Gearbox: DeFi's Composable Leverage Protocol

Transcript

we kind of create more guidelines as we go that's what we did with the internet look what it did for American innovation why aren't we doing that with crypto it's the exact opposite it's the wrong approach um and it's really unfortunate to see all right welcome back everyone to another episode of zero X research today is February 13th and we have an awesome episode lined up with the team over at gearbox but before we get into that as usual we got a quick little segment of hot seat and cool Throne to kind of talk about the latest Market happenings we're joined today by two blockworks research analysts effort capital and Xerox pibbles um I guess I can hand it over to you effort I know you got a hot seat you've been dying to talk about yeah the first

people in my hot seat are the NFL referees um they ruin not only mine but I'm sure a bunch of other people have been on the Eagles win the Super Bowl uh yesterday um really terrible holding call the final minutes of the game even though Bradbury claimed that it was you know he did actually hold I don't think that's the type of uh call you make uh with literally the last game of the year on the line um didn't interrupt the the wide receivers path to the end zone I thought it was an uncatchable ball overall just terrible call yeah strong agree there effort I uh can't agree more of my five leg parlay I had four legs hit and then my fifth leg was just Eagles winning the game outright and it was 25 to win 260.

so very upset about that and then not to mention my Bengals didn't get in so that was pretty disheartening it's a rough day for sports ball fans I got an actual Hot Seat coming and that's the um the SEC issuing a Wells notice to paxos over the issuance of busd which is tied to binance um this set's like a a pretty interesting precedent for future stable coin legislation um one immediate uh ripple effect for this was that BNB ripped downwards like eight percent which is tough you hate to see it but also what's interesting coming out of this is that paxos is

saying that they are prepared to viciously litigate against this because they do not think that busd is an unregistered security and then further you have the the New York Department of State or treasury something like that they're also ordering that paxo stops issuing busd by the end of this month so a lot of stuff heating up in legislation yeah one of the interesting things here was that uh you know it seems that Xerox NG might have actually flagged this but it almost seems like uh this this Wells notes was specifically related to like a Finance

bridged version of the asset right because uh paxosis didn't have any issues with their usdp stable coin this was strictly a binance related issue um so there's a couple of things that a couple different directions that you can kind of take that and one is you know maybe this just is more of a coordinated attack against Finance or maybe to you know binds kind of like took this stable coin and turned it into a yield program or it bridged it to another asset and you know that's kind of where the uh violation was coming through uh so it's it's a little interesting that paxis is totally fine with usdp it's really just as binance related asset and you know given how we kind of see finances uh US banking partner get turned offline what was that just last week maybe two weeks

ago now seeing another binance related event it's like almost like there's this targeted attack and you know just broadly looking at things tensions between U.S and China are continuing to heat up and you know there might be this uh effort being made within Washington to say all right well you know let's let's try to favor coinbase and usdc in circle here and maybe put out an attack towards bias of course there's no substantiate proof that that's the case but you know we're starting to see multiple attacks towards binance coming from U.S legislators I think it's crazy uh I think it's came out a couple hours ago and it's Monday February 13th but Circle was actually the one that snitched on binance or busd uh it sounds

like they actually went to the New York Department of Financial Services told them about uh just not not liking what they were seeing with how paxos has allowed binance to Mint busd on the ethereum blockchain but down to your point there are billions of dollars on like a binance pack version of busd on the binance smart chain so it sounds like Circle being a major competitor to busd and paxos were the ones that notified the regulatory body so I think it's especially interesting because there's rumor circulating that circle's the next one on The Chopping Block to get a Wells notice um given to them just like we just saw with paxo so

um I'd be surprised about this case uh but really interesting number lasted Circle was the one to kind of open up the can of worms I feel like it could just be psyops 2 on the sec's department trying to make it look like they're you know enforcing equally amongst all Market participants when in reality they just kind of want to pick the winners and losers of all this uh it's really tough to say but it just is pretty sketchy to me that you know FTX was structured very similar to similarly to the way the binance is today and that most of its activities actually overseas and not based in the US um so yeah just something to keep an eye on not sure how it'll play out but definitely something we're watching closely yeah and this this situation kind of also rippled into a cool Throne

as well right so usdt tether stablecoin has kind of been like a recipient of this uh this negative and this negative Viewpoint towards other stable coins uh usdt straight traded slightly above Peg which is you know still a little bit rare for stable coins just showing a demand for the asset uh three pool on curve uh The decentralized Exchange has seen over 700 million dollars of volume today which is about 70 of their total daily volume that just cracked a billion um and so there's kind of like some winners here right tether and curve are like you know being these these assets that are sitting right in the heart of this uh but not really the negative attention isn't really driven at them uh so tether is more of an interesting one

right because they've had a history of questionable backing and uh operationally or how they're run um but you know again like the market is kind of viewing them as being the stable asset at this moment so if we look at the three pool reserves those actually drop down towards 16 um again and it was about a negative uh 40 million dollar outflow from the three pool today of usdt now proving that investors are indeed looking to stable into usdt which is usually rare because if you follow on-chain activity at all you know that you know when when things go south usdc Circle stable coin is really where larger funds tend to stable into um so it's a little interesting to see that and again just curve sitting at the heart of of stable swaps has been absolutely loving this V curve stakers

are just raking in the fuse today what is the actual risk here though like do you guys see this as a scenario where usdc could actually depeg in a significant way to the downside or are you thinking of it more like this is going to be a lawsuit that drags on for one two years or you know what are you guys thinking of the scenario my view is definitely the latter there um because what's interesting especially especially as it relates to the busd paxos thing is they're still allowing redemptions right so if you own busd you can still redeem it one to one that's not a problem you just can't Mint new assets which I guess does bring in interesting uh point in is that you can't really like ARB if it trades the upside so like the trending jokes around the USD to two dollars I guess has some

Merit to it especially as liquidity starts to get drained um but I imagine this will be like okay if we wake up tomorrow and there's a Wells notice for usdc there might be some like short-term turbulence but the ARB still exists if it goes you know starts trading down towards 99 98 cents you can still buy that and redeem for one to one uh so I don't think it's less of a Peg worry to be honest but you know you might be holding some like uh asset that's now been deemed as a security by the SEC and like do you if you're a larger fund do you want to be holding that like probably not so it's just like a bit of regulatory dodgeball in my mind all right well that kind of leads well into my hot seat for the week I've got Gary Gensler obviously the chair of the

SEC I just don't really understand his his tactics in terms of the way he's going about things in in terms of enforcement rather than thoughtful you know legislation uh I mean to me it's like the Natural Market in in crypto decided that the US dollar would be the stable coin of choice for for all of crypto and for me that's ultimately good for the us because it keeps dollar dominance in check um it also you know creates a new demand source for U.S treasuries so it doesn't make any sense for me to be going after all these different stable coins that are essentially cementing the US dollar in this new Financial system that we're trying to build so you yeah he's an easy hot seat this week and then that steak

video that he put out like it's so meanable like if you guys haven't checked that one out I I highly recommend checking that one out but he's obviously going after Kraken staking program and then you know people are you know making conjecture that coinbase is next and you know Brian Armstrong's in in DC right now trying to trying to battle that good fight so Gary Gensler easy pick for the hot seat this week you might be getting a uh unwanted phone call in your near future for putting the SEC commissioner in the hot seat but uh it's tough not to agree there and I really liked your point about how you know if you just think about uh like blockchains as emergent economies we adopted usdc to like onboard new users and it was very like organic nobody forced that to be the decision that's

just like the global Reserve currency and we wanted that uh in our ecosystem and so this is if you like you know play this out and say blockchain economies continue to grow you know as the US government you would think like hey you know let's get the dollar in there this is a growing economy like let's help you know facilitate the growth of uh the US dollar and you know help legitimize and continue the success that the dollar has seen uh so it is it is pretty interesting to kind of see uh this this like negative backlash reaction and it's hard to really say why right even if it's like okay all these terrible things just happen FDX collapse uh the Luna collapse was awful investors lost a ton of money it's like okay well you did nothing to prevent that so now going after like stable coins just seems a bit

weird to me I agree um and not even just about the stable coin regulation I think Gensler in general if you look back in in the late 90s uh early days of Internet really emerging in the average American uh person's household um the America took a very or the government I should say took a very uh Progressive approach with American internet regulation they created open regulatory sandbox to allow innovation in America and that ultimately led to the creation of the major Tech Giants we know of today Captain America at the Forefront of innovation and really drove our economy to you know be what it is today uh you know leading number one in almost every single sector possible um

that is because of the regulation that they set forth in the 90s what we're doing right now assuming you know crypto is internet 2.0 or web3 whatever you want to call it we this type of regulatory approach reinforcement without proper uh guidance is going to drive an innovation elsewhere um you're already seeing the large players in in American crypto and uh scene really preach this and urge Congress and and other regulatory bodies to create some kind of rules so that we have safe protection for the average American Consumer that wants to venture the crypto space but allow Innovation to breed here uh allow it to to flourish and prosper uh and over time as we get about our understanding for what the

real value prop is for crypto over the coming years and how it can benefit the average not just the Americans but but persons uh people's lives then we kind of create more guidelines as we go that's what we did with the internet look what it did for American innovation why aren't we doing that with crypto it's the exact opposite it's the wrong approach um and it's really unfortunate to see yeah sure and agree there effort and just to piggyback off that I guess there's one silver lining in all of this which is the religious Banning staking as service so Gensler gets crypto like he taught those courses at MIT you can look them up on YouTube like he obviously understands it so one could take it as he just doesn't want uh staking as a service providers to be doing things that they shouldn't be

doing with customers assets so I I do get the protection to some degree and hopefully it promotes at home staking uh and and that's really the only positive I can take away from it but I think it's an important one to gather see I totally agree with that take but my issue is it is the way that they went about it right because you know Jesse Powell is pretty open about this he's like yeah like look we obviously wanted to comply with the with the law like we weren't trying to be uncompliant the issue is there was no way to like truly register these products uh with the SEC so it's like so easy for Gensler to come out and say hey well you didn't register when the reality is there was no way to register and Gensler knows this and he's being malicious about how he's like pursuing

these going through lawsuits you know making these large settlements that flow funds out of these companies to stifle their growth like it seems very maliciously coordinated to negatively impact the industry so I well I agree like that should be what happened uh the execution of that um I'm just seems like like full of ill intent in my mind and to take it a step further Gensler chose to attack Kraken now um right after they did 30 layoffs and they don't really have a ton of cash if they would have attacked Kraken a year ago they would have happily fought this and Jesse Powell even came out and said that so it really was just going for the neck at a horrible time we're obviously

biased on this podcast right like we're in the crypto industry we believe in this it's very easy from from our side of the fence go he's not doing the right thing for our industry that we love so much but then you have people there in his own regulatory agency of Hester Pierce coming out saying he is doing regulatory by enforcement with no guidance to Dan to your point Kraken could even register their product if they wanted to Hesser came out in uh Hess Chris came out in in a letter on the SEC website that strictly like explicitly says that and she's come out with multiple dissenting letters the way gensler's been approaching this entire sector for I mean past three three years plus probably at this point um so it really doesn't seem like the enforcement uh regulation by enforcement

has really done anything it's only hurt consumers it's only heard Innovation it didn't stop the ftx's of the world and I don't know why this is gonna you know I don't understand how the SEC didn't learn their lesson from you know years past it's really unfortunate the one thing that gets me though on the Kraken thing and I've never used Kraken so I don't know how many assets they support in the staking program but four to twenty four percent is what I saw and I don't know any proof of stake asset that offers 24 so that does kind of like raise an eyebrow for me and think you know what what were they doing over there like unless it was like a really like weird long tail asset that you could stake for 24 because that's like what the staking rate was but like when

you look at coinbase is taking yield it's like way worse than any other place you can stake so that does raise an eyebrow but uh but yeah that's that's the last point I'd make on that but effort I know you got a cool throne for the week as well that kind of ties in yeah um yeah my cold front today is is Brian Armstrong and I I honestly think like the entire coinbase executive team um they're really like the white knights in this fight right now they're coming out explicitly like after the whole Kraken uh Crackdown with the regular with their staking product they're coming out uh their Chief legal officer as well as Brian came out on Twitter and they posted in a blog saying we will fight this we have the funds to do it they're sitting on you know four or five

billion dollars in cash as of the last quarterly um report uh they have the funds to fight it they're going to continue to push American innovation here they're going to continue fighting the good fight and I think that's that's Noble um there's a lot of uh I think funds and a lot of crypto projects that are considering like leaving um leaving American borders and maybe pushing their Innovation elsewhere and pushing their team development elsewhere uh coinbase has specifically chosen to be headquartered in America they would continue trying to work with congressmen and women to try to create a really good regulatory framework for for Innovation to happen here um I think just this morning a couple hours ago Brian today is literally in DC meeting with congressmen and women uh to

hash out some type of regulatory framework and just have overall discussion about this because someone needs to do it if Nobody Does It Gary and the the entire uh US government is just gonna steamroll over every single crypto developer and crypto user and and uh service provider in America and I think obviously coinbase is really they're standing on the shoulders of giants at the same time they are a giant themselves they're they've been around in this industry in America for 10 plus years serving U.S customers um and really they're taking it upon themselves and I'm sure Circle as well they're going to be taking it upon themselves to really fight this fight for All American crypto users and I think you know we need them to do that yeah we're gonna have to have some people in our corner and across various

pieces of of the US and the broader regular regulatory landscape so having coinbase in the public company sector is huge for us having Tom emmer in the United States House of Representatives is huge for us uh having Hester Pierce sitting in the SEC is huge for us and we're going to need like those people they're going to need our support and we're going to we're going to be like objectively having to rely on them to kind of help push this industry along because at the end of the day there probably needs to be some regulatory framework that outlines what can and can't be done and that will likely be around the on and off ramps so coinbase again sitting and doing what they're doing is going to be very very good for the the growth of this industry yeah and like on top of that like I

always try and zoom out a little bit and think like the average person who is you know 20 or even 15 to 30 years old is much more bullish on the idea of crypto and everyone who's in office is you know twice as old as that for the most part so at some point in the future we will get crypto friendly regulation and we all know it's pretty much inevitable you can't stop distributed systems once they're actually decentralized so I think over the long term we'll get there it's just a matter of how long it takes so uh on onto like another topic because we're kind of beating this one to a dead horse we've got a more exciting cool drone from zero X pibbles you wanna you wanna share your thoughts there pibs yeah first of all I guess we'll start as a hot seat because coinbase and Kraken

both tried nft marketplaces and they were horrible failures but uh tomorrow we get blur and that airdrop is gonna be awesome it's backed by Paradigm it looks like right now looks is trading at a 225 million fully deleted value open C raised at the top at like a 13 billion value so um I'm really hoping that one the blurry airdrop just like absolutely prints money it's coming out the gate listed on basically every exchange but I'm also hoping that Blair kind of acts as almost like an index token where like okay if we want to be bullish on nfts we can just long blur because we don't really

have a proper fitting token for that yet so with Paradigm behind it hopefully the the actual token design and mechanics behind it will be 10 of 10. yeah I'm really excited for this blur airdrop I know I've been collecting those boxes doing all the airdrop tasks to make sure I get that and I'm definitely excited to see what it's worth tomorrow I just can't decide if I want to dump it because everything's so volatile right now or if I want to hold on to it but I guess I'll make that choice on a win tomorrow I actually hadn't considered that one point though pibs uh like how we don't really don't have a great way of having a liquid token that is a good proxy for nfts so that's going to be a really interesting way to kind of play this one going into the future as well

love that take so we can head over now to uh our interview with gearbox um but first I want to plug blockworks research you guys should all head over to blockworksresearch.com go to the research Tab and talk about the free research on the top right uh you can check out some of the most compelling research in the space and you can also follow us on blockworks uh res Twitter it's blockworks res and then also check out some of our Dune dashboards under the blockworks research team they're very good Dan and Westy have been absolutely killing those I think one of them is actually trending today with the three pool kind of in the Limelight so be sure to check those out um but yeah on over onto the interview all right we are here with two core contributors to gearbox I would love to pass it over to you guys in order to

introduce yourselves and then maybe give a little high level overview of what gearbox actually is thanks for having us guys uh happy to chat to you um guest introduction from ourselves sites first right so I'm more on the marketing Community aspect uh well in Dallas is literally everything apart from code right because this Dev markets in uh is kind of all intertwined so that's my thing my name is illgas uh I'm responsible for product site maths and risk side so everything related to I'd say calculations uh analytics uh and also product sites it's only yeah yeah so illus is one of the people who keeps the protocol running and safe and I just should post hopefully to get users in I'd love to hear that you need a good

poster on every team Ivan do you mind giving us a high level overview of what gearbox is for the listeners who aren't familiar so gearbox is a two-sided protocol you can essentially see serving completely two distinct markets on one side it's just liquidity providers who provide liquidity one-sided without any permanent loss pretty much like a lending action similar to how you have an other compound and they just earn passive apis so there is no active management nothing like that you just put your assets in and you see that's it then the other side is where the Innovation the sexy part is that is the leverage takers who then borrow that liquidity but on Leverage in D5 so there are no key there is no kyc no kind of like trust scores

no under collateralization so leverage takers essentially take that liquidity that is provided by passive providers and then they deploy it across different strategies in D5 later on could be even across nfts or whatnot so the way it works is how this actually leverage happen in a permissionless way without kyc or any kind of like I don't know people coming to a house and taking your money back right when you don't return it so the way it works is the capital that you supply and the capital that you borrow they both end up in a credit account and that's what the main person a credit account is an isolated smart contract that essentially has the both the borrowed funds and your funds in it so you operate through that see it like a leveraged D5 wallet essentially that

has liquidation parameters and all the Assets in it so you interact with the D5 protocols let's say margin training and unit swap leverage farming and curve leverage farming on convex and later on doing a bunch more other stuff with leverage you just do it through that larger credit account but it still belongs to you essentially you just can't take the money easily out um why well because otherwise if you just come in and you will say you put them if and you borrow 90 or you will just take it right of course free money why not but that's the thing the credit account has some rules in it whereas you cannot just trade into absolutely any coin so there is like collateral on board in similar to London protocols that is for the say that you cannot just let's say siphon the money out by

creating a university between yourself put in continuous Swap and buying it right that's pretty much like that would be a very easy way to steal the funds and the second part is the allowed contract so allowed assets and allowed contracts and that means you can only interact with the things that are essentially enabled by the dial by the protocol you can really see it similar to collateral onboarding if you wrap it together into a bigger picture it's like a leveraged D5 Volt or leverage nft wallet point is it's a smart contract wallet to an extent that you use when you have more funds in it due to leverage and then you go and interact with all these other platforms that you already used to and love like that but you do it of course without kyc

permissions or um and of course with more capital in it yeah yeah perfect so if I was just like summarize that back to you just make sure you know we've got this a hold of this so basically there's a two-sided protocol where passive lenders can supply funds that gearbox borrowers can pull from and borrowers leverage uh things called credit accounts which are like smart contracts that essentially can create the leverage from the lp positions and take that capital and Supply it into governance approved strategies uh into other D5 protocols and so is that is that a good summary there uh except in the last point I would just reiterate that uh these are not like so what we used to in D5 when this happens or with leverage right that there are

some pre-approved strategies per se and those strategies function as like I don't know volts right or smart contracts that essentially have the rules that allow you to farm and make money that isn't the case here so here you're given more capital and you're given some restrictions that you have to work within for security purposes but apart from that you choose how it happens so let's say you can go across collateral you put in some easy you borrow Stables instead uh and then you put it let's say into some let's say it's given a concrete example um let's say you want to leverage farm lsds right the latest Hot Topic stuff the liquid staking derivatives you can put in ifas your collateral then you borrow more these and then you put a lot of that into sth or what the more you can do is usually that's as much as it

goes right that is already accessible on other and e-board and other lending protocols there is nothing too fancy here but you can do the gearbox what you can do is you take the test if then later and you go to curve to supply liquidity there and then stake on complex so it allows you to go further and wider the school is because the yield that you get is essentially it's exogenous so it comes from other protocols while if you execute similar strategies let's say on average which doesn't great but the thing is that there you cannot go to other protocols you essentially Arbitrage within the protocol right it has a supply and borrow rate this sde has supplied borrow rate you essentially put one borrow the other cell put it back right you Loop it

here it's not looping here is you get so unleading protocols you Loop it around that's how you get leverage and more API the gearbox you first get just a bunch of capital and then you just go to whatever protocols that you're already used to so that's the big distinction that you decide how and where you deploy Capital how the risk score parameters changes and everything like that it's not a predefined strategy awesome no that's definitely an interesting rendition on what you know we currently see that's available in the market and I think is a lot of the reason why gearbox has seen some early success already surpassing 100 million in tvl we see users actually deploying across various strategies and it looks like one of the more popular ones is the susd curve convex position

um does that is that probably generated just graded really the yield that you can pull there I think was around 30 apy is that is that the most popular strategy today and you know if so like what are the other popular strategies that users are deploying into yep so the thing is that as you know strategy is always changing the apis right sometimes when the new stable coin comes to curve they incentivize a lot and then after some point when they have enough liquidity like ah we had enough and then it always switches right so rebalancing is the thing of itself actually when gearbox V2 launched I think the first week of November the most popular was I believe LUSD that's what it was printing a lot uh then LUSD they stopped issuing that much rewards and voting for it so there has been less

apy I think people transition into gusd after that after G USD started having some risks people just decided not to be not to be having fun with it anymore and now for the past couple of weeks it's USD but it can of course always change depending on what other basically it's a competition within the credit accounts themselves some people rebalance actively some people don't rebalance actively some take uh cross collateral position so essentially they even enter like a shorter alone while farming some just do it with correlated depth like East to Ether or stable to stable an interesting point to point out is let's say one could wonder why do leverage with gearbox right okay no permissions okay I see kinda good but

what is the actual ux Improvement in that because it allows you to do more with your leverage so for instance if you short btcy e so let's say binance uh you can like it's sufficient right it's good it's fast it's good pricing fees are not too huge but what happens is you only just go short alone and the only thing you can do is just to maintain your liquidation Ratio or like top up collateral that's it right you can't do much the gearbox what happens is when you borrow let's say you want to go short if that means you borrow more East on Leverage then you sell it within your leveraged wallet into usdc what it means is you leverage sold ethereum so you went short but that usdc you still have on at your disposal that usdc you later

on let's say you bring to core of convex or wirem and then you're a farm and then you make an API so that means the apy from that position of usdc is essentially either making money or paying back for the borrow rate that you're paying on the East that you borrowed so that's where you kind of like have a self-repaint short or a short that makes money so it's like double double the money if you do it right that's interesting now I I guess when I'm thinking of it from my perspective I I think I'd be looking at the the apis on the screen and constantly trying to switch to like the best strategy available like given that they're all variable rates so are the fees associated with closing an open opening positions pretty high to disincentivize that kind of behavior like are you going to end up shooting

yourself in the foot or how do the fees look yep well depends really per case right it depends how much in position 80 white has dropped it here in compared to the one you're entering and how long you expect it to be the case because even those that just do it on curve like rebalance and back from the day curve launched some do it successfully summoned up not figuring it out well because entering a curved position is a trade of itself right especially with LUSD like it was you can enter at 15 API but if you're buying LUSD essentially because if you enter a farm you bind into the asset right at least partially you know 25 or 33 or 50 depending on what the pull is so if you buy it at the High Mark and then the peg comes back you lost money even though you're making

API so that's one thing to point out uh that is not exclusive in gearbox not just anywhere you see those without leverage with leverage what you have to take into account is let's say you're trading 100K USD worth of btco3 so let's say usdc into ease your slippage usually is very tiny right because these pools are very uh they're very tight range so it's fine but if you do it on Leverage you say you have your own Capital 10K and you're trading 100K position your slippage would be like what let's say 0.1 Max right point zero five so like it will get correct me here 500 bucks right you essentially would lose so you're using 500 bucks on 100K trade which is fine it's not that much but

that loss is not applied to the entire position it's applied essentially to you because you cannot be losing lender's Capital right you're losing only your own slippage is your thing so that way if you trade way too much like this uh without realizing profit you could end up with a slippage eating into your position but that's in general anywhere like if you trade with Futures you also would kind of end up in the same situation yet so solution the best part is we see active switches we see less active ones actually a lot of active to be honest and so far they're doing it that means they either like him to lose money which could be the case or they're actually making it okay that that's super helpful in in terms of liquidations obviously liquidations are going to be a key part

of this system how do those work and uh I assume oracles play a role in this likely chain link oracles and what are the fees associated with it can you just kind of give us a a full like overview of how liquidations operate yeah sure so uh I haven't explained overall position always overclock last so actually in terms of liquidations there is no need to external Capital liquidate you can just work with capital uh that holding on your on create like a credit account and after that you can swap it back to underlying asset uh pay back the debt uh pay assets that left to the original user and

get some rewards like recognition premium to yourself articulator so uh that's like Capital very Capital efficient way of liquidations and in terms of in terms of understanding when and how liquidation should happen uh each credit account has a special formula and calculates its Health factor a position that actually represents the overculturalization of your credit account so it's like a formula when some liquidation threshold which actually represents long to Value Multiplied on the number of assets you hold and the price uh price from Price Oracle we now

use Chile price Oracle so of course like it's source of data and after that we aggregated this number and divided on the overall amount of depth that you have and this health Factor should be upper than one and if it's go to the one or below one then anybody can liquidate your position get some liquidation premium based application fee uh to the dollar and yeah and so like paying back the debt and closing position of the user and so I noticed that you know they still have like the 100K minimum deposit on the credit accounts and uh I think that's a portion of that has to do with the fact

that larger liquidations are more attractive and can be executed easier can you just speak to why that's the case yeah in terms of credit account you can now hold different position inside yeah so for example it could be a different deposit into convex for different curve pools and under wrapping the position could cost a lot of money especially one when for example price drops and gas prices speaks and such cases usually so now we should take into account all of this volatility of gas fees uh so and take into account that unwrapping such kind of position when you can hold up to I don't know Thief six convex positions

that could be very costly yeah so in terms of uh to be sure that this will be safe we should put some we actually can work with two numbers first one is liquidation premium amount uh or total uh balance sheet or the credit accounts so of course it's like for example is if total balance sheet on the credit account is 1 million we can charge small fee yeah so and in that case if it's this is a small fee we can give more leverage to the user so in terms of understanding best parameter here we

like uh take into account that we want to give some good amount of Leverage for our users because like Diggins wanna extend so that actually limits our possibilities our our um our possibilities to put different uh limits for liquidation premium and amount of money that you should hold on your credit account yeah I know as a frequent user of the curb and convex ecosystem I know how those gas fees can stack up all too well um but speaking further to that does it makes uh how are you thinking about deploying on l2s really I feel like that could kind of alleviate some of that

stress and potentially uh create an environment where you could lower that that borrowing uh limit so the thing is that it doesn't uh while gearbox itself for now has high limits minimum limits um even if they don't drop there are already two protocols like Melo and Brahma that work on making Volts for these strategies so those could be accessible to those Traders or farmers who don't have that much Capital so it's fine that we are not servicing the end user ourselves as long as they have the option to go and still become our user because like then we have a protocol to protocol product which is sometimes easier to manage than having every user individually um and another Point actually what we've seen since the literally the second day of launch is the utilization has been 70 and higher at all times up to 85 in a

few days and it can never be 100 because the utilization buffer formula is same as an hour essentially and then Legend protocol so as soon as it reaches 85 it's like hockey stick to the Moon uh not not the right mode the bathroom with a borrowers yeah so in that case like we haven't seen shortage of users on this so we have I guess we could say we organically has hit pmf on that side somewhat fostered and would trap but still not an issue the more of an issue is the passive side but that's mostly coming from the credit risk and the ones in markets the Fiasco of FTX and other scammers last year so yeah that's just enough this is a subproduct of what happened recently but it will not stay forever like that yeah that's what L tools you'll get over to

you sorry to interact you there no no go ahead okay let me start it uh so so L2 is definitely uh gas fees are much less of a concern uh the concern there is twofold first of all what even strategies and Farms to enable because let's say when we have curable convex they are like what are they before they used to be four billion dollar protocols I think about like one right so even if we have to be really huge to even matter and be like kind of bad and bad equation meaning that if a pool has hundred M and your box Traders are like 30 of that that's totally fine right that's absolutely okay now if you go to l2s and you have the same things and gearbox ends up as one of the largest users on it it's more risky because like essentially all the tvl is coming from

The Leverage side right so imagine if that wasn't an altcoin so then you could have some manipulation to an extent maybe not it's just I'm not a math guy right don't don't shoot me um so that's one which actually strategies to enable what will even be interesting to people because if you look at the TDL of like top protocols and optimism from polygon it's good but like top three are good and the rest are like around 30 20 am so not even sure how much it can service still we'll go we'll go there it's fine not complaining about that the bigger portion is the bigger question is how to enable more assets both in ethereum and an l2s and side chains what not without risk and securing that much so at that point actually it is the first time you're

speaking of it developers are coming up with the model where assets can have caps so assets have limits meaning we can even whitelist the penis coin if you put a cap that only 500k of capital can enter penis coin then it's fine right because like that's not that much exposure so in that case we could be adding more medium or long tail without having much risk so that would be a solution to that yeah if the fee in terms of liquidations isn't high enough then the protocol could be you know left with bad debt um and you know there needs to be ample liquidity for whatever assets being liquidated you know it's possible someone makes an error on the team or in the Dow decision-making process so what happens if the protocol is left with bad debt what's the recourse there um the

usual like it depends on the size of bed debt right uh some protocols like Ave have pioneered that back in the basement maybe Pioneers or not but they're known for their state other model that still lives to this day but correct me if I'm wrong cavity I've activated it actually like even after CRV thing with the mango guy I don't think they actually use the trade because like that depth is either like small enough and you can ignore it because it burns back or it will never shrink to that size or bed depth is low large that any nose taking module would really help it so depends really on the size the small size maybe the treasury can cover a vote for it to a medium size maybe tokens can be used from the dollar investing Forum to not cause the market pressure and then like as a remedy to

those who were affected right if let's say full TV I'll get drained I'm as it happened before protocols have just nothing to do with that right like you you can't like make money out to stay there well some do but unless you're a stable coin protocol you can't pull money out of there yeah I was to mention that we have some insurance funds working uh inside our protocol uh because like protocol is designed so that it takes all fees in digital tokens digital tokens is our LP tokens uh so this is the tokens actually uh hold it till now Treasury and if for example liquidations happens not on time and there is like some losses uh protocol just burns uh some LP tokens

that uh laying on the treasury so it's like self-insurance and self-paced is bad debt of course it's not work for like large but depth as I even said because this is some something else I guess but for small small cases that could work automatically and didn't take any action from Community or somebody else in terms of liquid staking derivatives I know you mentioned this a little bit but I would expect that to be one of the most popular strategies can you kind of explain the mechanisms of what that looks like how it works and what kind of yield you can actually expect so so far linguistic and derivatives could mostly been about if being a chip like on other and compound I think if borrow rate has

historically been like I think it was even as low as 0.3 percent uh all the way up to two and now even a bit higher you just take cheaper if you put it into sdh or some other liquids taking derivative that's available on the protocol you are doing it and then you just Loop it right um in gearbox is a bit of a different thing you don't Loop it you first just take a bunch of teeth and then you put it into liquids taken derivative but the end case is kind of the same whether it's other emote or gearbox or Euler or something else with gearbox you can although later on put it into carbon into convex or into curve and then the wire and so there are different other strategies with it but which were actually more profitable so while sdh Peg was more of a concern back in the

days Lido double printed more into the liquidity pool right to issue more Rewards and now for the past couple of months uh the back has been very good like almost one all the time so instead they're printing or not even printing into the normal stake because they want to ensure the TBL growth right so that's why the most popular strategy that they said just to file up a bunch of easy to borrow rate at the ship into sdh that's it a very dummy strategy now that actually might be coming to an end for all London protocols because what happens is there isn't much inflow of new ethereum intelligent protocols so you lose that cheap Capital to borrow from and you can even say there could be an argument that

ethereum borrow rate like pure ethereum borrow rate will converge with the stake in a way not one to one but like close enough violating protocols so in that case the LSD narrative farming might even die out because you will have you'll have a cap on how much amount can be extracted unless I don't know Joe Lubin wakes up and puts a load of ease into its passive side I mean that's but yeah you run off to passive supply of that speaking of that actually that is why Maker only learned a bit today to be honest uh maker is doing their what does they call it you see either die either die thingy where they splitting it so they just want to maintain that supply of idle ease that is cheap tomorrow because honestly she borrowed Eve has been the source of strategies

for insta dub for almost a year at this point has been the source of yields for Ava for Euler for gearbox like because that is the most organic Define native on-chain yield right while Stables have actually been underperforming because uh oh yeah there wasn't much demand for those since volatility has died in the last few months here so that is what that's my concerning though is these or more like a perspective way it could go but also people are saying that then I don't know the risk score of lsds the risk adjusted return of lsds will never be as much as ethereum uh normal yield on London so like it will always be some spread but when the spread is

too tiny people don't don't care right so then you might end up not having to see the pie grow you'll just what's your perspective and what is this yeah I guess like Spread spread will be very time and it's actually uh I don't I don't I don't think that uh leveraging will make a sense for such kind of stuff uh after Chicago is but for now it's like a huge narrative still and I guess one of the best opportunity to uh get yield yield will likely remain in lsds because they will be synthetics coming up on that front like what maker is trying to do and but for us I think it's also trying to do with their non-staked version of frax Eve so you could see that happen but that means the

yield will be there due to increased risks but if those risks are printed by the protocols that are the largest in that narrative in the first place then you can say it's not even that much additional risk to be honest yet actually funny thing because when we discussing this decent the fact that if pure Supply is running out and not really coming to letting protocols anymore uh ilg7 came up with an idea of like synthetic it's placing it into two and then we were like okay maybe we should even propose it to the dial and then today we see this read about maker doing either die which actually has been in the work for some time so if the ilgas is a scammer and he came up with an idea that he read two months ago or he's a genius who just thoughts are the

same way you'll guess so I'm gonna confess now what it was I don't know I just think that everybody's talking about it so it's like same idea is come to different Minds yeah yeah it's interesting to see because like currently you see are they listing all these lsds uh through their uh like ethereum V3 um that they recently launched on uh mainnet so it is kind of interesting to consider the fact that eth uh like raw eth will not be cheap to borrow forever because that Supply is kind of gradually moving towards uh being staked and therefore there's less less deep of a supply so the demand kind of catches up and I think I kind of agree that over the long term you will see uh that the

youth borrow rate kind of converge towards the east staking rate which is a pretty interesting thing to think about especially when you're adding leverage into the equation uh but to keep this keep it keep it rolling here you know last month gearbox announced a v 2.1 and one of the interesting things that was tied to that is gearbox which gives credit account users the ability to have some automation how will gearbots kind of change the user experience for credit account users so one of the problems uh as we as we can see the problems that faced create account users is that uh like Leverage is a risk right and of course you want a different uh different tools to actually

do this risk lesser yeah and in the success for example you have different stop loss orders and so on so on so you can manage this risk you can put stop loss and to be sure that even you are not online that your position will be closed and you don't lose all your money on chain it's a little bit particular to do such kind of stuff and that's how we came to idea with these gearbox where uh you can add some external uh predefined strategies to your credit account and Implement different Logic for example stop loss order for your leverage position

which actually can work pretty similar how it works on successive for example the back happens it could automatically using some automation protocol like gelato for example or keeper Network can be unwrapped underlying and okay you can be sure that everything will be good with your position you don't be regulated or for example you can do different for example DCA strategy yeah it could be something interesting for you if you're on a long-term asset and doing one big order on chain it's not very good idea uh not always so maybe you want to just increase your position

instantly and of course you can send every water our transaction by manually yeah it's like not convenient and here you can connect your create account with some external bot which implements this DCS strategy and again with some automation protocol it can work everything you want for you and in terms of how it works inside uh uh actually like we as protocol just checked that all operations that happens with this external Bots they are safe so that there is no like uh losing funds

you can put some uh some parameters how much for example slippage you can have on water with gearbox and so on so you can manage uh some parameters that uh available what's what kind of options available for uh both smart contract and it actually to be sure that uh strategy implementing these mods actually works what you want and can't do anything in besides that now when you say that there's like an external factor to this is that requires some off-chain computation that is then pushed on chain and executes the

automated strategy or is everything actually happening on chain uh now what we actually what what we're thinking about that this strategy should be on chain so it's like more more simple strategies not very very complicated ones uh so we think first use cases will be as I said some like stop losses some simple I don't know strategies that help you to manage your accounts while you're sleeping in and so on yeah so it's like the same stuff that you have already as a Trader the same you stop loss limit order but instead of some chain because if you do it off chain you either like kind of have to trust like gearbox service or the interface right that you shouldn't

be you shouldn't be doing that or I don't know you run your own bot and then you give it private key yourself and then it tries to trade for you while you sleep not a good idea either I mean here people will be able to see I guess right you'll guess where your stop losses and whatnot but in Legend protocols people can see liquidation price anyway so like what's the what's the difference yeah it only becomes an issue like remember how we were all watch in the other liquidation thing I was like looking to buy what was the at eight eight nine eight yeah I think something like that yeah that's why all the especially the Chinese communities were like yeah it's never going below actually didn't go below I think it even dropped to health factor of like uh it literally dropped to one but there wasn't enough liquidity

to liquidate it with profits in that block and next block immediately it was like higher I could be wrong but yeah that's I'm just making an example that the fact that it's Unchained and people know that your accounts will be liquidated then that's okay it's still small a big gearbox becomes 10 billion well yeah then it's an issue but that's pretty sure the solutions will pop up for that yeah no that's super interesting as well and so now it was just a day or half maybe two days ago Ivan you actually authored a post related to this special LP boost program and it's really kind of focusing on like okay how do we scale the TV out here how do we get to that one billion dollar Mark uh and then even at one point you said the main point need passive liquidity so how do you think about it

tracking that in and why is it so important to the protocol yeah so good good question actually I wanted to focus on that together so thanks for that um as I mentioned the utilization has been really high since the second day of launch without any incentives or anything like that so that's really organic and ninjas meaning the library takers and credit account side they just want more and more liquidity to utilize they have the alpha they know how to make money they are ready to pay them above the market but the issues that well first when we launched it was the ftxc associate and everything like that the market wasn't feeling that well then it was the gbtc right the very having a big week and sorry um so yeah we understand that's why a lot of liquidity just left or just got

scared so I think is that liquidity has always a Breaking Point right let's say if I tell you you can have rate on usdc on Ave at 10 you will go right but if I tell you there is 10 and usdc in a newer protocol you'll be like ah I don't know if it will stay for long enough right so the breaking point right now might just be way too high because you have to kind of compete with other protocols with the with the real world yield and with the fact that people are just scared for example I've been sitting on a huge usdc bag myself for the entire year didn't do with it uh I was just scared the that was like down and they're gonna put it I put it in gearbox for some time but later on I was like having all the eggs in my basket might not be

that smart it was in high side it was but I'm a Trader yeah so how to think about it um yeah so that issue that I just explained that is just something that will go away after a certain point like when the market either picks up or the fear goes away so then naturally people will be more okay with even lower yields at the same risk level now they're just scared another thing is we were trying to do the institutional route for some time but honestly institutional first of all they take a load of approval sorry uh to actually get the permission to put capital in so that's one issue it takes ages second because of that stuff that happened many of them just stopped doing it in the first place like they just like yeah they close that thing they close that thing they close that

thing so fatigue Alpha gearbox mostly has been Visions honestly one night I just get the deal on the K I just put 10 million in the protocol I'm like good good for us good for you so just trying to get more marketing more Community more doubt about stuff there is really now no approach because we don't know what approach could be like if you have suggestions happy to listen give a referral and stuff like that you know but that has been the uh growth bottleneck um maybe getting more passive assets on the passive side is one but long term how we think of it also is uh they will be Institute not institutions and protocols that will happily Supply liquidity at a lower rate

like retail might not be right all institutions might not be willing to take a five percent rate if you tell five percent to die and you say we are very much low risk well but like at 5x of our DSR they'll be happy to we just need to grow to enough reputation level to go to go to go to uh curve CRV USD to go to make or to go to frax at that point actually frax already approved the ammo for the other box but it starts only at 2m but they can scale it up so stable coin issuers for example they will always be ready to accept a lower rate compared to what the market offers in general uh just a bit too soon for us on that note but already see it working for instance what today's spark protocol that makers spin off right not

a spin-off more like a sub-dial initiative the kind of making their own Legend protocol uh but then they have access to the D3 module rate which just they're saying yeah I don't have two million 200 million liquidity at one percent rate to Kickstart an OP side that's like that's the adoption of the protocol happening just due to the fact that they're close to maker and they can get such rates and I wouldn't call it fair but who cares about Fair it's uh it makes sense for maker as well like otherwise they even have it sitting there right or they give it to somebody to have more risk question is there is enough risk yeah that that makes a lot of sense um do you mind explaining kind of the governance process as it relates to gear I mean right now that's kind of the main

utility of the gear token so how is that process evolving what have you learned from you know the first three or four months of of Dow governance and how do you plan to push it Forward good question so we cannot like peacock on the governance topic too much because for now it's just snapshot and multiple execution like if you haven't had any so that's like math like this lame right but we haven't had any deviation from the rules quorums or procedures so what was set up even though it was not fully Unchained has worked fully to the last rule of the law or like of the letter right so that's at least commendable to an extent um we want to have one chain governance obviously as soon as possible but while the pmf is not there and the product is not fully showing that like it's good

and stable but having governance is like I don't know trying to as I mean yesterday trying to put a dark mode on your interface while you have 10 euros you're like oh my God we spent the months making dark modes like look at this like good for you good for you of course not the same level of comparison because one is more security related but you get what I mean yeah so uh the multi-6 though they were enacted by the token holders from the very first day so everything has functioned properly just that uh yeah it was just snapshot delegation really um there are a bunch of interesting governance models uh more like there is one thing though if you have a bit of a leeway of how you work and you have the snapshot plus an autistic model you can experiment a bit more because once

you're fully on chain you you can't really experiment much right what I mean is that now what we what we are voting for is the Opera model like I forget how the abbreviation is um how the operation goes but point is usually governances are they have either working groups right and they get voted on or they rotate or this cancels or committees that also get rotate and get vote that periodically that is more like element model synthetics model wire and model close enough to an extent it's good and chain it makes sense what we're doing is we're doing essentially that proposal that Peter from 1tx proposed hypnosis save Dao that is you don't have working groups you don't have like teams you have just initiative so the dial votes for the big goals let's say we

want more TBL they want nice interest we want something else and then different teams come in and essentially compete with their proposals to execute each different strategy that the Dow voted for and then that just happens you don't need to have synchronicity it's also better conceptually legally speaking because you really don't have any overseer like the Dow just want to give budget and that's it like do your thing it's more like a grant everything turning into grants it could be hard to do the own chain uh because they are councils and Canadians are easier to the own chain right you vote for something you have designers then the vote has Quorum kind of easier it rotates here might be a bit harder but maybe even easier because they'll just votes for

the budgets right then it just sends the money and that's it there's nothing else after that so it could be even easier yeah but that's so far the governance front we want to see it end of this year hopefully unless our deaths or not even our depths unless the devs come up with some new crazy ideas that need more time working than governance might get a bit pushed but uh we want to have fully Unchained governance yeah what are the plans and maybe it's not up to you obviously you you're striving towards like a decentralized ownership of the protocol but what do you expect to be the main value accrual for the gear token uh over the longer term uh different aspects could be done actually while we are on it uh our country one of the contributors and place one in the code with talking terminal on that topic

so that could be interesting actually crop that one out because that is like another source right so anyway uh the point is gear token gear Dao owns the entire thing and it even voted to establish a foundation offshore so that the foundation on behalf of the Year Dow could own the ID licenses and stuff like that in this case Dao even though there is no Revenue sharing now it could do it because the revenues are all assembled in the protocol so that's the good part about it what token model the discussions have started there are different ones the thing is that token models the really ones that stand out is the v-curve model right all the other ones are more just like oh buy it back and burn I wouldn't call it a token

model it's just like it's it's fine like you have some Revenue you burn it's okay but it's not a token token model V at least says some Loop right it doesn't mean we are very much fans of V but it could be plugged in that it would make sense in a good way but also we're not really rushing it because we need to see how the next stage of the the product that's coming likely I don't know whenever there's make it I have no control over it uh then after that we could see what token model would make most sense and be most complementary yeah yeah ve models are definitely interesting uh to protocols I really need to focus on attracting liquidity so I can see how that could be a fit but I kind of like your approach of you being cautious about that right

because there are it's not necessarily an easy token model Implement even like balancer who seems to have pulled it off now just a couple months ago I had a huge issue with like a whale the uh the Humpty situation for those familiar they were kind of compete out competing bouncer or excuse me Aura they're uh their convex style yield aggregator so it's like it's it is interesting but it's not necessarily just like a plug and play token strategy um so if you think about like you know protocol Revenue the the Dow generates fees in three different ways and I think they've generated about a half million fees since Inception and would you ever consider things like Revenue share or does it make more sense to kind of internalize that revenue and help continue to bootstrap the growth of the protocol great question I think there is

always a thin line right like we of course don't have any control over this thing since the first day but obviously everybody wants to have some sort of Revenue sharing right or some sort of more genuine utility to do it although a16 that can buy a a lot of tokens one day to just vote a lot right because they do which is fine it's a good utility to have not not even a joke anymore right it works so but yeah some token of some Revenue sharing could be cool the thing about revenues is that now gearbox has two ways is one is the liquidation fee and one is the apy spread fee on the lens borrow that doesn't mean these are all the fees that could exist more could exist it's just that they're not being done now and that is what we see with many protocols is

when the total Market is like what what did it shrink to is it 100 billion or even less at this point it's less right total D5 market like how am I even gonna make money on that or if you split all of that Revenue that you can make over all protocols it's like tiny so there isn't much point to try to make Revenue right now because the market is so tiny so you have to grow first then you can do the revenue it's a it's a very easy reply right because it's like yeah you can't argue with it but also kind of true um okay a revenue model at some point would be cool uh I guess the question about the internalize it or not um I think this is in line right at that point I guess there would be arguments from like actual shareholders and versus

stakeholders that is what you see with maker as well where there was huge spending in the last year so like they were doing well but they also spent a lot a lot and it could be argued whether like even at least 30 percent of that was even well spent uh so yeah it depends I guess it's somewhat of an issue where enough stakeholders are also shareholders at the same time but why not like if they somehow manage to get the vote in power that's how it works here so we'll see we'll see do you guys have anything else you want to hit real quick before we uh Hop Off sure what kind of strategy are you farming yourself now myself right now no Dan yeah I've been farming the out of uh fraxies eth uh that the uh convex pool there just because the strategies

that frax is employing to kind of spin that flywheel is really intriguing uh so yeah I went balls deep and did the one year lock on that pool solid solid Big Balls nice man okay note it yeah I know and I'm curious like obviously like the frax token the stablecoin is specifically um you know that's kind of like been touted as like a farming token really it's not somewhere you go to stable for long terms or periods of time like that's really just usdc at this point um you could argue tether as well um and and I feel like dye's kind of getting there you know Sam because kazimian really talks about like the monetary premium behind stable coins and like why uh like users would want to hold them like spot creating spot demand for the token um and even in like Dow treasuries as

well right like you do see some Dows holding die now um and so that's kind of like why I think their view of creating facts eth uh as like you know kind of separating out the yield generating asset from the base underlying asset is pretty exciting um and so yeah it makes a great farming opportunity at least for the near term all right well hey guys thanks so much for coming on we'll have to do another update and bring you guys back uh in like four to six months once uh some more stuff happens in gearbox but again thank you if you guys want to tell the audience where they can find you uh hopefully not in jail but otherwise the gearbox.com Discord Twitter anywhere 24 7 online yeah sadly no life all right sounds pretty similar to us well thanks again guys we'll uh we'll catch you

again soon