[GIP-1] Proposal to Add Pools

Authors

This proposal was drafted as a result of a previous discussion and made with help of @0xn1ck, @ov3rkoalafied, @alnash, and @ilgiz. I am taking the liberty to turn it into a snapshot vote. The parameters have been discussed and can be learnt about via the docs links. Please study below!

Discussion

Link to previous discussion in Governance Forum MAIN section.

Summary

List of pools to add at the initial stage

These are fairly standard pools that have the most liquidity and are most commonly used in DeFi protocols.

Interest rate model for pools

Borrow rate for pools is calculated by the formula described in docs 2. It is a standard model many lending protocols use. As a reference I consider Aave parameters (Borrow Interest Rate - Risk). In Gearbox, the pool size is much smaller, so you need to set the utilization ratio a little lower in order to reduce the risks of a liquidity crisis. See more about Pools and APY math in the docs:

Pool Caps

Asset Pool max Min collateral Max pers borrow
WETH 600 WETH 0.3WETH 10 WETH
USDC 3M USDC 1000 USDC 40000 USDC
DAI 3M DAI 1000 DAI 40000 DAI
WBTC 50 WBTC 0.02 WBTC 0.8WBTC

At the start, it is worth limiting the amount of capital at $3M per pool. The problem that arises here is the risks of liquidity crisis if one whale takes out a large loan to his Credit Account. To avoid it I suggest limiting the max borrow amount per Credit Account to approximately $40k . This means that around 75 Credit Accounts will be created per pool if maxed out, and 280 in total over 4 pools. Seems that this is enough diversification so that the system is not so turbulent at the start.

This however still allows one to open many accounts and still achieve the same goal. To slightly mitigate this ad avoid liquidity on the LP side jumping in and out, a withdrawal fee (temporary!) can be put at 1% for a short period of a few weeks up until the pool can is either high enough or is lifted, when liquidity flowing in and out of LP would be tolerable. See below.

Other pool and credit manager parameters

  • Max leverage = 4
    More aggressive leverage can increase the risks of the protocol at the start, while 4 looks like sufficient leverage for financial transactions.
  • Withdrawal fee 1%
    This withdrawal fee can be considered as a backstop against system turbulence in the first weeks post-launch. This is only temporary and should be lifted in a few weeks. If you stay in the LP pool and the withdrawal fee is then not going to affect you. See more in the docs.
  • APY spread is 10%
  • Fee liquidation is 2% (going to Protocol Treasury)
  • Liquidation discount 5% (going to a liquidator) - https://docs.gearbox.finance/overview/liquidations
  • Default Swap protocol: Uni V2
  • Chi Threshold 0.995
  • Fast Check Interval 4

Snapshot - VOTE

https://snapshot.org/#/gearbox.eth/proposal/0x572e18c429f8270aaa2642e5ed50f53e8a13d57b20c4324b5aa4e8ee39938d36

3 Likes

NOTE: in the future, these parameters should be split and voted on separately - per Credit manager set or so. Since the system is not yet live, it would be easier right now to vote this in as a package. As such, the amount of pools is small and is not big in terms of TVL caps, to see how the protocol behaves in an isolated environment. I would think the DAO should lift up the caps as soon as and if caps are filled.

3 Likes

I posted this in [PRE-GIP 1], sorry didn’t realize official proposal was live. Not sure if this is a problem or not but thought it was worth mentioning.

What about Min collateral size? 0xn1ck proposed ~$1000 Min collateral, Mikael suggests “we should find balance between gas which makes liquidations profitable: 5% of total value > gas for liquidatin (400-800K per tx)” – if I did calculations correctly 800K gas at 100 gwei is ~$320.

If I’m understanding correctly, that would require Min collateral size to be ~$6400? And if anything we’d like it higher than that since gas can ofc be >100 gwei? Thoughts?

For swaps (for liquidations?) - Curve’s tricrypto2 offers a much deeper liquidity than probably anything

Great question. Taking inspiration from the previous discussions, it could be argued that such a small limit wouldn’t be practical as no user would want to use such a low position product given mainnet fees. The way it calculates it is I believe maxBorrowAmount / leverage smth… In this proposal, it is suggested that you can max borrow 10K x 4 (leverage) = 40K. So in total, your position can be worth 50K. You could of course add more collateral and increase the size, but you wouldn’t be able to borrow above this limit and would only be able to increase your health factor. Does this make sense or did I misunderstand?

NVM I wrote totally unrelated bs. I see what you mean, @mikael @ilgiz @0xn1ck?

So I understand this correctly, this is a discussion on the types of pools but not necessarily the platform the pools will be deployed to, correct?

I’m a huge fan of the Curve / Convex / Votium tokenomics to bring gauge weight and liquidity to the pools through bribe incentives.

formally speaking you right. but there are a few points:

  1. we do not know which avg leverage will be
  2. we do not know distribution of accounts by min debt size.

Taking into account that using Credit Account with 1k$ collateral size requires paying 100-200$ fees, I doubt that there will be a lot of such accounts… Actually, the answer on this is pretty close to Gauntlet’s analysis of Aave positions. So they estimate the size of “bad debt” - and it’s ok…

ok sounds good, just wanted to make sure everything checked out, ty ser

1 Like

The page cached weirdly and didn’t include images (probably slow internet). Added as they are described, I assume they might have been initially seen when it was posted and then gone…

Apologies for confusion!

Great, thanks for this addition, michwill!

Before this proposal, we made some audits, fizzing testing and data modelling with 3pool and it seems this integration is safe.

I like Curve, and will be happy to add more there, it’s great to make a proposals to add tricrypto and sETh pools as well. However, some research is required. Definitely, let’s discuss possible security issues and then DAO could approve this integration.

2 Likes

I agree in general, but I feel that providing a profit for the protocol to liquidate its users is a misalignment of incentives and hope this is reduced or eliminated in the future.

I do not think that fees can be removed at all… Their absence violates the design of the system and can potentially lead to exploits. Probably liquidation fees can be reduced - but this should be looked after launch. On the other hand, I do not see this as a problem - most of the lending DeFi protocols have a liquidation fees and users are quite normal about it

2 Likes

There are examples like Rari Fuse that don’t make money from their users getting liquidated.

All other fees are fine.