Gearbox Protocol: 'DeFi Is Boring, Let's Reinvent Credit' - Ivan & Mikael Lazarev. Ep. 540

Transcript

D5 has been somewhat dead for about 2 years right yields have been not that good there were a lot of hacks happening so it wasn't the nice time to be in the hacker could immediately drain all FS three Ramen the team said let's Infuse points and infrastructure coins into the boring dead Defi and defi got a Resurgence right that's the nobody cares of stable coin rates today only as a derivative of e maybe funding rates right maybe that but people just basically said okay defi is boring but now we can get points for a huge potentially infrastructure Point crypto is a market which is dominated by tail risk right like for 5 years things will be fine and then one sudden day there's

going to be a black on event and something major is going to blow up we invented a very great concept which is called quas and in this case all people from the pool could check how much money could be used as ceral for any particular other asset this episode is brought to you by nosis nosis builds decentralized infrastructure for the ethereum ecosystem with a rich history dating back to 2015 and products like safe cow swap or nosis chain nosis combines needs driven development with deep technical expertise this year marks the launch of

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remain in your custody so you can have complete Peace of Mind start taking today today at chorus. one hello everyone welcome to epicenter today I'm chatting with Ivan and mik from the gearbox protocol which is a protocol for composable leverage on ethereum uh this is a really interesting protocol that extends the scope of how leverage can be used with defi protocols in the crypto ecosystem Ian and Mikel welcome to the podcast maybe we can start with uh your story about how you got into the crypto space and you ended up with the gearbox protocol so maybe Ian was first who

joined the crypto space uh to me personally I participated in different technical events I'm originally from St Petersburg and we have a lot of different stuff related to machine learning and so on and one conference was related to crypto and I was totally inspired with energy and so interesting technical solution I've never heard before so pretty soon we have a really great uh group of Enthusiast it was called like St Petersburg uh blockchain developers group and around 400 developers were there so we have like each two or three week meetups to discuss new technologies

new stuff and so on and I really felt in love the tag behind that he talked more this time in 2017 related to bitcoin to eum to a lot of new things come to scene so I was actively deep into this stuff and after that I participated as many projects and many hakon In My Memory maybe it was around 30 or more and I won a lot of them but the biggest things won in January of 2021 I participated in Market make I was really close to fail and it looks like was night when I should create something and the idea of gearbox came to my mind so till 7:00 on

the morning I was cing cing cing right line by line there the p and sub meet one minute before deadline and boom the project became a finalist and after that a lot of people start to call me and say hey we want this project we want to use Marchin raing on Unis swap when talken when you deliver it and it was really cool so I have a friend El G who knows Ian and after that we team up maybe in a month and started this story yeah so my story is not as romantic I unfortunately cannot code my mom gave me birth without any special skills so I was one of the people dming from 2017 I was one of the people coming

to DMS of developers and asking servant token so I just continued doing it as a uh as a thing so been in this space since 2018 early days uh was always on the community marketing side kind of was like doing part-time jobs back at University and uh fast forward was like an angel investor and whatnot but basically at some point got tired of just like investing in things because you also want to be involved to an extent so with ilus as Mel mentioned the third co-founder we also spotted the project of mikale we spotted mik at the hackaton I like okay let's call with this guy maybe we can invest early and then fell in love with the idea with what it was contributing to the space so

since then I think this week or so marks three years together essentially yeah yeah it's three years aniversary I think so my longest time ever I think in a company or Community protocol however you call it yeah that's an interesting story hackerson do work in creating protocols and startups that's so guys tell me about the about the idea the idea about composable leverage and yeah what is it really uh it's a really cool question thanks for it because we started I started personally thinking oh I want to do something with leverage like a margin trading and then I thought oh it's

pretty hard to attract liquidity if you want to launch something like an exchange can I reuse Unis swap protocol and J it up so the first initial idea during the Katon what we mentioned before was to make a leverage for UNIS slap next stop we start talking with ilus and Ian and found that we can easily use it for year to leverage y tokens and then we found wow it's cool we can leverage everything not only farms and margin trading we can use different tokens and now we are going step by step to make a leverage layer so the idea here is to be a protocol which

could power ups different protocols to provide liquidity and make it possible to leverage wherever you want yeah so to add to it any complex idea architecture or protocol those building it always need to know how to distill it down to something very simple right for the users and like as a catch of phrase so 3 years down the line we are still on that path I think we are somewhere in the middle of figuring out a good way to pitch it but uh let me try a few different concepts and then see which one clicks the most right people sometimes have affiliation and more familiarity with one side of products of another so one way to see it is like account abstraction with leverage gearbox essentially gives you that smart account or call it smart wallet or

something else but with leverage inside it so you have more Capital like imagine if your metamask had 10x def funds but then you go and operate with other protocols through it it can be farming it can be TR gr and it can be doing some composable delta neutral positions so that's up to you so it's really leverage as a credit layer or leverage as a liquidity layer to an extent where trades Farms everything else that they don't happen within gearbox protocol gearbox protocol is just that middle layer in between that gives you more money but everything happens without a protocol so essentially that's why I personally fell in love with it at first because I was investing in many thing okay not that many things not like SBF

but let's say many enough to see that everything was granular and this was to be like wow you can actually focus on one protocol but be able to tap into different narratives be able to be always relevant right that's one of the hardest things in crypto to be relevant and when you building a protocol that is isolated in itself as soon as the narrative switches you have the issue that you are kind of stuck in something that people don't care about right and I was like okay gearbox is something I can actually dedicate full time to because if there is something new you can always see how to edit uh before jumping ahead of course that's one of the things with edit recently that we've seen success so uh the goal is to make an engine and then adapt to different things that the market

wants so the way kind of I see gear box and correct me if wrong now is in the traditional economy like tradire economy I can get leverage and usually that Leverage is kind of ear marked for a specific purpose so when I go to the bank for a housing loan home loan that's a form of Leverage I might be putting down $200,000 and the bank $800,000 so I'm Levering a 4X to buy a home with the home as collateral itself but those $800,000 that the bank gives can only be used to buy the home and like do repairs to the home you can you cannot use it for anything else and I similar for like auto loans or or you

know anything like basically other forms of Leverage now in the in trfi there is like another part of the spectrum where I can take a fully collateralized loan I go to the bank and give them gold and I get less than that value of gold as a loan and then I have like full Independence so if I if I do full collateralization like that probably I can do whatever I want with that with that money because the bank has the gold it has the collateral itself and then finally in in tradire you have like this kind of loan which is like the personal loan where which is usually very small amounts of capital only and I can go and get a loan from the bank and I'm free to do whatever I want and I may not even

need to put a lot of collateral up and in reality it is being collateralized by people's earnings power or their or their credit rating or something like that so that's kind of like the whole range in in Trad F so if you go full collateralized of course you have freedom to do whatever you want want but that's not interesting that's not leverage actually you not really leveraging if it's full collateral so leverage occurs when you have less than the total amount of capital but if you have less than the total amount of capital it's usually going to be in tread fi that you can only use it for certain small purposes because that's how the system is designed and now in

crypto when we move to crypto the the interesting thing is that the role of the bank in a sense is replaced by a protocol where there are so many different Primitives that can be accessed inside ethereum itself like from unisab to igen layer to liquid staking Etc unlike a bank which only might be dealing with Home Loans ethereum might be dealing with like hundreds of different instruments and so what you're trying to do is have a protocol where I can put up some capital x can get leverage on it like 4X or 5x or 10x the amount of

capital and then I could deploy it not into just one like one system but like a mix of various systems depending on on my choice so it's it's about bringing the freedom to do a lot more on ethereum because fundamentally ethereum is a composable machine in a way that taty systems are not you are correct and just explain so basically maybe as I definitely believe in crypto we should not copy narratives from The Real World I've seen a lot of project who try to callope the existing products from web 2 to web 3 and

majority of them were unsucessful so gearbox it's a no approach to solve this problem and they here may be a little bit similar to credit card so our credit accounts could be considered as a credit card you open in once and then you can go across different protocols and use this credit account as a smart contract wallet to many of them when you go to Unis swap you immediately get margin trading because on your smart contract wallet there are two source of funds the first part your pound funds you should provide around 10, or so to get leverage

and then your credit account could immediately take money from the pool so when you really open a position you provide for example 100 usdc and 900 usdc comes from the pool now you have 1,000 and of course this smart contract wallet has some limitations for example you can't withw money all of them into your pocket because it's creating solvency for the protocol but you can consider gear box as a lot of different boxes and let's label each box with a token for example we have a box called usdc we have a box called e link and so

on and so on so when you do any operation between tokens for example you make a swap on Unis swap you put some to usdc and get some tokens to the box of east or if you go to provide some liquidity to the farm you take some usdc tokens and get some y tokens after each operation we go across these boxes and compute your collateral and if we really compare this collateral with your depth and it's bigger than depth operation could be considered as safe and okay if not it's reverted it's why we protect pools from and protocol from insolvency

so each time you participate and interact with third party protocol you really provide some tokens out of the credit account and get some good tokens and then we compute codal pretty clear and furthermore in V2 we have a really great experiment feature can connect gearbox protocol through the wallet connect to external protocol for example to Unis Swap and have a really native experience so you shouldn't learn how to use gearbox application you can simply connect to Unis swap then do swaps as usual and gearbox automatically make all rooting and so on to create native

experience and probably in the future I believe we also could Implement such things thanks for credit abstractions and create amazing product when people should not learn what gearbox is we want to become a part of infrastructure so it's like a credit card you never keep into your mind how it works when I paid for a milk in a shop gearbox could be the same you have a special gearbox wallet you have 10x money and then you go to Unis swap or curve or Lia wherever you want and just use them this extend money pretty cool I think nothing I would that specifically I would just say you started with don't copy the narratives from web 2 to web 3

I think what you probably so meant don't copy the implementation of the products people might want right so you kind of just do them the same way and that get back to M's point where he said that uh like you can get a loan to do anything right but it cannot be large size and it is guaranteed by your earnings so there is things like somebody come into your house to beat you up to get your money back right like let conceptually that's how they work in real world right to an extent there is also the concept of digital identity that needs to be maintained while in crypto you have a bunch of different addresses conceptually right so you cannot copy this leverage right this loans at a larger amount than you initial in crypto the same way the pro as mik said and fully agree with him there if you try to

copy that fully you just don't arrive anywhere because your rails are fully different so you need to adapt maybe the narrative is similar to like Prime Brokerage in real world but the implementation is is absolutely different and that's what we see with many successful products right like from I guess okay let's not go that far for now uh but yeah as Mikel said you get like essentially we supercharge your wallet with X5 X10 the amount of money and then all of the trades Farms positions whatever you do like a credit card they happen elsewhere uh and that's the composability part right you can margin trade on Unis swap you can leverage Farm on curve Lio uh convex balance right where whatever else it is or you could leverage restake which is

the hottest narrative in town this week's right or this month so uh yeah so yeah let's cover let's cover this hottest uh hottest narrative now maybe like Leverage restake is already quite complex let's first think of like Leverage stake so I'm able to leverage stake with gearbox what is it like what could I get what kind of returns could I get through through through this these strategies uh let me start this one and then Mikel can catch up and tell what I missed so Leverage staken conceptually is pretty pretty old strategy right abhe it instad D had it on top of AA and so on the point there was well you have a few different ways to get to leverage

staken position right one way is when you have delta neutral so you don't have like a long or short on E compared to usdc you just have eth right and you want more of eth you don't you don't want to care about the volatility of the eth price right those are the essentially the strategies that have been popular on a and pretty much any other lens and protocol uh with that what what the position is really about is you Arbitrage the rate between vanilla eat borrow right so normal eat that you borrow and the Stak in yield that let's say Lio or some other staken provider like rocket bu gives you right and then you Loop it so what you do is you essentially borrow e right you put it into s e Swap and go back that's just

the looping right the US strategy everybody is familiar with with gearbox that strategy also worked and got very popular I think around $30 million worth of e deposited into Lio directly module back in V2 which was last year uh but it was done differently so in gearbox you don't do the looping like in ABA for example right you have almost two pools right you just borrow between them and you Loop in gearbox you take X5 the money at the beginning right in your credit account and then you do for example that swap or ligher deposit with that amount of money fully all together you can do it in tranches or you can do it all together so the difference here is your execution and your yield is exogenous it's not about just

arbitraging the rates within one protocol it's about doing all of that rate composability among different protocols and which on those are that depends on you as a user and of course whatever Integrations are enabled today people might be earning 3.5% apy on on Lio on average right so if I had for Simplicity sake 100 e that's a lot of money now so if I had 100 E I could open essentially like a wallet uh credit account with uh with gearbox protocol If I deposit the 100 e in there I might be able to get up to 1,000 E

from the from the gearbox protocol itself I may even choose lesser I might you choose to take less 500 400 whatever so let's say I take 400 so 100 of my own and 400 from the protocol 500 when I deposit the 500 into Lio it gets deposited as e and it starts to on on interest so so basically with 100 I would have made 3.5 each per year assuming 3.5% stays for the year but with 500 E it it is as if uh my position is making 3.5 multiplied by five so that's something like

17.5% e by staking on on eum which is like a pretty safe operation and on the other side because I've borrowed this 400 e i I need to pay some kind of interest to the protocol and if that is less than 17.5% then kind of like it's a it's a worse file trade is that right I think you're right but I want to have some addition what really made gearbox different because we focus in your example just to get healed from the St is and it's crial strategy it's very common but gearbox

has unique feature as I mentioned before you have a lot of boxes why you should keep your St is on account a g rate not enough y let's put it in the curve and get curve token C I forgot I think it's like CV is or so and then put this curve token into convex position to get more yield it's doable and it's why gearbox have a big difference with our or on protocols we are fully composable so basically you start let's go and follow your example you have 100 e you go to

gear box and say hey I have 100 E I want X for leverage now you have 500 E for Simplicity let's consider that all rates are one to one so you swap 500 East into 500 State East pretty cool you already get some interest rate but it's not enough for you you put your 500 SES into cure to get for Simplicity 500 crve and then you put it into convex position so you really make it boosted position you make yelds from ests you made some rewards from cure and it's a quite unique for gearbox because your own your

own credit account we should not really follow for complexity when people use like an old design of pools in our all money or Elder all money located into the pool which creates a honey for hackers and it's hard to compute your separate position in gearbox when you open CIT account 500 is on a dedicated smart contract and if conx want to pay rewards this rewards will be transferred on your credit account we shouldn't take all this complex math how to spread spr them for All Pool owners because it's a pretty complex task for computation each

protocol should have a different cures schedules and so on and as a result if you use like a pool design things it would be hard to really make all computation and at the end provide uh the real rewards in gearbox your convex position behs to your credit account so all extra rewards which could be in different token all the yours it's really good so you can make EST in convex and then you can get L token if I remember correctly or something else as an additional reward which creates more and more juicy rates for

you so you know that sounds that sounds really amazing right because I could stake and participate in a curve pool and maybe something else or all together with gearbox earning uh more and more interest with every cycle B every additional thing in which I participate so one of the one of my worries and maybe like we can cover that later in theep in the episode is when users start to use let's say three different smart contract systems with gearbox let's say you're using curve Lio maybe like something else then if isn't it the case that even if like one of these protocols

gets hacked and their e gets stolen so there's a smart contract with Lio smart contract r with curve and maybe there's the third thing is yearn there's a smart contract r with YN any of these systems blow up all of that bad credit then lands up on the table of gearbox because that e cannot be retrieved anymore not so so I think like this is this is kind of like one of my conceptual questions maybe for now or either for the future that how do you actually can you even keep a protocol like gearbox safe when smart contract hack risk is so major in our

ecosystem I think it's a really great question because I'm really crazy and focus on safety and uh our deaths really a little bit hate me because I ask them right there do aits and so on because we want to make it as safe as possible and gearbox in comparison with with many other protocols I know has a totally different safety model just imagine and let's compare with Oiler or hour which based on or more for the same on this pool model

in these protocols you have a pool when you have e and St for example and all time all users interact with this pool though if a hacker potentially hacker could be able to do something with this pool the hacker could immediately drain all funds what happens with Oiler and it was up to 200 Millions another part that this pool design really likes to have unused mod because it increase a TV if you go and check some pools in hour you can find that the some of them has a very low utilization it's around maybe 5

person so a lot of money just light some L some money somehow somewhere and do not generate additional things Gbox has a totally different security model at the first time as you already mentioned all money come to the pools so when passive lenders comes to gearbox they provide their liquidity to the pool you as a leverage user or Nas could not access to these funds directly instead of then when you open cedit account we transfer this money from the pool into dedicated smart contct

contract and then only you as a user could manage them through the our security system what implications for security of such model it's a very easy when we have a high utilization it means that initial pool of 100 million will be really uh spreaded across maybe 100 smart contracts and each smart contracts which held around 1 million in different assets correct at this case if you're a hacker who want to really steal money from the pool your honey part is limited because it's if we go through the high

utilization around 90 person it means that you can't borrow so much because for more security we have a special buffer on the top of utilization which allow users who are on beside to Vis M so basically if we have like a three five million of available money to borrow and if you're a hacker you can own and you can find the some security hle I hope we have now them but you never could be confident yeah you can really borrow up to 5 million to this threat and steal them because all other money are spreaded across

different wallets it's a totally different security a model and we want to be to make a gearbox is a very Capital efficient we are not willing to cap to keep like a stale money on the pools because they create this honey pot for e now in this risk takak company it looks like our utilization 90% so if you come today as potential hacker and want to borrow there is nothing to borrow for you we really go through the limits and it's create a very good stop however as you mentioned previously if of course some protocol when we

provide money could be hacked of course it create bad debt but the same problem in our if you use St or curve token as collateral and the protocol would be hard the same risk agreed if you look at gear box itself right so you have a bunch of um sort of passive lenders putting in putting in capital and then you have a bunch of people on different side of the market which is like taking leverage and then putting them into into a set of protocols and maybe there are like 15 or 20 different Integrations maybe in the future there

are 100 Integrations uh that your that your protocol has and yes the the system can be financially designed the system is financially designed in a way that if those counterparty protocols you which with which you are integrated if they are safe your entire system will run safely and it will be pretty hard to hack into but in crypto like you know it's crypto is a market which is dominated by tail risk right like for 5 years things will be fine and then one sudden day there's going to be a blacks event something major is going to blow up like Tera USD is going to blow up I think like these when I look at these D5 protocols in ethereum they have they

have a similar nature right if you make like if you make 15 Integrations every five years you're going to have an event where two or three of these Integrations that you have are going to blow up in the same week and they are all going to like go to zero for for some reason right like either the money gets stolen because of some some smart contract vulnerability that two two system share or something like that and it feels to me that like that is something that is very hard to defend against for gearbox for anything that is offering leverage in a in a smart contract environment yes and the we do step by step things to protect users so

basically if we consider gearbox from the business perspective you can find the gearbox and maybe I think it's a very good model comes from Web Two in terms of narrative here we have a passive lenders and it looks like a deposit in a bank so you want just to get money and not focusing on details for example I am really the worst Trader ever if I buy any token or any asset it's immediately going down and so basically and is opposite so you can really do it in different way and make a lot of money so I prefer to be on

a passive side and of course there are some people who have some great skills and experience who can trade and so on and so on on The Leverage side and in this case it's a quite simple way to find the equilib room between these two parts we invented a very great concept which is called quas and in this case all people from the pool could check how much money could be used as collateral for any particular other asset for example just imagine we have this e pool and we

have a quot how much money could be invested in to Ren the protocol for is taken now the quarter is around 15K East so basically the system account that not more than 15K of East could be used as collateral in any way so all potential losses are fixed and in the way how other companies or Farms build their portfolio they could have like a blue chip with higher limits for example if a pretty safe today as we know to invest money into Bitcoin related to a Smart contract or technical problem yeah we

trust the system or is it's also great example of very stable system at this case for example if you open a long position from usdc the qu limit for is could be very very high however for all risky assets which could generate a lot of eats the can set a lower limit and at this case it's create a good combination me as a passive lender could ship wow this 60% of the pool could be used only for safe tokens when the risk of the smart contract program is quite low and this 40% could be spreaded across

different small protocols which could generate high yields but for each protocol the limit is set for example after to up to a few million and the logic here is how maybe vure phones Works they try to invest in many many many startups some of them could fail but as a result another one could generate so many so much Mone that they really cover bad depth and so on of course we have a lot of risk models consideration and when analyst our Quan compute how to set up this limit and so on they do s their job to really eliminate all potential risks however as

you can see of course smart contract is exist but it's limited it's also exist across different protocols and we try to add additional things to really detect it before and do some steps it's really in our backlog to protect more and more so of course our main goal to make gearbox the safest one for this Investments let me just add one thing I think the comparison with Venture Capital isn't exactly the right one there even though the logic makes sense the comparison is that Venture Capital has downside right they can just go to zero many of them do with gearbox the point is it's more comparison with the

bank where they say you're allowed to do a loan for example 5% for the real estate market in New York right but only 0.5% for Detroit for example so so that way you cap them and let's say if liquidations occur there are things like LTV being lower right there are things like monitoring systems so if an asset has a shortfall if that's the right word it is conceptually that gearbox would liquidate it before lenders have any downside exposure so the idea is of course that lenders never lose their money unless a huge hack occurs and then you have things like reserve funds stepping in whether it's enough to cover or not as one question right before the reserve fund they in there are things like Liquidator premium and other things

where M sophisticated Bots because it's a fully open system right they can liquidate the position before let's say some idle holders from another protocol are able to do so right so there are a few different steps I think getting back to a question M here on 175 years something blows up right if that something that blows up is a light of for example I don't think any amount of security modules are going to do anything right Mel you can beat me up here but I don't think we're able to do anything with that so if it's one of the most safe pieces failing that's one thing right if it's the tail risk which are new stuff for tail risk we have this quot as and limits of the protocol and uh coming back to M's point of gearbox

being secure due to being this like you know having many different pieces uh I buy into this story but of course we don't anyhow hate a Oiler right aam Moro and others they all great teams but we of course are biased thinking that the design we have is better end of the day though I think all of these Protocols are moving towards a model where there is more granularis right so are different pieces risk is isolated risk is priced differently it's just the question of whether you have uh one system with a lot of modules in it right or you have fully separate modules and one system uniting them all together then and that's where lending protocols or lending mechanics disagree uh because

one thing is maybe safer from one perspective but then it's unusable right another one is more usable but then it packs a bit more inside so we can have that debate forever yeah but but on on a high level on a high level the idea is that yes like when you do a lot of Integrations as a composable leverage protocol you are exposed to the risks the smart contract risks in like the counterparty systems that you are integrating but you have this system of quotas where you're probably assigning higher quotas to safer systems or systems that have lasted in the wild for a longer run like ethereum staking

itself or Lio and then smaller quotas for the very new D5 protocol that might be offering 40% yields and the hope is or the engineering design problem now is to adjust these quotas well so that the protocol survives and does well in the long run without harming the passive lenders of the the protocol that makes sense right like that's probably the limit of what engineering can achieve in a in a market like that and it seems that people argue that you have like an a like model right where you essentially it is bootstrap and then they can integrate new things and then you can use different stuff right gearbox

probably is a bit more Mikel would it be fair to say it's a bit more similar to AA than to other lenson protocol so you would say not a fair comparison uh I think we are in the middle between uh Landing protocol mid curve Landing protocols like our because the initial pool design I was inspired by our in 2021 I really learned concept from them and we similar in the pool design however this quotas and the way how we spread money credit accounts are quite unique and in this case I think maybe we are a little bit similar how Sexes work so for example when you use Ken you have

a special smart contract when you deposit your money for this exchange or withdraw and basically the same logic in gearbox so we have a separated credit account for each person it's quite unique I think maybe some teams try to copy but it's um pretty comp complex concept to be implemented but it's safer so it's like Risk in any system right sorry one like like in society in technology right I don't know why I am saying this I have the least experience out of all the people now in the podcast but the thing there is you either have like some level of aggregation right which makes it easier for users and anybody interacting of course that

introduces a bit of bottleneck and a bit of not centralization risk but more like some level of something uring there or you full on permissionless this but then you have to bootstrap every single time from zero and the middle ground right is what we are trying to make in the best way possible another part sorry a a few words so gearbox just imagine it's a very very modular system and now we talk a little bit that there are some pools when lenders could deposit their money as a passive site and they are connected to a entity which is called credit manager which really holds on policies related what you can do and not and then

a lot of credit accounts connected to credit managers so it's like one to many one to many so one pool could have connected different credit managers and each credit manager has a lot of credit accounts it's like a three and from the passive side it's quite easy we have a clear list which protocols or tokens uh could be used uh in these credit managers and in quas you can check wow this pools has such limits for these assets but without any line of code we can create because it's modular more complex stuff for example we can create a few pools for usdc why not one of them

could we called like a conservative one and we can allow to use money from this pool only for Blue Chips it would have better safety measurements because the lift of the protocols are very very safe like East BTC and so on and another Pool is opposite we can hold risky one or juicy one or one and this funds from this pool could be used across nudify protocols and in this case you as a passive side could choose between this two pools if you want to focus on safety you can use more conservative one if you

can take into account that risk is possible or one of these tokens could have some problems in the future but the E looks so lucrative you can provide your passive liquidity to this pool so it's create modularity and at this key gearbox without any additional line of cod could we can build a lot of different project so margin trading leverage farming leverage raking we can simply build a lending Market just from different modules to make them properly configured cool okay so yeah quota limits for for the protocol and then for the

polls are like two ways by which like you can sort of like adjust risk and like there there different pools that offer can offer different riskiness and they different pools can have different Integrations and that is how you know like different kind of flavors of risk I guess can be can be created in the protocol now actually coming back to the leverage reaking so recently like a lot of attention in Twitter has gone to your new leverag treaking products and uh yeah could you explain what what Leverage reaking is and like why why people are kind of interested in this strategy D5 has been somewhat dead for

about two years right yields have been not that good uh there were a lot of hacks happening so it wasn't the nice time to be in uh I guess for Builders like mikale who sit in the dungeon and C this good no no like nobody calling you asking servant token for me it gets less less good because I have to see everybody being upset right like sir when is defi Reviving anyway at some point Ian ler uh let's put aside all of the da availability right the data availability and other stuff let's talk about what's relevant for us the IG layer part of reaken s Ramen the team said let's make let's Infuse points and infrastructure coins into the boring de Defi and defi got a Resurgence right that's the nobody

cares of stable coin rates today only as a derivative of e maybe funding rates right maybe that but people just basically said okay defi is boring but now we can get points for a huge potentially infrastructure coin and that made the borrow yields insane because people that's one thing to farm that's one thing to prearm when you don't know what you prearm right that's another thing to prearm points that you don't even know at what ratio going to be there for what you were going to get at what valuation at what Supply right full on absolutely Gamble from the people who want it but people made valuation sheets and said this is going to cost dozens of billions so I'm going to pay a huge amount of borrow to get more e today to

leverage restake so lier rates today uh 3.5 as you said yourself right and then they said okay uh this is going to be whatever it's going to be multiples of that uh fully based on people's expectations but because of the expectations that gave resurges to defi because now people are prepared to borrow vanilla e or even Lio st e right at a huge rates because they expect this air drop Dr to be worth a lot so all the previous talk we just had for the past half an hour about composability rates granular realization right all of that that is all an engine to enable Integrations which the market wants and we saw that one is the one that market

really wants uh as soon as the LR as soon as the possibility to leverage igen layer yield uh points sorry not yields they points right came to life we integrated it there were a couple of things why we couldn't do it earlier is because layer has a 7-Day withdrawal window and for lenson protocols unless you modifi the logic you need to be able to withdraw immediately right to be able to withraw immediately you need liquidations to work immediately and there was no secondary Market to have this 7-Day withrawal window be capped right to let's say a minute okay a second really so then came LRT protocols liquid reaken tokens uh I think that's ethery Renzo kelp and a few other or puffer right and a few others essentially they

said okay okay we're making derivative so basically it's a they made their own St ether but for raken right conceptually pretty much the same uh for the user behind it of course it's some avss right figuring out what operator you are which avss you service where the yields come from all of that people don't care they see a new s but they think it's going to yield 30% and because of that they pay 25% today that's pretty much it so the protocols that capitalize on given l leverage to it the Pendle and gearbox essentially I'm not sure there is anything else I know there is a Wales Market which is like an OTC platform to literally buy and sell points with some collateral but

that's basically like a centralized exchange right you pay for points at a certain price that's like no like mechanics there per se uh with pendel you split your yield between the uh principal and the yield token right and then you just Loop it with gearbox you get more vanilla eth and then you shag it all into ether fire Renzo and other Integrations available so that's the Resurgence of dii the borrower rate they're prepared to pay depends on how much they expect the air drop to be right the airdrop depends on how much percentage of air drop I ler is going to give an air drop which they have never even promised a token yet right there are so many dependencies of people expecting stuff in this case it's crazy but hey we have protocol we service what

the market needs as long as it's safe is it safe well those are just LRT right they have hundreds of millions of dollars of liquidity on balancer Unis swap right curve and whatever else so who are we to judge we service the user if it's within safety and so far it seems to be pretty vanilla safe um I'll shut up at this point I think that's probably enough I'll let Mel add whatever I missed on that front yeah and as of part what I really like in all these things because it's amazing stuff in terms of safety these poems exist only as all of us in web three likes on post grass or somewhere centralized

database and at this point because this point something epical we do not take into account when we compute Cal so basically we know that each a layer e could be swapped somehow to real e so it has a great C trial we shouldn't take into account all future or expected profits when you really measures the value so it's a quite safe because I can see we can grow very very high until we know this all money comes from gearbox will be stake to real ease in aan Lair and it's save because there is no promises there

is nothing like this uh token could cost like 1.2 e no additional stuff and of course these points could be beneficial but it's quite cool and is Ian said gearbox now is one of good information uh providers how people measure and expect how much money they could get if they willing to pay so high rates to borrow this e it means they have a really high expectation and you can really use gearbox starts to understand the real the real pricing for these points and so on so pretty cool pretty cool I really like it it's absolutely crazy a friend of mine who

was like bearish the entire time he's like pretty whale but he was like no this is all risky he is now looking at gearbox interface every second day just shagging hundreds of ethereum into leverage because he's saying this is the future like we went from buying companies with companies with cash flow right to icos in 2017 which made promises to then icos without any promises to then absolutely VAP Away stories without any Tech to now to then farming tokens right and Future air drops without knowing what they are to now farming points for future air drops not knowing what they are and now people are making liquid tokens of the points which give you tokens then so I don't know how much more this can go and it

doesn't actually so none of this is bad for security right because these are people's expectations for profits they don't as Mikel said they don't care for collateral value the only thing they care for is that people are prepared to pay more higher today in real genuine assets compared to what's going to be tomorrow so it's not like you know it's not that it's not like Luna where you have tail risk of that stuff right none of these points are ever calculated anywhere you only have one new thing which is the derivative the LRT itself right and those are pretty straightforward like that's basically the business you run right just with a bit more stuff that you need to do on top as the smart contracts go there is nothing conceptually new so when people

compare reaking to Luna collapse like at some point no this is just like a couple of staking contracts right and that's pretty much it all of the craziness is just expectations and smart contracts don't care of what you expect like they are not anyhow valued into you know future value or collateral anything else it's just people are just prepared again to pay more today than they're going to get tomorrow because they think tomorrow is going to be brighter and that's fine that's what we are here for as a market service essentially right so this is this is actually like a a signal of a bull market to come that I I totally agree with you Ivan right like so if you look at the system itself you are dealing with igen layer and like this reing liquid resing systems which per se

are not very complex smart contract systems right like their complexity is off off ethereum their complexity is not on ethereum itself the part you're dealing with but it's it's it's really the case that Igan is promising or like some like IG is giving some kind of points if you restake with igen layer today when you restake with igen layer there is actually nothing that is done with that capital in the here and now nobody knows exactly what these points are worth whether they will convert to a token one token or two tokens or zero tokens or not but still the market is kind of expecting it to get converted into a token and for that token to be

extremely valuable so much so valuable that it's fine to borrow eth at 20% from gearbox protocol and this is like the clearest sign of a bull market that probably probably we can see we can see around right like I've I've actually come across that's really that's really cool and yeah I think like gearo protocol will do well in in in that particular that particular Market so now one of my Curiosities is you know like when I look at something like gearbox protocol where like first of all when I am kind of let's say I'm a passive lender I lend passively to a pool and I must get an interest rate on the on the

other side if I am I'm taking leverage I must pay an interest rate so something has to set the interest rate but it's not just the interest rate like earlier in the conversation we talked about how how you need different kinds of um quotas to determine how the how much risk to allocate to each integration that gearbox protocol does so there are like all of these parameters to be set into the protocol for it to run well and so how does that work how does the governance of this system work I can start to make the complex picture of this qu system

and how we really uh develop them step by step in our minds and then Ian can talk more about Dow and how the voting works so the initial idea was okay we are really worrying about if someone could invest he or some visas could invest during like a hike cycle invest a huge part of the pool in some risky asset and then it could black one when the asset become zero and we can get b that okay the next point was wow we want to limit the possibility with guys you could not use more than the quote limit

into some particular asset looks good after that we keep kep in mind okay if we have a limited possibility to use some pool funds into some particular asset which could G create very high yields it's create a shortage it's create a higher demand because you as a needes at this case should really be the first to use this opportunity correct so it's a way that we should really increase the price of using these pool funds to this particular asset otherwise it would be like first come

first take and in terms of small quarters it would be unfair things and we create a quar interest rate and gauges the concept is a very very simple we are not willing to be uh people who who really provide the idea this asset should be priced or this should be additional interest of 5% or 10% on so on because it's a craziness it's a lot of work and it doesn't fit the market needs you can't predict it instead of that we create a very clear system called gauges so each asset has a quot limit and at the same time it has a mean

rate which is computed based on security model so for example we can understand that probably the additional value that need you should pay in original qual value so we do not keep into account how much the price of uh end asset we really talk all time for the underlying asset so if you want to use E from the pool for this restating you should additionally pay 15 or 20% more and this amount adds to the base interest rate from the pool and then there is a minimum rate and maximum rate it's a maximum possible profits we expect for

such an asset and then people could stake their deer tokens and what for minimum side or maximum side so basically it's create a great Market equili if you're MP it's so natural that you go to gauges take your gear and what to maximize your profits correct because when the interest rate going up it means you earn more if you a needer it's so good to go to the gauges and vote to reduce the interest rate because when the interest rate for any particular token you have

position is lower you make more money so you stay on both side and it's what we call gear worse and there are some interesting cases for example if you compete for the liquidity you can really want to lower interest rates for your protocol and increase for a competitive one it's also pretty cool for us and in this case because we have a very very flexible system as a result different parts could agree what is a market equilibrial if the additional quar rate will be very very high nobody wants to borrow and keep these assets it's

unprofitable and in this case all people who stay here do it for nonsense here at the opposite side it's a quite low there is no big demand to uh liquidity to the pool so it's a way how we can really found the real market price a lot of people could vote for different Stu different different two parts to reduce or increase this rate and as a result the gauges is the way how they could make the final decision what is the market equilibrium and I think it's a very good model because all stakeholders could agree using gauges what is the

real additional price for this risk for this particular asset for this community just to summarize so if I'm borrowing some asset from a pool and I want to put it into some integration like hen layer or Unis swap if I'm borrowing e for maybe Unis swap lping I have one interest rate and if I'm borrowing it for the igen layer I have a different interest rate now this interest rate there is some minimum amount that is like set by the protocol but then there's a variable amount for these different applications and how is the variable amount set the variable amount is set by the holders of the gear token which is the token of the gearbox protocol and

they can take their gear and they can essentially participate in this decision making of the interest rate setting and your underlying assumption in this in this system is that because the gear holders have a stake in the system that collectively they will set the interest rates intelligently enough that they don't set it too low that there's too much market demand and too little Supply or too high such that there's very little demand and too much Supply so you are you're banking on the token holders to collectively make this kind of assessment and and do it yeah you are correct and just cons just consider an

example because we talked a lot today about leverage reaking it was fun because these gauges We Believe of course more people will be involved when tvl will be more than even now but when the people found wow it's cool to really use gearbox for taking we all the e and we and then we found that people immediately understand the concept and they start voting to lower the price so it works by EPO so the interest rate FS for a whole

week and it Chang each Monday so basically during the week you can vote to increase or decrease it and the latest value before EPO change happens on 12 GMT on Monday will be used for the whole next week so each week we has update like in cure and we recognized wow we do not really talk more about the system but people immediately recognized and lower the interest rate for the quotas close to zero or so because they understand that and then another part wow I wrote a tweet and some of them recognize that zero interest rate is too low and whats to really make it higher

so basically it's going back and forth and now I believe it's around 50 or 20 person I maybe you have latest numbers yeah y around there does this system work in practice uh how long has it been live and do you actually believe this will scale to billions of dollars so there is an interesting discussion on this some people believe free market should be free without absolutely any like anybody tweaking the rates and whatever right real world economics have a bunch of people trying to tweak rates whether that works or not is a question right like with those interest rates of the power right and all the memes of the

last three years and the steamy checks right all of that let's put that a bit aside and see that gauges thing as a bootstrap and incentive layer so it's not even about to make the system perfect and because we think gear stakers are amazing at a much better at finding race than the free market is Right usually free markets humble everybody it's more so a layer that helps bootstrap new Integrations and the layer that helps final liquidity in different ways so seed it as an extra engine that helps the system work rather than something that tries to replace the free market conceptually the system should to an extent try to relate to the free market if there are any other opportunities and protocols offering

similar right so it's not like we are trying to change free market it's more so that let's say three liquid rest staken Protocols are added they all battle for liquidity and let's say gearbox has that liquidity they're going to be incentivized to either give points or they even own tokens liquid right bribes essentially for the rates for their own protocol to be lower lenders on the other side who we envision to be not just let's say smaller passive investors but rather protocols themselves right let's say like d3m module of maker Dow would want to vote the race to be a bit higher now whether they participate in that themselves or not that's a separate question right we don't expect core maker governance to vote and it probably one of the subow or like core units as they call them now

right but that's the thing is that extra bootstrap module extra incentive module to FAL liquidity differently the system has been live since mid December and as Mikel said the TBL up until a week ago was kind of tiny to care about it right as actually interesting Integrations pop up as Mikel said also people now actually start to notice it uh the TBL probably needs to be a bit higher for that to make sense but it's already pretty interesting and we see with curve gauges right how interesting they are curve gauges all of these bribing markets right CRV incentives they created dozens of protocols around this model there the gauges are focused on incentives as emissions in gearbox cases

not about emissions it's about fees so the logic of every week you vote uh whether you change your Vote or not that depends right that logic is somewhat similar but the outcome is different that you don't Emit and inflate you build less or you build more because of Integrations are interesting by themselves where yield comes from outside you don't need to give more right that's the thing with gearbox it's not about leverage here sorry I'm mixing a few things up they make sense in my head maybe they on in your so stop me at any point uh leverage can be achieved from multiple ways you have perpet you have synthetics right you have some other derivatives you have loopin on lensing protocols or you have margin

gearbox is margin um put safety aside they are all different ways to get to similar exposure at the end let's say you want to have exposure to real estate market in Spain you can buy a house or a flat you can buy a management company that Services those that if the real estate market grows it grows in value as well right and profits grow you can buy some real estate index on their Stock Exchange so different ways different risk exposure as you go there similar exposure in terms of an asset at the end a bit less a bit more right like ETFs uh have the same thing in gearbox case you get to it with think in a safer way and in a more composable way if you want to have leverage reaken if let's say an LRT

is added to aat you could loop as well right you can just Loop in with gear box you do it differently so different mechanism similar exposure different risk for some Less in their perspective for some more uh Market rates converge to some extent in a way as well but that gauges model is very interesting because it allows other protocols not just people to come into this market and incentivize it so we allow for influx of exogenous yields into that system as well not just into Integrations but into gear economics too so in a sense because the product you want to offer is like comp composable leverage and composable

leverage means many different Integrations many different integration means many different interest rates which creates like a complex decision- making problem right now who is setting these interest rates and and sort of your challenge starts to be that you are operating in a decentralized environment and how could you do it like either you could have some kind of fixed mathematical model that will work always it's too early to have like a fixed mathematical model you could have something centralized where like there's a bunch of community members known that are they're setting it that could work if

the community members are good that could fail in in in various circumstances the problem of centralization and so the only actual alternative you are left with is kind of the gear token holders it's like like a decentralized set set in the beginning probably it's like a smaller set of gear holder so it be it's kind of like behaves like a centralized mechanism because the number of holders will be small as time goes on it becomes more and more decentralized maybe like that is the only alternative that is practically available for a decentralized credit leverage protocol and we'll we'll see I guess like how how

well that mechanism works yes and just to talk a little bit more about this game in terms from the mass Point here it's quite interesting here why we ask gear holders to set up this fees we definitely try to solve the optimization Mass problem just imagine you a gear holder and of course it means that you want to maximize protocol fees it's quite simple how you can maximize protocol fees if you take a cut from the interest rate so if we can really set up the interest rate

multiplied to the size when people borrow we can maximize protocol fees so it's so natural for all gear holders to maximize the meod which is he based on this interest rate multiply the depth from the whole protocol if gear holders would be dumb they maybe set up this interest rate too high but the depth will be lower and multiplied each other they will be a little bit lower than it could be so it's a simple optimization problem and gauge is solve it so basically you are

really involved as a gear token to set up this really uh interest rate in a rench which allow in gauges to maximize fees which is good for the protocol because you are gear holder so it's a really good feedback from the Fe and so on and I definitely believe it's a good mechanic it's a good game and of course people should learn it they should understand and we should it should take some time of course it's quite noise nobody use it so we have no expectation how past it could be adopted but I think it's a very good connection between your action and protocol

fees I think me as you said um it's similar to let's say you want to do a fundraise right you can just open a free icoo contract let's say legally if you were able to right open Ico contract say Supply is fully circula everything is out there go have it right fully free market nothing absolutely hidden full on loocks at the start for everybody I like a full on free market I don't believe in any levers and pulls right and whatever or you could try to do funding routes with see deliver more right and try to make the valuations higher end of the day you end up on a free market end of the day you end up in full circulation it's just that it's the path to that right anything relevant enough and large enough we'll end up with a free market but at the beginning having some not

control rather but having some mechanism in place that help bootstrap might be a good thing uh but as you said yourself it will result probably once it's big enough in something a bit more uh model like maybe maybe not cool so we are at the end of the hour I had a bunch more other questions cuz it's such an interesting new Protocol New D5 primitive but time short so maybe would you like to tell our listeners about if they if they're more curious about gearbox what are the best sources that they can go to to understand the protocol understand how they could participate understand how could they could buy tokens

Etc I think the best ways to understand gearbox go to github.com gearbox protocol it's the best way to understand or either scan and go to the contract sources but for all other sources of information Ian can yeah true so for developers there are Dev docks uh there is GitHub of course with all the code open and we also have a risk framework so essentially it shows protocol updates time lock anything related to transactions and security we have like a dashboard where you can see many of these things so for developers that might be quite interesting uh for community and the Dow I think a few interesting things that we do is we do monthly reports on how much has been

spent on on what so for pretty much almost three years at this point there are reports on how much the Dow spent on what where the money goes so the usual worry of Dow is not persistent here because it's not a huge one right so there are not many like managers trying to skew a piece to take it off so you can see it all openly and yeah Discord telegram Twitter we are 24/7 terminat online cool it was nice to chat with you mik and even and best of luck for for the next next year the next crazy year thank you me cheers thank you me great interview thank you sir