November 16, 2022
Bear markets are for builders, and it seems like this one has many great releases to offer. In the wake of the freshly introduced LUSD Chicken Bonds which helps support the token’s liquidity, another protocol is joining the effort with an innovative approach: GearBox, the composable leverage protocol.
Just like Chicken Bonds, GearBox is a brand new type of protocol, with no equivalent alternative available: it introduces a new super-efficient form of borrowing for leverage-hungry degens while creating another attractive passive and risk-controlled earning opportunity for those who supply the borrowed tokens.
GearBox went live about two weeks ago, on October 31, 2022. It has attracted over $128M of TVL since, demonstrating a significant product-market fit. The supply side is actually lagging behind, with most markets at >80% utilization because there is so much borrowing demand.
So with this post, we’ll take the time to understand the novelty GearBox is bringing to the table, and how it can impact the LUSD/3CRV pool, one of the supported and most used collateral tokens on the protocol. But before we get to that, let’s consider what GearBox V2 means for Liquity, since the LUSD/3CRV convex token is one of the supported collateral.
First the timeline. GearBox V2 is already live and used to leverage LUSD/3CRV Curve/Convex yields: so in this post, we’ll be able to have look at the observed usage data to estimate the impact of this product.
GearBox is currently in a controlled launch phase, where only a limited pool of users can use the leverage service. Further expansion of the user base should help GearBox sustain its current rapid growth pace.
If you are interested in GearBox and would like to partake, you are a supplier of tokens used by leveragers (open to anyone), to earn a native yield and GEAR tokens. So if you’d like to earn and provide liquidity to facilitate LUSD/3CRV leveraging, you can already supply DAI or USDC on GearBox.
GearBox is a novel take on an underused DeFi primitive: smart contract wallets. Any smart contract can store funds and thus by definition is a wallet. However, the smart contract features can be catered for that specific use case, like Gnosis Safe is doing, providing convenient and flexible multisig wallets widely supported across the industry.
In GearBox’s case, the additional logic provided by the smart contract wallet (called Credit Account) is used to restrict what can be done with the funds borrowed by leveraging degens, providing additional security to suppliers. Indeed, unlike on Liquity where the borrower gets the LUSD borrowed sent to his wallet directly, with GearBox, the borrowed assets never leave the Credit Account (and collateral as well).
Thus, it’s impossible to use GearBox to leverage decent collateral and ape into say, a suspicious meme coin like SHIBA for instance. Instead, the protocol allows borrowers to deploy the funds in pre-selected and authorized protocols and pools, including Yearn and Convex ETH and stablecoin vaults. This is enforced directly by the Credit Account, which stores the fund, so this is a technical guarantee provided by the protocol.
It will be up to governance to decide the inclusion of new collateral types and usage possible with the borrowed assets. GEAR is an ERC-20 token, but has been untransferrable since its inception. Here again, it will be up to the governance to make it transferable when desirable. For now, it means GEAR is in the hands of protocol users, either those who minted Credit Accounts back at the V1 launch or the ones supplying assets now thanks to the GEAR Liquidity Mining program.
GearBox Credit Accounts have been launched with a minting ceremony almost a year ago, where minters also earned GEAR. Credit Accounts are quite heavy smart contracts and where gas intensive to mint, so they needed incentives. The 5 000 Credit Accounts were minted and 5% of the GEAR supplied was distributed: it was the inception ceremony of the GearBox protocol.
With the V2 freshly launched, GearBox’s composable leverage services are now available to a restricted pool of users: credit account minters who post their addresses on the governance forum. This safe restriction did not prevent GearBox from growing quickly, attracting over $100M TVL in a week.
The main collateral used by borrowers are productive stablecoin positions on Convex, such as cvxFRAX/3CRV or cvxLUSD/3CRV, the two top collateral amounting to $10.2M and $8.4M respectively. It comes without a surprise then to see stablecoins as the most borrowed assets, as they are needed to leverage the position on pools such as those mentioned above.
Similarly, borrowers are also harnessing GearBox to leverage up to x10 productive ETH-based positions, such as ywETH (Yearn wETH vault), ystETHcrv (Yearn stETH Curve vault), or cvxstETHcrv (Convex stETH Curve vault).
GearBox leverage seems cost-effective enough to attract serious demand on vaults with attractive base yield (4-5%). For instance, GearBox LUSD/3CRV leveragers are earning 14-19% APY depending on their risk appetite (x6-9), while un-leveraged depositors on Convex are earning 3.61% APY. Of course, it comes with additional risks to account for, including GearBox’s contracts' technical risks.
Despite the limited amount of users who can access the borrowing side of the protocol, GearBox quickly attracted demand beyond expectations, to the point where it might be facing a supply-side challenge: a great first-world problem to have on a one-week-old lending service.
Indeed, despite a sizable Liquidity Mining program, targeted at providing a 10% GEAR APY with $55M of assets supplied to the protocol, most of the widely borrowed assets such as stablecoins or ETH are observing utilization rates over 80%.
It seems like GearBox release was clearly met with demand. From a macro perspective, GearBox fulfills a function similar to a risk-tranching protocol “as a service”. For each supported collateral, it generates a market with two sides:
It seems like the next months will be busy ones for the team and governance: the controlled launch approach enables them to slowly and safely grow the user base of the protocol. To get involved, you can already supply assets to GearBox to earn a native yield as well as GEAR tokens.
In the next few months, it seems like the discussion about GEAR’s transferability will be an essential one: having GEAR liquid and traded could make the Liquidity Mining program more attractive for suppliers, helping GearBox out of its supply-side challenges. You can keep track of the protocol news and developments, on Twitter, and/or join the GearBox Discord.