Mellow Protocol sees itself as an integration layer for DeFi that enables building automated strategies integrated with best-in-class protocols.
We love building composable stuff as it’s one of the key benefits of programmable money. That’s why we were interested in Gearbox, as it provides inventory for programmable leveraged strategies. This allows you to increase the capital efficiency of many strategies.
Gearbox is a generalized leverage protocol. It allows anyone to take DeFi-native leverage and then use it across various (DeFi & more) protocols to earn leveraged yields, this enables you to compose your position as you want. You can find more details in Gearbox docs.
We implemented integration with Gearbox — our Leveraged Vault. It allows strategists to easily program leveraged strategies for different protocols using Gearbox Credit Accounts — all of these can be provided for strategists as a ready solution that can be deployed as an end-user product. The goal of the strategist here is to manage the strategy’s risks. Here’s the list of parameters that can be managed to achieve that:
- Set the type of collateral provided to the vault (choose once per initialization)
- Leverage coefficient (choose once per initialization)
- Vault funds allocation (choose once per initialization)
- Backstop parameters
Let’s first see the diagram showing how everything works:
This strategy allocates your assets into Gearbox and leverages them to put into the Curve pool, then deposits your Curve LP tokens into Convex where you get your juicy yields.
The backstop module monitors the position’s health factor and has pre-defined deployment parameters when the strategy can be stopped. If market conditions correspond to these parameters Backstop Module automatically triggers Closing Credit Account to avoid liquidations.
Not everyone can implement the appropriate infrastructure to automate maintaining the position. Tracking it manually is also not easy — we all need to sleep at least sometimes. While leveraging is also challenging — sometimes quite low depeg can lead to liquidation.
Any on-chain implementation of leverage has some hidden effects — for example, oracle’s deviation:
Estimation of such kind of risks needs the expertise to keep your assets safe.
Low entry threshold
In fact, Vault represents a tokenized index for leveraged strategy — the user can easily get into such a complex derivative product, while an external party manages the risk. For example, such an index can later be used as an infrastructure for building leveraged indices (IndexCoop team, we got something to discuss👀).
What are the benefits of such leveraged vault strategies for end users:
- 1-click deposit without opening the credit account
- No need to monitor 24x7 your position liquidation status
- Users don’t need to wait to get access to Gearbox
Strategies we’re building as an example
- Leveraged FraxUSDC, collateral USDC
- Leveraged LIDO, collateral ETH
- Leveraged LIDO, collateral USDC