We know crypto is supposed to be dead… so why is Gearbox shifting into overdrive? Let’s dive into the protocol that’s tearing up the racetracks.
Gearbox describes itself as a “generalized leverage protocol.” We’ve often cited the difficulties in successfully pulling off high leverage on-chain. Is this the real deal?
We’ll fully confess — we’ve never used Gearbox, we have no affiliation with Gearbox, and we don’t have any particular expertise on Gearbox. What follows is what we could glean from a cursory reading of the protocol’s documentation, repository, and whitepaper, with occasional foul language and misspellings tossed in to make it clear it wasn’t written by ChatGPT.
In other words, we’re simply assembling our research and presenting our findings so more competent researchers may have a jumping off point from which to make their own judgements. We may well get some points wrong and look forward to corrections. Naturally, none of this is financial advice!
How it Works
At the high level, Gearbox is simply a two-sided marketplace. There are lenders, and there are borrowers. It functions like any lending marketplace, with liquidations, health scores, et al.
The liquidity provider side is quite simple to understand. You add liquidity in a variety of tokens, and you get rewards. The smaller chunk of these rewards come from the fees borrowers pay to utilize the assets. The larger component of this is emissions of the native $GEAR token.
Pretty good returns at the moment, but of course this comes with the usual caveats about protocol emissions. It’s also highly dependent on the price of $GEAR, which is barely liquid at the moment, so it may see some extreme volatility as it thaws.
The more degen side of the protocol is the borrowing side, which promises to allow users to leverage up to 10x their position. Here you can run it manually, though they’ve done some gas optimizations for running through their pre-baked strategies on a variety of yield farming platforms (Curve, Convex, Lido, Yearn).
As they test the protocol in prod, they’re including several restrictions to ensure a smooth launch. The permitted assets and contract interactions are subject to DAO votes to be place these onto allowlists. Gearbox has been loosely restricting access for borrowers — users have to jump through the minor hoop of sending a message on Discord, and early users are subject to some caps.
Once you’ve borrowed, you can automatically farm these assets via their strategies. If you choose to lever up your yield, then your borrowing APY also increases accordingly and you get pushed to liquidation on much smaller price swings. They describe the effect in a Medium article:
Applying this process to Lido, for example, could mean 23.5% returns on ETH for risk takers, notably higher than simple 3-4% validator yield. Gearbox details back of the envelope math you might run to try to operate this process in a relatively safer manner.
Leverage v2
Gearbox v2 launched a few months back with a variety of new features including a multicall for complex transactions and smart router for automated routing.
The full announcement description of v2 was a lengthy but wonderful read. It tackles the question of how Gearbox manages to provide 10x leverage on-chain in a manner that won’t explode.
The basic mechanism is to restricting the playing field to a known set of tokens whose volatility is well understood. Gearbox is not attempting to serve the max degen traders looking for 100x leverage. By focusing on leveraged farming of a few known quantities, they consider their offering a bit safer.
Stablecoins, for instance, tend to trade in a tight range if they’re working properly. If you expect a stablecoin will indeed hold near peg, then these coins are relatively less risky. Hence the rather tight allowlist with a focus on quality.
$GEAR Unlock
Gearbox is presently in a rather interesting phase of its rollout of its native $GEAR token. The $GEAR token has been nerfed, but within three days the rollout ends and the token becomes fully transferrable.
The affiliated GEAR/ETH Curve v2 pool has subsequently been a pleasant surprise in the bear market. In under an hour, it ranked as 11th largest v2 pool on Curve by TVL.
This entire release schedule for the $GEAR token is a bit staggered. We’re not going to walk through the full mechanics of the release, because as much of it is already in the past. The important thing is you missed it, but it becomes fully liquid in three days anyway. If you want to read the history, the process is well documented.
The purpose of the unorthodox release is explained as such:
However, the release is not without some controversy. @DeFiMoon considers the Gearbox rollout to be a red flag.
At any rate, it was a fairly successful launch in a bear market. Building, shipping, and finding product market fit in these times is an exceptional achievement, so congratulations to the team.
The social media hype around the announcement has been intense, though we have to note that at least part of the hype appears to be highly inauthentic.
Lacking more details, we can’t really hold this against the project — maybe such activity was coordinated by one overzealous fan.
By other metrics, the staggered launch appears to be succeeding at juicing developer interest and revenues, so Gearbox and its inherent composability may well be here to stay.
For more reading, here’s a good thread:
And of course, Flywheel Pod
Of course, we advise everybody to be aware of the risks, which may include risks not brainstormed by the team. Excessive leverage is always risky, and people and protocols can lose big when they play the game, so make sure you know what you’re doing and are willing to gamble.
Keep this in mind, particularly as the new v2 pool heads to a vote for a gauge.
A discussion has also popped up in the forum, but it’s quiet at the moment. The Crypto Risks team has yet to weigh in on the protocol, and we’d feel more comfortable voting on such a gauge if they had a chance to review and issue a recommendation.
Therefore we’d suggest voting against this proposal at the moment, and would recommend the protocol resubmit when more people have had the opportunity to look under the hood.
Nonetheless, from what we’ve seen, we’re long-term bullish on Gearbox and think it makes a wonderful addition to the DeFi ecosystem. #NFA™️!