Gearbox Yield Tranches
Risk-adjusted lending against composable leverage
Idle DAO is excited to announce the launch of the latest tranched markets: overcollateralized lending pools built on top of the USDC and WETH markets of Gearbox on the Ethereum mainnet. These new markets offer users the opportunity to lend money, benefiting from the higher rates offered by Gearbox while hedging the higher risks coming from leverage borrowers within the protocol.
This article delves into the details of Gearbox and explores the features of these new Yield Tranches.
Liquidation Cascade
In late April 2024, an unusual pie chart outlining the future airdrop tokenomics of an LRT protocol triggered a depeg event, leading to multiple liquidations.
A liquidation cascade happens when a large amount of positions gets liquidated all at once often because of a price decrease in a crypto asset. As these positions are liquidated, they put more selling pressure on the market, causing the price to drop even further. This can trigger more liquidations, and the cycle continues. It is like a domino effect of selling.
Such systemic events heavily impact DeFi, particularly leverage farming protocols such as Gearbox, Juice, or Extra Finance, due to the leverage utilized by their users. If the liquidation mechanism is not properly battle-tested and set up, liquidation events can strain the entire lending and borrowing system, ultimately leading to bad debts for depositors.
Bad debt refers to loans or outstanding balances owed that are no longer deemed recoverable and must be written off.
While leveraging in DeFi offers opportunities for enhanced returns, users should approach it with caution and a higher risk tolerance. Yield Tranches provide a solution to mitigate the risks associated with lending money to leverage farming protocols, offering users a more secure way to engage in such activities.
Gearbox
Gearbox operates as an Ethereum protocol offering composable leverage solutions. It enables users to engage in various activities such as margin trading on Uniswap, leverage farming on Curve, leverage liquid staking on Lido, and leverage restaking with EigenLayer derivatives. With Gearbox, users can access these opportunities with up to 10x leverage on their initial capital.
The protocol embraces the modularity and composability of the DeFi ecosystem, ensuring that leverage utilized by users is not confined within Gearbox pools but instead interacts with the broader DeFi DEXs liquidity.
Gearbox’s users can either deposit their assets to earn passive yield or borrow these assets to create spot-leverage positions. To safeguard the assets deposited by lenders and mitigate downside exposure, Gearbox closely monitors the health factor of every trader’s portfolio, also known as the borrower. If the health factor falls below a given threshold, automatic liquidations are triggered to protect the deposited assets.
Throughout these years, Gearbox’s lending pools have never faced any security incidents and feared as expected through depeg and high volatility events. The protocol is also improving its leverage mechanism with Friendly Leverage introducing lower borrowing rates, fundamental oracles, and partial liquidations. This will strengthen the protocol during volatile moments and indirectly benefit the protocol’s lending market.
Vault Features
The newest Yield Tranches integrate the USDC and ETH v3 markets of Gearbox on Ethereum as underlying yield sources, catering to users seeking diversified risk exposure to on-chain lending.
Gearbox’s Yield Tranches offer a solution to minimize bad debt losses resulting from forced liquidation events, thanks to the different risk profiles offered by the Senior and Junior mechanisms. When depositing through Yield Tranches, users can choose their preferred risk exposure:
- Senior: Lenders in the Senior tranches withhold part of the underlying yield generated in exchange for priority payout in case of bad debts and hack events.
- Junior: Lenders in the Junior tranches earn a boosted underlying yield by offering the first loss capital to the Senior counterparty.
From a yield perspective, Senior and Junior returns are dynamically adjusted based on the Adaptive Yield Split mechanism conditional to the utilization rates of each lending pool. Senior offers APYs ranging from at least 80% to the base yield on Gearbox depending on the coverage rate. Junior gets APYs always overperforming with respect to the Gearbox base yield, a sort of simplified 2/3x leverage.
Additionally, for the initial liquidity formation phase period, Idle and Gearbox will incentivize the Senior yield offered with weekly GEAR and USDC/WETH airdrops to LPs based on the following thresholds:
The incentivization campaign will last at most 3 months. In case the Base APY is higher than the threshold stated, the reward distribution does not apply.
Additionally, users depositing to the Gearbox WETH market can enjoy 410 Kelp Mile per hour for every ETH deposited in the pool.
Users can explore the Gearbox Yield Tranches by visiting the Earn section in the Idle’s dApp or using the following links:
The main contract addresses are 0xbc48967C34d129a2ef25DD4dc693Cc7364d02eb9 (USDC market) and 0xdd4D030A4337CE492B55bc5169F6A9568242C0Bc (WETH market).
Ready to take your DeFi journey to the next level? Don’t miss out on the opportunity to be the first to deposit into the Gearbox Tranches and unlock double-digit returns on stablecoin lending, or the fund coverage provided to Senior Tranches.
Dive into the future of decentralized finance with Idle DAO. Join now and diversify your holdings today!
About Idle DAO
Idle is a DAO that empowers the DeFi market with robust yield automation and hedging instruments, facilitating its expansion and establishing the foundation for a sustainable credit financial ecosystem via a more efficient and risk-adjusted capital allocation.
At the heart of Idle product design, there is a much broader thesis on the shifting DeFi lending market. It is formed on the core belief that, over the coming years, the global debt activity will move on-chain, making every transaction and loan programmable and auditable — as the world’s debt moves on-chain, liquidity providers will have the essential need to manage their exposure to it.
