Leviathan News - Leveraged ETFs on-chain ft. Gearbox & Spool

In this episode of Leviathan News which took place on March 21, 2023, DAdvisoor, Amplice, and Simon discuss the integration between Gearbox and Spool and future plans for the protocols. Read our note below to learn more.

Background

dAdvisoor (Host) – a crypto investor
Amplice (Guest) – Contributor at Gearbox
Simon (Guest) – Lead Contributor at Spool
Gearbox – a composable leverage protocol
Spool – an institutional yield protocol

Gearbox Protocol Overview

Amplice says that Gearbox Protocol is a composable leverage protocol aiming to be a leverage layer for DeFi. V3 implementation enhances risk control, enabling faster integration of new protocols like EigenLayer points, Renzo points, and Ethena Shards. TVL has surged to $160 million post-integration, offering leverage up to 9x on various assets but cautions against high leverage due to associated risks.
He adds that high utilization in lending pools results in organic yields of 23.5% on $ETH and 43% on $USDC excluding token incentives. The demand for leverage products is driving growth, with plans to integrate narratives aligning with DeFi trends swiftly.
Amplice says that users should be careful about leverage at high ratios.

Curious Implications of Leverage in DeFi

Amplice says that when leveraging assets in DeFi, it’s crucial to consider that borrowing $ETH while depositing into an $ETH-based product can expose you to risks. Liquidation risk is present when using leverage, with a buffer of around 20% due to potential peg fluctuations between different $ETH-denominated products. At 5x leverage, there is a need for a buffer to ensure orderly liquidations and prevent positions from going underwater abruptly. Points earned through leveraging are not directly convertible to money, posing a risk if their value does not exceed the borrowing costs.
He adds that borrowing at high rates requires confidence that accumulated points will appreciate sufficiently to cover borrowing costs, introducing speculative risk. Neglecting position monitoring may lead to unexpected liquidation as interest accumulates without corresponding point value appreciation. Smart contract vulnerabilities pose a significant risk factor, as any exploit or hack could result in immediate loss of funds deposited in DeFi protocols.
DAdvisoor says that the current DeFi environment presents a multitude of opportunities compared to previous bull markets, emphasizing the need for newcomers to navigate complex choices effectively.

Understanding Risks and Opportunities

Simon emphasizes the need to balance exploration of possibilities in crypto with a deep awareness of associated risks. He highlights that many individuals lack time to manage their positions effectively due to work commitments, leading to incomplete risk awareness.
He adds that Spool acts as an intermediary between innovation and risk management, catering to users seeking a balanced approach.

Automated Management and Infrastructure

Simon illustrates the risks involved in high-yield investments like Anchor and Terra, emphasizing the need for automated tools for portfolio management. He describes Spool’s infrastructure as a comprehensive solution offering automatic position management, rebalancing, and user-friendly features like vault access.

Monetization Strategies

Simon explores how users can earn money by bringing others into the ecosystem, setting fees, and customizing allocation strategies within Spool’s framework. He compares Spool’s model to traditional exchanges or DAO treasuries, ing its active management capabilities for optimizing capital utilization.
He adds that positions on Spool act as a middle layer facilitating easy access to services like Gearbox yields through customizable VAs managed in an automated yet personalized manner. He clarifies that Spool streamlines processes by automating management tasks according to user preferences, making DeFi more accessible and efficient.
DAdvisoor foresees automation revolutionizing user onboarding by providing reliable management solutions that appeal to both experienced users and newcomers seeking simplicity.

Spool Vaults and Integration with Gearbox

Simon says that Spool Vaults cater to institutions, project treasuries, and individual users with over $100k in DeFi. Recent UX changes split the product into two parts: one for depositing into a vault with high yields and great managers, and another for setting up a vault.
Simon says that all vaults are accessible by default; however, during creation, whitelist settings can be adjusted to control access.
He adds that Spool introduced a new set of vaults by Spool built on top of Gearbox strategies for automated leverage. Users can set up these integrated vaults effortlessly for optimal yield generation without constant monitoring.
Simon says that staking rewards offer an $ETF-like product comprising diverse assets such as $rETH, $stETH, and $sfrxETH among others. Users depositing into staking benefit from automatic rebalancing ensuring optimal yields without active monitoring.
Simon highlights safe side offerings within Gearbox through Spool integration yielding approximately 25% on $ETH and 40% on $USDC.
He adds that the integration process was relatively straightforward, taking less than a month to complete. Both teams were proactive and efficient in setting up the integration. Auditing the adapters took longer than building them, emphasizing the importance of thorough auditing for safety measures.

Gearbox Code Integration

Amplice says that Gearbox code is of good quality, easy to work with, and suitable for integration on both passive and leverage sides.
Simon says that Spool has completed around 41 integrations so far, highlighting the importance of offering a variety of choices to users for a Plug-and-Play solution.
He adds that Spool aims to exceed 100 strategies this year by doubling its integrations. The focus is on providing a wide range of options for users. With plans to go live in two months, Spool is rapidly integrating new strategies to enhance user experience and choice.

Expansion Plans and Ecosystem Analysis

Simon says that Spool is currently active only on mainnet but aims to expand to Arbitrum due to high deposit costs on mainnet hindering efficiency. Arbitrum is an innovative hub in DeFi due to its capabilities to handle complex transactions efficiently compared to other layer-2 solutions.
Simon says that strong ecosystem synergy is crucial due to the significant impact of Pendle, GMX, and Gearbox. Plug-and-play solutions are ineffective without a robust ecosystem with diverse yield protocols.
Amplice says that DeFi heavily relies on composability for success, making integrations like Spool and Gearbox essential. Successful integration in DeFi requires leveraging existing ecosystems for optimal performance.
Simon says that they are excited to integrate with protocols like Compound, Curve and others for increased yields. They put emphasis on providing robust risk management solutions to encourage users to explore higher-yield opportunities.

Arbitrum Integration Plans and Grant Proposals for Gearbox

Amplice says that they submitted a grant proposal to Arbitrum‘s long-term incentive program pilot for future developments. They are requesting support through community votes for Gearbox’s grant proposal approval.
He adds that they focus on integrating various DeFi protocols such as Camelot, Jones DAO, and GMX on the Arbitrum platform for enhanced security.

Evolution of Crypto Usage

Simon says that in 2018, there were limited use cases for cryptocurrencies beyond investment. However, since 2020, there has been a rise in real products and user engagement. His oersonal experience is a transition to using crypto for daily transactions, including rent payments and everyday expenses through platforms like Nexo and stablecoins.
DAdvisoor says that user experience in crypto transactions has improved, contrasting with traditional banking delays and restrictions when transferring funds internationally. Despite ongoing improvements needed in user interfaces, accessibility to on-ramps and off-ramps has facilitated easier utilization of cryptocurrencies for various purposes.
He put emphasis on integrating crypto into mainstream financial tools like credit cards and debit cards to enhance usability for retail consumers.

Institutional Capital Influence

DAdvisoor says that the notable inflow of new capital into $BTC due to institutional investments via ETFs prompts profit realization among existing $BTC holders.
He adds that analysis suggests that while some profits are reinvested in quality projects like Gearbox and Spool, a significant portion flows into speculative altcoins within a gambling-oriented market segment. Differentiation between new retail investors entering the market versus existing participants reshuffling profits amidst price surges is important.

Future Vision for Protocols

Amplice says that Gearbox aims to serve as a leverage layer across DeFi platforms, offering safe leveraging options for various assets within decentralized finance ecosystems. The goal is to provide omni-chain leverage seamlessly across different layer-1 and layer-2 solutions.
Simon says that Spool serves as a back end for users to build upon while retaining ownership of contracts and stacks. The platform offers a great SDK and user experience, making integration easy and fast. The focus is on providing DeFi access in an understandable, straightforward, and risk-managed manner.
Simon says that Spool has integrated with Fireblocks, Ledger, and plans to partner with Safe. They aim to be a one-stop-shop for various players in the space like exchanges, banks, funds, etc.

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Show Information

Medium: YouTube (Video)
Show: Leviathan News
Show Title: Leveraged risk-managed ETFs on-chain – the future of DeFi?
Show Date: March 21, 2023