Whenever a normie friend asks me to explain crypto and decentralized finance to them, I show them this video and tell them about the r/place Reddit pixel art experiment. 

Place was a collaborative project and social experiment hosted in 2017 by the largest online forum in the world, Reddit. It involved an online canvas 1000-by-1000 pixels large, which users could edit by changing the color of a single-pixel from a 16-color palette only once every five minutes. 

The event lasted 72 hours and saw massive engagement from more than 1.2 million unique users placing more than 16 million tiles. The result was this:

I have an ultra-high resolution poster of this collaborative art piece on my office wall. It’s there to remind me that we shouldn’t underestimate people’s ability to build something in collaboration, even if they are strangers.

DeFi is the same as Place—a collaborative project and a large-scale social experiment—only we’re coloring with financial primitives instead of pixels. 

That’s what I tell my normie friends. There are barely any limits, rules, time constraints, or barriers to entry, so this space is inventing new primitives and building novel financial products and protocols at unprecedented speed. 

One of these primitives that recently caught my attention and was a huge missing piece in DeFi so far is the Credit Accounts pioneered by Gearbox.fi. Let’s dive in.

Gearbox is a protocol designed to help bring generalized leverage to DeFi. In simple terms, leverage is the practice of using borrowed money or debt to purchase financial assets to amplify returns (or losses).

It is an immensely popular investment strategy, with the leverage volume on centralized crypto exchanges outweighing the spot volume by roughly 5:1 on average. However, the way leverage or margin trading typically works on these marketplaces is that traders borrow a specific amount of a specific asset to execute a specific trade.

Gearbox is different. It uses a truly novel financial primitive, called a Credit Account, that gives users generalized leverage, meaning they can borrow a specific asset but use it for a wide array of purposes across DeFi.

Smart Leverage

To take on generalized leverage using Gearbox, borrowers must open a Credit Account by depositing USDC, DAI, ETH, or WBTC and choosing the desired leverage (up to 4x).

The Credit Account contains both users’ funds and the borrowed assets, which the borrower can then control to perform leveraged interactions on Uniswap, Sushi, Curve, and Yearn.

Credit Accounts allow users to obtain leverage and execute financial transactions without accessing the funds directly. The borrowed assets never leave the Credit Account smart contract, and borrowers cannot withdraw them to their wallets.

This approach is similar to obtaining leverage on centralized exchanges; only Gearbox’s protocol functions cross-platform—and therein lies the key to its ingenuity.

Instead of borrowing ETH on Binance to margin trade on Binance, you could interface with Gearbox, create a Credit Account, borrow ETH, sell it for USDC (open an effective ETH short) on Uniswap, and then use that USDC to yield farm on Yearn. If the market goes your way and ETH declines in value, you are getting profit on the trade plus some yield.

Or, say, there’s a 2% spread between the price of stETH (staked ETH on Lido) and ETH on Curve. You could open a 4x leveraged ETH Credit Account with $1000, buy $4000 worth of stETH on Curve, wait for its price to go up or for the spread to disappear, and then sell it back for ETH for an instant 8% (4 x 2%) profit on your initial $1000.

Finally, it may be something simple, like longing ETH and yield farming with 4x the size on Yearn. The point is, Gearbox is composable, which means you can use its leverage primitive in dozens of different ways.

Importantly, taking on leverage means proportionally increasing risk. Although with certain yield farming strategies in Gearbox this doesn’t necessarily have to be the case, it’s something to keep in mind.

When using Gearbox, your whole Credit Account becomes the collateral, and because everything happens on-chain, the protocol can always see and calculate the value of its assets. It’s important to understand that Gearbox will calculate the health of your account in the underlying borrowed asset.

This means that if you open a 4x leveraged Credit Account with 1 ETH (you borrow 3 ETH and your account holds 4 ETH in total), you have to maintain the value of your account reasonably above the current market price of 3 ETH (because that’s how much you owe) or you get liquidated.

For instance, if you sold your entire ETH position for USDC, and after that, the price of ETH pumped 30%, you’d get liquidated because now your USDC position wouldn’t be enough to cover your ETH loan.

Gearbox will measure the risk factor of your account in real-time and give you a numeric representation of your account health. If your health factor approaches or drops below 1, you might get liquidated. The higher the number is, the safer you are.

To wrap it up, Gearbox is the first protocol for generalized leverage to ever exist. Admittedly, the things you can do with it at the moment are somewhat limited, but as more protocols and assets get safelisted–your options and strategies will only increase and do so exponentially.

Once it matures, it will become a financial primitive leveraged by many, including DAOs and other yield farming protocols. In other words, it’s a protocol that deserves to be on your radar.

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Disclosure: At the time of writing, the author held ETH and several other cryptocurrencies. Read our trading policy to see how SIMETRI protects its members against insider trading.