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Credit Accounts are separate smart contracts with predetermined, whitelisted features like as liquidation thresholds and allowed coins, which help Gearbox increase capital efficiency in DeFi. Credit Accounts hold both user cash and borrowed margin funds, are deployable on any DeFi protocol, and are non-custodial, allowing users to keep their assets. All transactions are routed via Credit Accounts, giving consumers a simple method to navigate the DeFi ecosystem and leverage-interact with any protocol they like.
Overview
Many aspects of DeFi currently lack composability, which creates a substantial bottleneck in terms of capital efficiency. Because the protocols in the sector are mainly incompatible, there are a lot of idle assets and unused capital because users can’t simply shift assets across chains and dApps. Furthermore, user-side over-collateralization is a key capital efficiency constraint, which has fueled the development of novel credit instruments centered on undercollateralized or collateralless loans.
Gearbox allows users to easily access, use, and interact with external DeFi protocols. This is made possible by the introduction of Credit Accounts. This new DeFi primitive serves as collateral for a variety of leveraged activities, allowing users to execute financial transactions without having to access cash on it. This strategy is analogous to gaining leverage on a controlled exchange, where customers borrow money for margin trading inside the platform, but Gearbox’s protocol is cross-platform. So, rather than having access to leverage on BitMEX, for example, A user may connect with Gearbox, establish a Credit Account, and then use this smart contract to undertake leveraged transactions on Uniswap, Sushiswap, and perhaps any other relevant protocol by borrowing money on BitMEX.
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How does it work?
Users that want to get leverage may use the Gearbox protocol to set up a Credit Account. They may choose the assets they want to use, establish various whitelisting characteristics such as liquidation thresholds, and then fund the Credit Account with monies to activate it. These monies are then used as collateral for the user’s debt, allowing them to be controlled by sending financial instructions to their Credit Account and ordering it to conduct things like margin trade on Uniswap or leveraged farming on Yearn. Overall, the Credit Account works as a standalone smart contract that connects user cash and borrowed funds. To assist limit risk, each Credit Account has a set of criteria built in, including liquidation levels, a list of permitted tokens, and a list of approved protocols. Setting specified settings and whitelisting particular protocols helps guard against malicious actors and maintain network integrity.
When a user is done using their Credit Account, they may either settle the debt and withdraw all money to their wallet, or they can use the default swap function, in which case the funds are used to repay the loan and any leftover funds are refunded to the user.
Lenders and borrowers are the main players in this protocol. Borrowers are users (e.g. traders or yield farmers) who seek to increase their positions by borrowing liquidity from the protocol, for which they pay an interest rate. Lenders are liquidity providers who seek additional yield and have a higher risk tolerance, whereas borrowers are users (e.g. traders or yield farmers) who seek to increase their positions by borrowing liquidity from the protocol, for which they pay an interest rate. Borrowers use these pools for composable leverage, while lenders supply liquidity by depositing a range of assets, such as $DAI and $WETH, and earning a return on them.
Gearbox’s liquidation mechanism is one of the most important parts. The procedure utilizes a measure that continually assesses and determines the health of all outstanding Credit Accounts. Anyone may liquidate the Credit Account whenever that metric falls below a score of one. The liquidator is paid a fee for liquidation the Credit Account and guaranteeing the network’s integrity in this scenario. Any residual amount is restored to the Credit Account’s creator, and the liquidated monies are paid to the protocol treasury. This architecture encourages market players to hunt for unhealthy holdings on a regular basis, so providing another layer of risk reduction.