All you need to know about Gearbox Protocol (GEAR)

Introduction

Lending is the second largest DeFi track, second only to DEX. The main driving force behind the explosive growth of the DeFi ecosystem in 2020 was the value explosion in the lending market. Currently, there are over 330 lending protocols in the market, and lending products are becoming more diversified. The total value locked has exceeded $22 billion. From the current data of the lending sector, the funding scale of Ethereum lending protocols is undoubtedly the largest, while other network ecosystems have a smaller share. Ethereum is still undisputedly the main battlefield.

Source: https://defillama.com/protocols/Lending

Based on the different levels of collateral fund reserves when borrowers apply for loans, agreements can be categorized into overcollateralized loans and non-overcollateralized loans. Overcollateralized loans refer to cases where the value of the borrower’s debt is lower than the value of the collateral. Non-overcollateralized loans, on the other hand, do not require sufficient collateral as security. Among non-overcollateralized loans, there are leveraged loans and unsecured loans. Leveraged loans reduce the risk of default but usually come with limitations on the use of funds and have limited composability. Gearbox opens up possibilities for leveraged loans through credit accounts, offering greater flexibility and composability. This article will provide a detailed introduction to the product logic, economic model, and current development status of the Gearbox protocol.

Introduction of Gearbox Protocol

Gearbox Protocol was selected as a finalist in the Ethereum hackathon event in January 2021. In August of the same year, the team was established and community operations were initiated. The beta product was released on the Ethereum Koban testnet in October 2021, and it went live on the Ethereum mainnet in December. The early version of the product was initially focused on building a margin trading platform based on Uniswap, but it was later refined into a generalized leverage protocol. After more than two years of development, the current product has been iteratively updated to Gearbox Protocol v3, continuously expanding the integrated protocols, including DeFi protocols, RWA track, and NFT. In the summer of 2021, the project received an initial funding of $2.3 million. In August 2022, the team completed a $4.15 million DAO financing, followed by a $1.585 million financing in September of the same year.

Source：https://docs.gearbox.finance/

The characteristic of the protocol is to achieve high-leverage lending through a credit account. The credit account is actually a rentable and separate smart contract. The collateral and loan funds deposited by users are held in the smart contract and cannot be directly withdrawn to the wallet. However, users can choose whether to use the funds in the smart contract for other DeFi protocols supported by Gearbox, for trading or mining. Currently, protocols such as Uniswap, Curve, Sushiswap, Lido, Convex, Yearn, etc. have been integrated, fully leveraging the composability of DeFi.

Source: https://gearbox.fi/

Core Logic

Gear follows a borrowing and lending process, which includes depositing, withdrawing, borrowing, and repaying. For depositors, the process of depositing and withdrawing assets is similar to other traditional lending agreements. After depositing assets into the lending pool, users receive a certain amount of deposit tokens (dToken) as interest-bearing tokens in Gearbox. When withdrawing deposits and interest, dTokens are exchanged for the corresponding assets through smart contracts and destroyed. For borrowers, there are significant differences. They are required to deposit collateral and borrow debt in the same asset type, with the debt value exceeding the collateral value. The borrowed funds can only be used in the credit account.

The core logic of the Gearbox product is as follows: Depositors deposit funds into the lending pool, which can be borrowed by borrowers. Borrowers need to use a credit account to engage in leveraged borrowing from the pool. The borrower’s collateral and debt are stored in the credit account, which can interact with other DeFi protocols such as Uniswap and Curve.

Source: https://docs.gearbox.finance/overview/how-it-works

Credit Accounts

The core of protocol design is the credit account, which is an independent smart contract that holds the borrower’s funds. The borrower can hold the funds in contract form but cannot withdraw them directly. This means that the funds in this account are considered collateral for the debt, and the borrower can operate these funds through instructions and strategies sent to the account, such as mining or trading. The account only supports authorized protocols or tokens. When the value of the investment portfolio held by the account falls below the liquidation threshold, the account will be liquidated.

Borrowing users can open a credit account in the Gearbox protocol, deposit collateral, and select a leverage ratio to borrow funds from the lending pool. The amount of assets that can be borrowed depends on the value of the collateral deposited by the user, the leverage ratio, and the availability of funds in the lending pool.

Users can control the funds through the credit account and decide whether to use them for trading or mining in other protocols supported by Gearbox. As shown in the diagram below, a borrowing user opens a credit account and deposits 25 ETH as collateral. With a 3x leverage and a 1.68% loan interest rate, they borrow 75 ETH from the funding pool. The collateral and borrowed funds together amount to 100 ETH, which is kept in the credit account. Users can trade on Uniswap, Sushiswap, or engage in mining on Curve or Yearn through the credit account.

Source: https://docs.gearbox.finance/overview/credit-account

The characteristics of a credit account are twofold. Firstly, the initial value of the collateral deposited by the borrowing user and the funds borrowed are both held in the credit account, and the assets cannot be withdrawn to the wallet until the account is closed. Secondly, the type of collateral initially deposited by the user will serve as the valuation unit for the credit account.

Interest Rate Model

Borrowing users in Gearbox only need to pay loan interest for leveraged borrowing, and they do not need to pay funding rates. The interest rate model used is also quite common. The model mainly regulates the interest rate changes in the borrowing pool through the utilization rate of funds. The higher the utilization rate of the borrowing pool, the higher the interest rate for users. When the optimal utilization rate is reached, it will cause interest rates to soar, encouraging borrowing users to repay their debts and reducing borrowing demand. At the same time, it incentivizes deposit users to provide deposits to the liquidity pool, increasing liquidity.

The interest rate formula is as follows:

Source：https://docs.gearbox.finance/lending-market/pools-and-apy

Among them, r is constant and the specific value is determined by community governance. U(t) represents the actual utilization rate of the lending pool, and U represents the optimal capital utilization rate of the lending pool, which is the inflection point. The interest rates for some targeted assets are set as follows:

Liquidation Logic

Gearbox has introduced “health factor” to assess the risk of each credit account, and accounts with a health factor less than 1 will be liquidated. Based on the liquidation formula, an account will be liquidated when the total value of assets in the credit account is less than the debt value and interest.

Source: https://docs.gearbox.finance/overview/liquidations

The liquidation amount includes the user’s loan amount, the interest to be paid, and the liquidation fee. Currently, the liquidation fee is set at 5.5%, with 4% given to external liquidators as a liquidation reward and 1.5% given to Gearbox DAO. The liquidation funds allocated to the DAO will be used as a reserve and will also be deposited into the lending pool to earn interest on deposits.

Source：https://docs.gearbox.finance/overview/protocol-fees

Leverage Farming

Gearbox is able to implement a “one-click strategy” for leveraged farming. Users can open a credit account and choose to borrow assets against their collateral to obtain corresponding leverage. The protocol will deposit the user’s collateral assets into protocols such as Lido and Curve for mining, thereby increasing returns. Users only need to input the quantity of collateral they want to deposit on the Gearbox platform to complete this process.

Source：https://app.gearbox.fi/strategies/list

Tokenomic Model

GEAR is the native token of the protocol, with a total supply of 10 billion tokens. The community decides the supported assets and protocols in Gearbox through DAO governance proposals, including various parameter settings for the supported assets. The official allocation plan is as follows: 58% allocated to the community; 20% allocated to early Discord members; 9.2% allocated to early App testers; 1.28% allocated to early external contributors; 11.52% allocated to the company.

Source: https://docs.gearbox.finance/gear-token/supply-information

The main purpose of GEAR token is governance, deciding the supported assets and protocols in the protocol through community proposals.

Development Status

Gearbox Protocol is currently updated iteratively to V3. The total value locked in the liquidity pool has surpassed $30 million, and the total amount of loans is approximately $9.23 million.

Source: https://charts.gearbox.fi/overview

The protocol currently supports 9 types of crypto assets, with the largest pool being ETH. The DAI pool offers the highest deposit yield and also has the highest fund utilization rate.

Source: https://charts.gearbox.fi/pools

According to official data, there are 1452 credit accounts created, out of which 62 are active accounts.

Source: https://charts.gearbox.fi/accounts

According to Dune Analytics, the number of new credit accounts created on the Gearbox platform is around 20 per day.

Source：https://dune.com/p_dot/gearbox-v3-passive-pools-are-being-filled

Conclusion

The innovation of Gearbox lies in the use of a credit account to achieve leverage lending and composability. The collateral deposited by users and the borrowed funds are kept in smart contracts. The overall product design logic is reasonable, and after more than two years of polishing, the product has been iterated to v3. The protocol is continuously integrating liquidity mining protocols, including DeFi, RWA, and NFT, to provide users with more application scenarios. It has already achieved a certain business scale and will focus on becoming a leverage tool in the future. The platform will enable activities such as trading and mining with leverage in other protocols.