Three minutes to read the new lending agreement Gearbox: How high leverage and low collateral lending can be achieved
Traders or liquidity miners can open virtual accounts and borrow funds to leverage for trading or liquidity mining.
Written by Ke Li
At the MarketMake ETHGlobal hackathon in February 2021, co-sponsored by Aave, 1Inch, and Chainlink, finalist Gearbox Protocol raised eyebrows. The goal of Gearbox is to combine the concepts of decentralized trading and lending protocols to create a new lending protocol in the DeFi space with high efficiency, low gas fees, and high leverage collateral.
Features of Gearbox
Gearbox is a low collateralization protocol for margin lending transactions and liquidity mining, focused on lowering transaction Gas fees and allowing liquidity providers to earn higher annualized rates.
After presenting a demo of the project at the MarketMake ETHGlobal hackathon and winning awards, the Gearbox team has kept a low profile and has not released much information about the product to the outside world. According to the team’s website, Gearbox has these core features.
Aggregation of transactions from decentralized exchanges such as Uniswap, Sushiswap, Curve, etc.
Trading on margin with 4x leverage at low collateral rates
Higher annualized interest rate returns when providing liquidity
Lower trading Gas fees
One of the best features is that traders or liquidity miners can open a virtual account with Gearbox and borrow funds to trade or liquidity mine with 4x leverage.
The pain points Gearbox is trying to solve
According to the Gearbox team, these features are designed to address the main pain points faced by currently available lending agreements.
Excessive pledging of lending agreements.
The need for traders to trade on margin using either lending protocols or decentralized exchanges.
High Gas fees for trading on separate protocols
How Gearbox works
Liquidity Providers (LPs)
Liquidity providers receive a higher annualized rate of interest (APY) from Gearbox. They choose between pools in order to deposit funds, each with underlying assets and risk parameters such as: list of allowed tokens, allowed decentralized exchanges, stablecoin pools, etc.
The annualized interest rate of the deposit depends on the basic pool parameters and the pool utilization.
Traders and Liquidity Miners
Traders and liquidity miners can choose a pool with a higher APR and token strategy. To open a leveraged position, a trader or liquidity miner should deposit 25% of the required amount into a virtual account and the agreement will automatically add credit funds.
Traders can trade tokens from the list of traffic pools of major decentralized exchanges (Uniswap, Sushiswap, Curve) at Gearbox. Funds are held in Gearbox contracts and cannot be withdrawn directly by traders.
Virtual accounts guarantee security
A virtual account is a separate smart contract that is used to keep the trader’s balance. However, traders do not have direct access to this account and can therefore consider it as collateral.
By using the virtual account, users can trade any token assets from the major decentralized exchanges (Uniswap, Sushiswap, Curve) or use the funds for mining proceeds. All funds are stored in Gearbox contracts and traders do not have direct access to them.
The protocol is built on an innovative architecture, which makes it very efficient to use Gas fees, more reliable and hacker-proof.
The liquidator’s role is to check the health of assets and liquidate accounts with non-performing assets, rather than setting up specific pools. The agreement pays 5% of each liquidated portfolio as a bonus.
How to assess account risk
Gearbox is designed in such a way that users can borrow and lend with leverage to increase the utilization of their funds. How the risk of a trader’s virtual account is assessed becomes critical and determines the reliability of the system.
Gearbox has not yet disclosed its specific risk assessment methodology, but members of its team told Chain News that Gearbox uses a risk model to continuously assess the amount of money in a trader’s virtual account and the risk of the account. If a user holds a portfolio that converts to the underlying asset with a value below the liquidation threshold, it can be liquidated using the liquidator’s premium.
The risk model is designed with a “threshold weighted value” parameter (TWV, see image) to calculate the lending health factor (health factor = threshold weighted value / lending amount). When the lending health factor is greater than 1, the lending is safe, and if the lending health factor is <= 1, the system will start liquidating.
This approach allows assets to gain multiple leverage for interactions with different DeFi protocols while maintaining overcollateralization across the system.
The important point in this scenario is the initial calculation of the liquidity threshold (LT). The Gearbox team has indicated that two options are being investigated.
Adopting the collateralization rates from existing sustainable protocols such as Aave/Maker/Compound.
Collecting the volatility of assets over the past 1 to 2 years and using the maximum price decline to estimate a safe liquidity threshold (LT)
However, these are currently under design and the exact model will be disclosed in a future project white paper.
Gas Fee Efficiency and Comparison
In addition to the high capital efficiency Chiwen, another feature of Gearbox is the high Gas fee efficiency. The team compared the Gas fee consumption of different protocols during shorting operations in a document.
For short positions, the Gearbox protocol offers 4x leverage compared to Aave’s 1.75x leverage, consuming 104K less in Gas fees.
Comparison of Gearbox and Compound Gas Fees
For short positions, the Gearbox protocol offers 4x leverage compared to Compound’s 1.8x leverage, consuming 188KGas less.
Differences between Gearbox and dYdX in terms of margin trading
Gearbox has similarities to dYdX in terms of leverage usage. However, with Gearbox, leverage can be traded on automated market maker exchanges such as Uniswap, Sushiswap, Curve, etc. This allows users to trade multiple assets, while dYdX only supports a limited number of asset trading pairs, and Gearbox can also use leverage to gain liquidity mining revenue.
Core Project Developers
As you can see from the project’s GitHub, the core developer of Gearbox is Mikael Lazarev, who is the technical lead and frequently commits code. He is an experienced blockchain technology developer with over 10 years of experience in software development, having won hackathon competitions held by Coinlist, Wrike, Nucypher, and being a finalist in the ETHGlobal final.
Gearbox is still in the “small but beautiful” early stage of development, and no more information about the team members has been officially disclosed.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/three-minutes-to-read-the-new-lending-agreement-gearbox-how-high-leverage-and-low-collateral-lending-can-be-achieved/
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