Gearbox
Gearbox is a defi lending protocol that allows you to borrow more than the collateral you post. Most of the current lending protocols, like Aave, only allow you to borrow some fraction of the collateral that you post on the platform, and that collateral can only be posted as a few restricted tokens. This is a far cry from tradfi lending, which enables people to be able to buy homes.
Gearbox is a step towards reaching tradfi lending. This protocol allows you to borrow more than the amount of collateral you have. It allows this with the use of credit accounts that hold the borrowed funds and the collateral. The protocol has a bunch of pools that you can borrow from, and whatever funds you borrow go into your credit account.
Once you have funds in your credit account, you can use those funds to interact with any of the protocols that Gearbox has integrated with, including aave, uniswap, etc. So, you can essentially provide liquidity, trade tokens, and any other operation on these protocols. Whatever tokens you end up holding in your strategy will be held in your credit account.
You will be liquidated if your account does not have enough value to offset the cost of your borrowing. The cost of your borrowing is equal to the principal you borrowed plus the interest and fees accrued. The total worth of the tokens in your credit account will be multiplied by a risk factor for each token held, and if that value is less than your cost of borrowing, then you can be liquidated.
One interesting thing to note is quotas. This is a mechanism to limit the exposure of a pool to an asset. Each pool has a quota for every token. The amount of this token that can count as collateral for debts of this pool is limited to this quota. For example, say the quota of some pool for token A is 10. Lets say that there are three credit accounts borrowing from this pool. Then, the sum of the amounts of token A in these credit accounts that can be counted as collateral for the pool is 10. If a credit account holds more token A such that this global limit is exceeded, then the extra tokens are not cunted as collateral, which means that account can have a higher risk of liquidation. If a credit account wants to have 5 token A and have them count as collateral, then that account will have to ask for a quota of 5 from the pool. This will be granted if that quota is available. There is a quota interest paid by the credit accounts on their debt depending on how much quota of each token they take up. This incentivizes accounts to not unnecessarily take up quota from a pool, which would not allow other credit accounts to trade with that token.
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The fees behind debt on Gearbox are —
- interest
- quota interest
- trading fees — This is a fee incurred when increasing the quota of some token
- protocol fees — This is a fixed percentage of the
interest + quota interest
The key components in the architecture of this protocol are -
- Credit Accounts. This represents an account that can borrow funds and trade with it. Users can manage their credit accounts using two kinds of calls- account management calls and external calls. Account management calls allow users to borrow, repay, add collateral, withdraw collateral, and manage quota.
- Pools. This is a pool of funds that lenders provide funds in.
- Credit managers. This is a backend of sorts that performs checks on accounts whenever they try to make transactions and facilitates the calls that the credit accounts try to make. Each credit manager is connected only to one pool.
- Credit facade. There is always only a one-to-one pairing between credit facades and credit managers. The credit facade is a frontend of sorts that is called by the user to execute transactions for the credit account.
- Adapters. These are contracts used to interact with external protocols.
Overall, this is an interesting protocol that I think is providing a nice service. However, lending in crypto still has a long way to go before it can replace tradfi lending. We probably need better identity protocols and better support for RWAs.
