The purpose of this revamped model is to streamline, identify, and quantify Gearbox’s revenue model in a manner that enables us to become profitable while ensuring that yield levels are optimal to compete with the rest of the market without feeling excessive.
We are going to focus on three key sources of revenue with an outlook to move to two as liquidity stabilizes. Further, the goal of these changes will be to move away from liquidation fees as the primary source of revenue to a model that’s more sustainable:
Liquidation fees are common in DeFi and are a source of revenue generation. They can further be utilized to set up an insurance fund over time.
Having a leverage protocol where funds can further be levered up or used in adapters entails increased risk. In particular, during times of high volatility, it is possible that the value of some accounts will drop below zero before they can be liquidated. Should these “underwater” accounts occur, they must be handled promptly in order to ensure the solvency of the system as a whole.
In order to address “underwater” positions, we require creation of an insurance fund that enables us to restore equilibrium to the system. To maintain the same levels, I propose we allocate 1% of our liquidation fee towards the insurance fund and another 1% as protocol revenue. The remaining 5% to be allocated to the liquidator.
As seen above, the liquidation fee is in-line with industry average and thus a reduction at the moment is not needed
- Funding fee spread- monetise utilized TVL
As a protocol that’s not defined it’s PMF yet, the best way to maximize revenue is to utilize our overall position size and the time that it has been open into a constant income stream. One strategic advantage we have over peer-to-peer based funding fee model is that the spread between supply APY is significantly lower than annualized funding fee traders pay on exchanges.
Referring to Binance blog in the appendix, the annualized APY for funding fee is 10.95%. Industry rates have gone as high as 13% annualized (add appendix reference). DeFi supply APY ranges between 0.3-3%, assuming average at 2%, it translates to 0.0018% funding fee every 8 hours.
We can monetise this by adding 0.0018% on top, which will lead to a monetisation of 2% commission on the daily average utilized TVL.
The ideal way to represent this will be to maintain lender APY as annualized percentage
While funding fee is represented at an 8 hour interval
This spread based model enables us to have an effective daily funding rate of 0.0108% daily, which is 64% lower than the lowest funding fee paid on CEXs.
Even if APYs in DeFi go 3X, our borrow rates will still be 38% lower than CEXs making this a great area of monetising TVL without excessively charging users. Even DyDx is 0.03% daily and this will be a massive competitive advantage.
This model also incentivises the DAO to make sure that liquidations are limited, positions are able to last the longest and in turn makes $GEAR as universal collateral a direct option to safeguard our continuous earning on utilized TVL.
- Withdrawal fee on TVL
Currently, there is a 1% withdrawal fee, but it poses as a barrier to add liquidity, considering users make that much APY in 6 months at current average APYs). We should be looking at significantly lowering this to about 1 month’s APY, 0.167%, as that should be deterrent enough to withdraw but won’t pose as a barrier to entry. Lender’s don’t usually pay withdrawal fees on most protocols.
Post V2, we should aim to completely remove the withdrawal fee.