On 26th July 2023, we hosted an AMA session with our partner, Gearbox, a decentralised lending protocol. Thanks to their passive pools, you are now able to earn crypto rewards as part of our newly launched Earn program. Check out what went down during that chat – here’s the scoop!
Let’s take a deep dive into the world of decentralised finance (DeFi), lending protocols and all things crypto! Gearbox’s marketing contributor, Mugglesect, joined our COO, Mike Blank, to answer all the burning questions about EXMO.com’s hot-off-the-press Earn program during our latest AMA session. Get ready to explore the ins and outs of risks, rewards and make the most of astounding annual rates!
Mike: Hey there, everyone! Before we dive in, let’s kick things off with a quick intro to EXMO.com. We’re a European crypto exchange, fully regulated and operational since 2014. Our daily volume hits around $60 million, and we’ve got a team of over 130 people. Now, why did we decide to venture into this yield space? Well, our aim is to provide this yield opportunity without the complexities of MetaMask and private keys. We wanted to give our traders more incentive for holding their assets on our platform, and that’s where Gearbox DAO comes in. We got the approval from the Gearbox DAO community on 4th June 2023, which is publicly documented on snapshot. Essentially, we allocate our traders’ funds to Gearbox’s pools, generating the yield that we subsequently transfer to you every month within our Earn program.
Mugglesect: Gearbox is a composable leverage protocol. What sets Gearbox apart is that it provides instant leverage using real assets. This allows you to utilise it across various DeFi protocols, while earning yields. For instance, consider Lido. It enables you to stake your ETH, generating an annual yield of approximately 5%. Now, picture this: with just 1 ETH, you can borrow 4 more and stake all 5 ETH to earn a yield. This is the power of Gearbox. While you need to repay a fee on borrowed ETH, the resulting APY is significantly higher than what you would earn with just 1 ETH. Gearbox’s primary objective is to establish itself as the base layer of leverage layer within the DeFi space.
Mike: There are two account types on Gearbox – Ninja for leverage trading and a passive pool account that doesn’t involve leveraging. We transfer EXMers funds to these passive pool accounts, so they can gain your rewards. Now, can you tell us how these passive pools work?
Mugglesect: With passive pools, users provide liquidity without leverage, while Ninjas borrow from passive pools. The borrowed funds generate yield for the lenders. It’s all about utilising assets efficiently within a secure framework.
Mike: Precisely! And in the world of DeFi, Gearbox’s transparency and safety shine. Plus, it’s powered by the market, not a central bank, which makes crypto unique.
Mugglesect: Absolutely, DeFi is groundbreaking with its transparency and programmatic nature. Plus, Gearbox’s safety measures ensure your funds remain secure, and the yield is generated by real utilisation on the protocol.
Mugglesect: The liquidation mechanism is similar to that on perps. The entire process is handled through a smart contract, so our involvement is minimal. We utilise Chainlink oracles linked to each account, which assist in gauging the account’s ‘health’. For instance, if a user is using 10X leverage and their account value drops by 9-9.5%, the liquidation mechanism triggers to ensure the safety of users’ funds.
Mike: Thanks for bringing up the safety aspects! Could you also shed some light on why APY rates are unstable in DeFi?
Mugglesect: Absolutely, the APY rates can vary due to demand and supply dynamics. It’s all about basic economics – as utilisation levels change, so do the interest rates. For instance, if a protocol is operating at 85% utilisation, you might get a 3.5% APY. But, if demand increases and utilisation goes up to 90%, you could earn 4.3%. This approach ensures that as demand rises, the supply generates the necessary additional returns.
Mike: These rates are updated every Ethereum block, roughly every 12 seconds. During each cycle, the proportion of users borrowing and supplying ETH may differ, affecting the actual borrowing and supplying rates. Different blockchains have varying block times, but since Gearbox is currently on Ethereum, the 12-second time frame holds.
Mugglesect: If users want a historical view of APY rates, they can check DefiLlama or the native protocol’s page for insights. It’s a good parameter for users to understand potential returns.
Mike: Moving on, could you touch on some of the risks associated with DeFi lending?
Mugglesect: Certainly, DeFi lending includes governmental, smart contract and oracle risks. Additionally, market volatility, liquidity challenges and potential governance risks are factors to consider.
For instance, there’s the risk of an oracle malfunction leading to incorrect liquidations, although it’s important to note that this hasn’t occurred so far. The challenge lies in building a system that can withstand such events. While I’m not well-versed in the technical details, our developers have implemented certain measures to mitigate these risks. We also have a monitoring system in place, and any incidents are publicly reported on our page: risk.gearbox.foundation.
Besides this, there are collateral risks to consider, where changes in collateral and borrowed asset prices can impact your holdings. Market risks come into play due to market volatility and DEX liquidity. When liquidating an account, there needs to be sufficient market liquidity to cover the borrowed funds and return them to the pools. If liquidity drops, returning the borrowed funds becomes challenging. There are also front-end DNS risks to be aware of – these are common risks present across the whole internet.
While these risks exist, they’re actively managed and monitored by protocols like Gearbox to minimise potential downsides. Gearbox has had over 7 audits, has 2 types of insurance available, a bug bounty program, multiple monitoring tools and bots and like we mentioned, Gearbox Risk Foundation brings transparency and proactiveness to all of the risks mentioned above. Gearbox has now been live for over 2 years without any hacks or exploits due to our practices.
Mike: EXMO.com traders are shielded from the front-end risk because we directly provide your assets to Gearbox DAO’s smart contracts, without engaging with their front-end interfaces. This approach ensures that you’re not vulnerable to common DNS hacks, where hackers redirect you to a fake front-end that appears to be Gearbox’s, but isn’t. In such cases, users might unknowingly supply assets to a malicious smart contract, ultimately ending up in hackers’ wallets. Fortunately, for EXMO.com traders, this risk is minimised as we aggregate and securely move your funds to verified smart contracts.
Mike: Think about wanting to know Ethereum’s price – is it around $1,900, $2,000 or $3,000? How do you find out? Well, protocols like Gearbox typically utilise Chainlink Oracle, considered among the best in the crypto world. Chainlink has a well-funded setup and a network of users who provide real-time asset prices. They gather this data from a range of sources, including exchanges like EXMO.com, Binance, KuCoin, both centralised and decentralised.
They then aggregate all this data, employing mathematical formulas, to create a composite price for ETH at the current block. This price is embedded in a smart contract called the price feed. Gearbox relies on this feed to accurately assess ethereum’s price. Now, when it comes to attempting any “hacking” of this system, you’d have to alter the price across numerous centralised and decentralised exchanges, simultaneously. It’s theoretically possible, but practically very difficult – we’re talking about needing substantial resources and actions akin to a financial citadel. This complexity makes tampering with the price of highly liquid assets like ethereum on Gearbox’s platform, an extremely challenging feat. While in some contexts, like less liquid markets, manipulation might be easier, Gearbox primarily deals with highly liquid tokens, which makes any significant manipulation very unlikely.
Mugglesect: At the moment, Gearbox operates with a limited number of programs and pools. The pools consist of assets that lenders can deposit and borrowers can utilise. In terms of volatility, we don’t have many highly volatile assets. The most volatile ones in our current landscape are Curve, Convex and Lido tokens. However, Gearbox has limited the exposure to these assets based on the liquidity available on DEXes. Gearbox has a strict 0 Bad Debt policy and that’s the bedrock of DAO’s decisions.
⚠️ Currently, the Earn program is not available for residents of Austria, Belgium, Bulgaria, Croatia, the Republic of Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden.