This topic will be controversial as it’s somewhat edgy, but please stick around till the end of it - so we can have a proper discussion and decide if this move is warranted or not.
This proposal does NOT bring extra short-term supply: if anything, the majority (while small in size) would come next year in 2024. So there is no immediate downside whatsoever, only upside.
Summary
Introduce a boosted APY program for longer-term depositors with capital worth $4M+. The APY boost in GEAR given to them will depend on the brackets of capital provided and the time-period: the longer, the more - as they are aligned with the protocol then. The goal is to target $40M passive liquidity increase at avg +2.5% increase, requiring about 0.5% of GEAR. This amount would only be used if the program is actually successful, otherwise it will remain unused.
Motivation
DeFi is open to everyone. That’s the idea, that’s the ethos for now. You can argue if having centralized assets is DeFi at all (which is ethos-wise sadly very true) but all the protocols have strayed away from this far enough to not be able to come back… Probably?
Coming back to the topic though: DeFi protocols are about money. They win by having more liquidity. People can borrow more, leverage more, and the more money it holds - the higher the trust is. That’s just a rule to accept. As a result, one of the main points of any DeFi protocol - is to grow its TVL - as long as it is meaningful… What it means is that the TVL shouldn’t be the summer 2020 “kimchi 500M TVL’’ style but rather something meaningful.
For lending protocols, that meaning is their utilization - because that’s where the protocol fees originate. In the case of Gearbox, fees can be taken at various points (and is a discussion in another topic because current fee structure was just set up at the beginning, there is more room to experiment) - but the main point for this proposal is that utilization has always been through the roof. Consistently at least 70% up to 85% mark since the second day of V2 launch. Consistently without extra incentives, so all fully organic. Which is freaking amazing… Yay!
From here: Gearbox Protocol Dashboard
If you want to argue about whether the nature of utilization is fully organic in Gearbox or not, here is a long message in Discord addressing this from all sides. Feel free to reply there.
Ok, this long intro has come to the main point: NEED. PASSIVE. LIQUIDITY.
There are a few reasons why Gearbox Protocol is not 1B yet [lol]:
- DeFi has been dying throughout 2022, truly. People leaving, firms bankrupting…
- Gearbox is only 3 months old, it’s really a new baby: larger capital usually doesn’t trust new things. They wait to see how it performs. Time is an ace card in this game.
- And again point above: the longer you are around with decent rates, the more people are likely to get in. So compared to the overall DeFi growth rates of 2022, Gearbox actually stands out. So things are going well, but we all want them to go even better.
There are different ways on how this is achieved:
- As stated above, just constant marketing + time building trust. Organic, slow growth.
- Work with other DAOs and stablecoin issuers (so those who have others’ capital and need to earn on it passively) like has happened with Yearn<>MakerDAO recently. That’s the goal for the coming year slowly, but it’s a topic for other proposal(s).
- Do some “liquidity round” type of thing, whereas the point is: “if you LP for long enough a good amount, you get tokens”. So it’s just different framing for the boosted program and getting a share of the protocol. That’s what this proposal is about.
A bit of research
Majority of liquidity in protocols (hello pareto rule, whatever you call it) - is coming from large players. Thanks for coming to my TED talk… Anyway, that’s normal as money gravitates to where there is more money. That’s just a sad fact, so let’s work around it.
Here are the queries for some decent-TVL fresher protocols:
- Euler Deposits - euler
- Aave Deposits - aave
- MorphoAave - Supply distribution - morpho
We can derive from that that a $4M+ mark can be established as the lowest, because below that amount protocol TVL increases are too incremental. Meaning a 5% minimum increase to the current TVL must be made in order to improve the stats. Later it will be a lower % as the TVL grows, but that is fine. Such a deposit services 4 big-size Ninjas anyway. Good!
Is it unfair to the smaller players?
The protocol has needs. The protocol must grow.
In fact, such programs are done in many protocols, often just not talked about. Here, it’s just suggested with full transparency. Smaller depositors are free to play together and make one big address - that’s up to them (but they likely won’t and it’s fine). There is no desire to obfuscate or discriminate.
In fact, smaller players usually have more time on their hands and are more likely to participate in community programs like VIBES, mine with Credit Accounts, and so on - there are countless opportunities to get involved in. After all, there is a task, and it must be done. While this might not be that nice from the ethos perspective, suggest concrete alternatives then?
Program Rules & Details
Now onto the rules, which require no “oversight” and can be verified by anyone:
APY Boost in $GEAR is calculated at $200M FDV, $0.02.
| 4 months | 8 months | 12 months | |
|---|---|---|---|
| $4-$6M | +1.5% | +2% | +2.5% |
| $6-$10M | +2% | +2.5% | +3% |
| $10M+ | +2.75% | +3.35% | +4% |
What is the expected APY?
The base APY everyone gets on Gearbox protocol consists of utilization + GEAR rewards. You get that one as everyone else: any changes or modifications are not in the scope of this proposal. The boost above comes in as extra in GEAR tokens, benchmarked at $0.02. The rewards given this way are fully liquid when transferred at the end of each period, but not prior to them.
Are there any withdrawal penalties?
Yes, but they are applied in a positive way. What it means is: you get distributions at the end of each period relative to your size, and if you continue staying - you get the new period rewards + whatever was owed to you for the previous one. For example: You LP $10M. At the 4 month mark, you get 3% in boosted rewards. Then you stay for another 4 months making it 8 months in total. So then you get 3.5% for that 4 month period + the missing 0.5% that were for the first 4 months. Why this way? It’s easier to top up than to punish, and requires no trust. So the longest-bracket applies to your size fully, just incrementally. That way, if you withdraw earlier, there is no need to track down your family: you just got less.
In the same example, if you withdraw after 10 months, you will get the 8 months APY applied to the entire body. That makes tracking and rewards much easier to monitor. Basically, it makes sense for you to just say “ye I’m in for 12 months” even if you want to only be for 4 months, and simply withdraw whenever. You’ll get what you want, but have the “option” to stay longer and have better terms. That’s absolutely fine to do. In case you withdraw before 4 months run out, you will still get no boosted APY though. So, respect the time periods. Rewards those staying for longer, protocol happy.
What if GEAR price goes up/down?
If you LP now and then GEAR shoots twice as high - great bet by you, congrats. You are still benchmarked at 200M FDV, but instead have a much higher reward in reality. At the beginning of the new period, the DAO has the right to change the benchmark though, but no past commitments should be re-discussed. So again, it keeps things fair for both sides.
As for the price going down, that’s also a bet you take. In case the price goes drastically down, so does your boost (and the normal APY everyone gets) - but then you are free to leave any time. In that case, the DAO doesn’t take risks because it also doesn’t pay you for that period.
How are assets denominated in USD?
Currently, only ETH, USDC, and DAI are considered in the scope of this proposal. If other assets are introduced to passive pools, they can be voted on separately.
A 2-weeks TWAP can be applied to the value of the position at the start of being onboarded.
What % GEAR inflation does this bring? - Not large.
Let’s take 2.5% on average boost and target getting 40M passive pool liquidity this way. That’s 0.5% of total GEAR supply for the entire year. So the proposal if voted YES - would approve this budget, but it doesn’t mean it will be fully utilized though. It can also be increased if needed with subsequent separate proposals. Besides, the larger number is skewed to the end of the program, so if anything - this number is only becoming liquid in 12 months. [Same chart as above]
How many with such size would now get “overpaid” in Gearbox with this boost?
Pretty much no overpaying. See this dune to see who’d fall under this program currently: practically just 4 suppliers - Gearbox Deposits.
Does this apply to other protocols LPing as well?
Sure, why not? If MakerDAO brings in this money or Yearn, they should get the boost too. If FRAX starts bringing in $4M+ if their AMO increases, let them earn more as a DAO too.
Aren’t the rates already high enough?
They are good indeed, but still maybe not worth the risk for the large capital. After all, a marginal 2-4% increase in top is not a x2 for the rates. So the added cost is not that much, yet some LOVE to have a hypothetical edge, just psychologically speaking. Let them, if they bring $$!
Let’s not rush the vote on this one and take the sweet time to weigh in all the pros and cons.
Disclaimer: written with the help and support of external and Gearbox contributors, expressing the views of many and not my own personal thoughts. I act on behalf of the company I consult with and have indirect interest in seeing Gearbox DAO succeed, of course! Ah sers.
