Gearbox deposits recover from 80% crash as users pour $250m into new lending market

For some DeFi projects, when airdrop rewards dry up, it kickstarts a terminal liquidity decline from which they don’t recover.

DeFi lending protocol Gearbox has defied that pattern.

Last year, its total value locked fell 80% from its $410 million peak. Users caused the slump by abandoning Gearbox when opportunities to farm airdrops of restaking services like Renzo shrank. TVL is a metric that measures the amount of deposits to a DeFi protocol.

Yet, Gearbox’s TVL has since bounced back to $340 million, DefiLlama data shows. The TVL includes funds borrowed on the protocol.

“A significant aspect of Gearbox’s comeback strategy was integrating assets no one else can,” a Gearbox team member who goes by Mugglesect told DL News.

For instance, Gearbox users can tap into illiquid assets available on protocols like Mellow Finance, a $430 million liquid restaking protocol.

Mugglesect said Gearbox is betting that this growth is anchored in users actually leveraging the protocol rather than chasing the next speculative farming craze.

Gearbox’s revival comes amid a resurgence in crypto’s lending sector that has pushed deposits to $130 billion, catapulting the sector to the summit of DeFi, even overtaking liquid staking, previously the biggest sector.

Unique advantage

Gearbox is small compared to giants like Aave and Morpho, whose deposits are in the tens of billions of dollars.

But it has a unique advantage: so-called credit accounts, Mugglesect said. These are smart contract wallets inside the Gearbox app that allow users to deploy leveraged capital across several DeFi markets for trading, staking, or providing liquidity.

Users deposit approved collateral like Ether on Gearbox to open a credit account. Based on the account’s leverage limits, they can borrow multiples of their collateral to use as capital to stake on Lido to earn staking yield, provide liquidity on Curve to receive boosted rewards, or trade perpetual contracts.

“You don’t just loop an asset, you borrow up to [40 times] your capital in a credit account and utilise it across DeFi, turning any integrated DeFi protocol leveraged,” Mugglesect said.

“Credit accounts can also connect to assets that aren’t on [decentralised exchanges] or aren’t even tokenised, something traditional lending protocols can’t do.”

Gearbox’s credit accounts offer composability, which means users can integrate across several DeFi markets via the platform.

That’s not possible on other protocols, such as Aave, Morpho, or Compound. There, users must manually transfer borrowed funds to other DeFi apps if they want to farm or stake.

Risk curators

In March, Gearbox launched a new lending market called Permissionless. It has been a major boon for the protocol, with credit accounts on Permissionless accounting for $250 million of Gearbox’s TVL.

Permissionless features risk curators. These are DAO-approved managers who define the assets and DeFi strategies that can be used with a Gearbox credit account. They also set the allowable risk parameters, like leverage limits and liquidation thresholds, to keep credit accounts safe for users.

Usually, the Gearbox DAO approves new assets that can be added to the protocol via a governance vote.

“Permissionless enables risk curators to onboard new markets to Gearbox without the DAO intervention,” Mugglesect said.

Under Permissionless, Gearbox has added five new blockchains and more than 25 markets to its lending stack while tripling the protocol’s market expansion, Mugglesect said.

“The protocol is already on 27 [blockchains], the most of any lending protocol,” Mugglesect said. “We’ll be doubling down on more such integrations to create sticky growth.”

Zero bad debt

But with crypto lending comes risks. As Gearbox swallows up more liquidity, the peril for lenders could increase.

The team takes a proactive approach to unforeseen events by forking the networks eight times a day to test against black swan events, Mugglesect said.

Gearbox has already proven its chops in navigating periods of market upheaval, Mugglesect said.

Last year, ezETH, Renzo’s Ethereum liquid staking token, lost its peg to Ethereum due to confusion over the protocol’s airdrop. Users couldn’t redeem ezETH for Ethereum, and that caused a massive selloff on exchanges.

The ezETH depeg caused $56 million worth of user positions to be liquidated, with $33 million of those losses happening on Gearbox due to the protocol’s popularity among restaking airdrop farmers.

Yet Gearbox didn’t suffer any bad debt thanks to its design. That design separates lenders, risk curators, and active borrowers into different layers within the protocol.

It even earned a profit from the ezETH depeg liquidation, whereas Morpho, the second-most affected protocol in the ezETH depeg incident, incurred about $34,000 in bad debt.

The protocol boasts a bad-debt-free track record since its inception in 2021.

Osato Avan-Nomayo is our Nigeria-based DeFi correspondent. He covers DeFi and tech. Got a tip? Please contact him at osato@dlnews.com.