allow Gearbox to provide under-collateralized lending (more like margin funding) and hugely improve the utilization rate. The maximum leverage that Gearbox provides is 10x.

A credit account is an isolated smart contract that holds the user’s collateral and borrowed assets. It is where users can start their leverage. Users can trade, farm or do whatever strategy they want through credit account, like a DeFi wallet. However, a list of allowed tokens and protocols is in place to manage risks.

Although users’ assets are stored in credit accounts and all trades happen on third-party protocols, users’ assets are always in the custody of the smart contract.

Liquidation

Credit accounts contain users’ funds and borrowed amounts from Gearbox’s pool. To ensure liquidation, the credit account will continuously assess its value. The risk model Gearbox uses to assess the position of a credit account is the health factor. If the health factor is less than 1, the credit account can be liquidated with the liquidator’s premium.

However, one thing is different for Gearbox: there is one input called liquidation threshold, which is defined by 5-min, 15-min, and 1h change of the asset’s price for the last 180 days.

Protocol Fees

As a leveraged lending protocol, Gearbox charges fees from different operations:

Liquidation Fee: current liquidation fee going to the liquidator is 4% and 1.5% goes to the protocol
APY Spread Fee: 50%
Liquidity Provider Withdrawal Fee: 1% (LP withdrawal fee is planned to be removed)

Final Thought

Gearbox is a strong community-driven project started from ETH Global Hackathon. The innovations equip incredible composability and improve capital utilisation. As a generalized leverage tool, Gearbox not only can satisfy DeFi ‎enthusiasts to implement complex strategies but also provides general users a simple leverage tool.

Now Gearbox is doing Liquidity Mining Program (LMP) to boost its TVL and going to launch V2 with a new interface. In short term, TVL and daily users will look great, but it is challenging to sustain as the APY is mostly from its native token, real APY is not high and borrowing demand is very low.

In the bear market, borrowing demand is way lower than in the bull market. On top of that, the current 10-Year Treasury rate is 4%, which is higher than the average yield in DeFi. Hence, Gearbox has to experience a tough time in the short term.

Part II. Market Updates

FTX could launch its own stablecoin via a partnership, says Bankman-Fried
FTX could launch its own stablecoin, CEO SBF said in an interview but would prefer launching a stablecoin via partnerships.

Apple cracks down on NFT functionality, social post boosts with App Store rules
Apple updated its App Store policy to restrict apps from using NFTs to incentivize users to purchase items or features to avoid 30% App Store fees. NFTs are allowed to exist within apps on the App Store but they can’t unlock additional features or content

MakerDAO Community Approves Proposal to Place USDC in Coinbase’s Custody Platform
MakerDAO community approves proposal to place up to $1.6B in Coinbase’s custody platform, Coinbase Prime, where it will earn a 1.5% reward.

Crypto Exchange SushiSwap Approves Restructuring, Will Create 3 Firms for DAO
SushiSwap approves restructuring — the development of the DAO will be managed by three organizations, which would be based in Panama and the Cayman Islands.

Magic Eden, Rarible join Twitter pilot to embed NFTs in tweets
Twitter will expand its trial of its Tweet Tiles feature to five NFT platforms, which will allow display of NFTs directly within tweets. Marketplaces Rarible, Magic Eden, Dapper Labs and Jump.trade will join the pilot, making them the second batch of companies to test the new format.

Part III. Fundraising News

Arf — Web3 banking platform
Raised $13M in a seed funding round. Other investors include Coinbase, Solana, FTX, Kabbage, Circle Ventures, Hard Yaka, United Overseas Bank Venture Management and others.

Thala Labs — Aptos DeFi applications developer
Raised $6M in a seed funding round co-led by ParaFi Capital, White Star Capital and Shima Capital. Other investors include Beco Capital, LedgerPrime, Qredo, Kenetic Capital, Big Brain Holdings, Builder Capital and others.

Hexens — Blockchain security company
Raised $4.2M in a seed funding round led by IOSG Ventures. Other investors include Delta Blockchain Fund, ChapterOne VC, Hash Capital, ImToken Ventures, Tenzor Capital and others.

Paragraph — Web3 publishing platform
Raised $1.7M in pre-seed funding round led by Lemniscap. Other investors include FTX Ventures, Binance Labs, Global Coin Research, Sfermion and Seed Club Ventures.

Kollider — Bitcoin derivatives exchange
Raised $2.35M in a seed funding round led by Lemniscap. Investors include Castle Island Ventures, Polychain Capital, Alameda Ventures, Okex and others.

Reference

https://docs.gearbox.finance/
https://medium.com/gearbox-protocol/leverage-2-0-credit-account-as-a-defi-primitive-8be6ea86e883
https://defillama.com/

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Note: TKX Capital do not offer any financial advice for retail investors and we have no affiliation with projects in this research.