Gearbox Protocol: Essentials
Gearbox Protocol opens up various options for earning: allowing anyone to margin trade on Uniswap, leverage farm on Curve, leverage liquid stake on Lido, leverage restake with EigenLayer derivatives, and use 10X more capital on protocols you find interesting and promising to invest in.
The main goal is to make decentralized leverage a real thing thanks to Credit Account abstraction. Gearbox is supposed to be a place where lending and prime brokerage meet finally.
Gearbox protocol is ambivalent:
- Passive lenders: these are asset lenders who are interested in passive yield and low-risk tolerance. It could be compared to providing liquidity to Compound and getting cTokens back. Lenders' assets are utilized by others, for which they get APY. Anyone can be a liquidity provider on Gearbox. Check out how it works here.
- Borrowers: active traders, farmers, and protocols who want to increase their position by borrowing liquidity from the protocol at multiples of their collateral. The liquidity they borrow can be 10x of what their initial size. That’s how leverage works. Find out more here.
source: https://docs.gearbox.finance/overview/how-it-works
GEAR Token
GEAR token is an ERC20 utility token, acting as a governance token for the protocol. It stays exposed for taking new functions the DAO could propose for it. The GEAR supply is capped at $10B which can't be technically changed.
Source: Gearbox docs
Utility & Staking
Tokenomics can be adjusted in different ways. What is crucial is that the protocol has had the fee switch turned on by the DAO back in 2022. There are 4 fee streams, and they are all configurable to adjust to different use cases and integrations. GEAR staking is live with gauges, almost 3% of circulating is now staked.
Protocol Fees
All protocol fees that DAO earns go to the fee guard. The protocol is fully operated by holders. The fees, collected in dTokens, automatically become a Reserve Fund unless unwrapped. As Gearbox is modular, fees can vary. They differ from one Credit Manager to another, depending on the integrations inside.
Most of the fees are static and are voted in through the main governance process. However, Gauges are voted on separately onchain every epoch by GEAR stakers.
Gearbox: Passive Lending
Earning with Gearbox is as simple as lending on Compound or Aave. Next to that, pools are semi-isolated. Lend liquidity in the asset you choose and start earning APY! No impermanent loss.
With Gearbox's Credit Accounts, your assets never end up in custody of any one person or company. They are held on an isolated smart contract after they are borrowed.
How Is Yield Generated?
The yield comes from various sources:
- Borrowers pay rates according to the regular utilization curve. The more the liquidity in the pools is utilized, the higher the rate;
- Borrowers pay extra rates according to gauges. These rates can be configured by GEAR stakers and vary from epoch to epoch;
- Any extra GEAR rewards or other tokens that are available.
M for Modularity
The protocol can function into modules enabling individual pieces to be used in various contexts and yet serve their purpose for Gearbox when used together. That delivers higher flexibility for:
- Better Composability: the opportunity to integrate and add adapters into new protocols and assets quicker;
- Enhanced Risk Granularity: the possibility to add any interesting credit opportunities without increasing risks to the protocol. Thus, lenders have a wider choice concerning risks.
What else does modularity bring to the table?
- a separate risk pool where lenders can be exposed to profitable assets staying 'passive' and making more yields on top;
- DAO treasury with “its own gearbox” where their own governance decides the AllowedList and their LTVs, essentially pricing their own risks;
- KYC pools with restricted lists.
Source: Gearbox docs
In the future, there can be Pool N or other pools like the Alpha pool… modularity doesn’t have to stop. This modularity overall helps granularize risks while allowing for growth. Such a pool setup doesn’t fractionalize liquidity which is also quite important for lending-like protocols.
How to Earn Passive APY
On Gearbox you can earn APY in the same asset and additional GEAR APY. To do that, follow these steps:
Step 1.
Go to the Passive Pools page and click on the asset pool you want to earn with.
Step 2.
Decide on the amount you want to supply or just click on MAX
Step 3.
Click ‘Approve’ and wait for the transaction to be confirmed. Then, click ‘Supply’ and wait for the confirmation. Once a transaction is confirmed, you will receive staked diesel tokens.
You accrue GEAR or any other extra token yields too, those are accruing to your staked dTokens too, but you need to claim them.
You can claim the GEAR rewards either onchain through Etherscan or by clicking on the rewards tab.
As for Notum, the platform offers to consider the following ones with nice risk profiles and interesting numbers in terms of TVL and APY:
Pool
Protocol
Risk
Base APY
Total APY
TVL
Pool
Protocol
Risk
Base APY
Total APY
TVL
Pool
Protocol
Risk
Base APY
Total APY
TVL
Passive Yield Strategy Breakdown
That’s a real fact — when you just stake $ETH for ~4%, you don’t use the whole potential of your asset, so you miss the opportunity to earn more.
Gearbox protocol wants to fix this and find a solution in leveraged borrowing that boosts $ETH lenders' APY to 25%.
After launching leveraged restaking, it saw a serious inflow of borrowers seeking to enhance their restaking airdrop rewards to the fullest. As a matter of logic, this surge in demand ended up with the growth of the lending capital utilization ratio which impacted the APY.
The formula is rather simple: to supply more borrowers, it is essential to incentivize lenders, and the increasing APY serves this exact purpose.
The $USDC lending APY has surged to 14% recently, while $ETH has an impressive 25% APY.
On top of other perks, lending is a relatively low-risk strategy. The only risk you're exposed to is the smart contract risk, which is the same risk you face when staking. The leveraged restaking launch of ETH resulted in an initial increase of the APY to 17%, and then to 22% to foster new deposits.
Be ready, as some impressive numbers are coming! This could be translated into 4,000+ ETH or $13M+ in fees generated by lenders.
It's crucial to mention that even when the supply/demand comes to its norm, lenders with Gearbox will continue receiving an APY of 17% which is higher than the average. That’s achieved thanks to the leveraged nature of borrowings.
The APY you gain is split into two parts:
• Organic borrow APY;
• $GEAR incentives.
Your organic borrow APY accrues to your dTokens (Diesel Tokens) automatically, so you don’t need to do anything.
As for the $GEAR incentives, they are accumulated separately. You can claim them just by clicking on a button. Yeah, that's simple.
How Safe Gearbox Is?
Also, audits can’t guarantee complete safety, Gearbox protocol goes through a number of them (you’ll see the list of the latest ones below). In the world of decentralized finance, there are always high risks involved, as many platforms are composable and depend on each other. Nevertheless, Gearbox is constantly evolving and thus, going through audits.
- ChainSecurity (Q2-Q4 2023): full V3 coverage, reports (see multiple files);
- ABDK (Q2-Q4 2023): full V3 coverage, reports (see multiple files);
- Decurity (08/11/2023 - 20/11/2023): governor audit, report.
Final Thoughts
Gearbox has created a DeFi primitive that provides cross-chain composability and blends various protocols within the space. It helps users to squash the maximum out of their crypto.
The protocol stands out from other DeFi lending protocols, as Gearbox’s borrowers don’t have custody over the assets they borrow from liquidity providers. Besides, they introduced modular and composable pools meaning that users can deploy and redeploy different pools up to their choice. That gives extra freedom and flexibility. Thus, a taste of true decentralization.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.