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  • RFC - Olympus x Gearbox Proposal Temp Check

Gearbox Protocol Proposal - Enhancing OHM Utility and Maximizing DAI Yield

Dear Esteemed Olympians, I am amplice, hailing from the faraway lands of Leverage, here to bring you an offer of alliance that shall bring great fortune and prosperity to both our kingdoms!

Seriously though, I'm here from Gearbox with a proposal that I think could benefit both our DAOs, want do a quick temperature check here in your forums first before posting a formal proposal, please let me know your thoughts/comments/concerns.

Introduction

Gearbox Protocol is a composable leverage protocol that aims to be the credit layer infrastructure for all your prime brokerage needs. It utilizes an account abstraction primitive called Credit Accounts, which are functionally a kind of leverage-enabled smart account that allows Gearbox users to put up to 10x more assets to work than they deposit. Some examples of things that Gearbox users can do include margin trading with leverage through Uniswap/Curve/Balancer, leverage farming on Convex pools/Yearn vaults, leverage staking via Lido, leverage restaking and leveraging points via EtherFi and Renzo, and leveraging NFTs/RWA/and other assets in the future. When users wish to withdraw funds, all they need to do is pay back the loan (plus accrued interest), and they can withdraw their original deposit + profits, with no fixed terms on the borrowed funds. This innovative approach combines lending and prime brokerage in the same protocol.

Gearbox has a strong track record, with V1 launched in December 2021, V2 in November 2022, and V3 going live in December 2023. The protocol has undergone 6+ audits with $2M+ spent on security, and has never experienced a security incident or bad debt to date.

We are excited to propose a strategic collaboration with Olympus DAO that we believe will enhance the utility of the OHM and provide attractive yield opportunities for the DAO's substantial DAI reserves.

Proposal

Seamless OHM Deposit and Yield Generation

Gearbox Protocol will develop and implement a streamlined process for OHM holders to generate yield on their tokens without the need for active management. The proposed flow will work as follows:

  • OHM holders will use their OHM as collateral on Olympus to borrow DAI (via cooler loans)
  • The borrowed DAI will then be automatically deposited into Gearbox's DAI lending pool
  • OHM holders will earn attractive yields on the deposited DAI, paid out in DAI
  • To make this process as user-friendly as possible, we will integrate a dedicated deposit button directly into the Gearbox UI to completely automate this flow, such that it can happen in as few clicks as possible.

This will allow OHM holders to earn yield on their OHM with minimal hassle, in a way that does not require active management, and while maintaining their OHM exposure (via the loan). OHM holders won’t need to navigate between different platforms or perform multiple transactions manually.

We believe this would prove useful and profitable for OHM users because of the large rate differential that exists at the moment between the borrow cost for OHM holders on DAI and the yields that Gearbox is generating in our passive lending pools.

For reference, currently our DAI pool is paying 32.46% organic APY, or 44.27% total APY if you include GEAR token incentives. Admittedly this is on relatively low TVL (2m at the moment). However, our USDC pool, which has 53m deposited, is currently at 37% organic APY (38% with incentives), so even at scale our stablecoin pools are generating market leading yields.

Benefits for OHM Holders:

  • Seamless yield generation on OHM holdings without active management
  • Holders can maintain exposure to OHM whilst still earning good yields
  • User-friendly experience with a dedicated deposit button and flow in the Gearbox UI
  • Passive yields in DAI in Gearbox are much higher than the borrow cost of DAI for OHM holders, making this an attractive opportunity

Olympus DAO Treasury: DAI Deposit

Gearbox Protocol has recently created a DAI lending pool. As a part of this overall plan, we propose that Olympus DAO considers depositing up to 5 million DAI (initially) into our lending pools. Our reasoning is as follows:

Currently, Gearbox allows leverage on some very popular strategies (e.g., Ethena shards farming via USDe and sUSDe), which has led to extremely high utilization rates and thus APYs on our USDC pools. Our USDC pools are seeing 37% organic APYs (38% when GEAR incentives are included). Borrowers who want to deposit into popular stablecoin strategies are likely somewhat agnostic about which stablecoins they use. Therefore, we can assume borrowers would be happy to borrow DAI (rather than USDC) in order to enter into various leveraged stablecoin positions. Our DAI pools are extremely new (just a few days old right now), but if the medium term borrow demand is at all similar to what we have seen with USDC, it's plausible that DAI will have a source of organic yield that is 25%+ or even 30%+. If this plays out, the organic DAI yield available on Gearbox will likely be market leading compared to any other yield on DAI available on the market.

The reason we're able to have these such APYs in our lending pools is as follows:

The DAI pool that Olympus DAO would be depositing into is structurally similar to the lending pool in any other lending protocol. It’s a pool of DAI that borrowers can take loans from and when they repay the loan they need to do so with interest.

The difference is on the borrowing side - borrowers can take this DAI and use it (with up to 10x leverage) in various different strategies that are whitelisted by Gearbox. One example that is driving the demand for leverage in Gearbox right now is Ethena’s USDe.

Because there is huge demand for levering up and aping into USDe (partially because people are farming Ethena shards), borrowers are willing to pay a lot to borrow stablecoins in Gearbox. Most of this high interest rate on the borrow side is passed on to the lending side, therefore Olympus DAO would be getting exposure to high yields without taking on all of the risks associated with directly participating in higher risk strategies (like USDe).

Please note that this is not “risk free” - as is the case with Aave (or any other lending protocol), there is always the risk of bad debt. But bad debt would only accumulate in a situation where some strategy drops in value faster than liquidation bots can liquidate borrower positions. Also, Gearbox v3 has built in risk management on this front - we have quotas, which limit the TVL that can be used in any given leverage strategy and/or asset. This prevents any particular strategy from posing a systemic risk to Gearbox or its lenders.

We are able to maintain high utilization ratios and therefore high passive lending APYs thanks to the demand for leverage on these riskier strategies (like USDe), but the majority of the risk is taken on by the borrower that’s using leverage.

As long as there continue to be various popular stablecoin strategies available to be leveraged on Gearbox, utilization ratios on our stablecoin lending assets should continue to be high, translating to attractive APYs in DAI.

This means that Olympus DAO could have an enduring, long-term, high organic APY option available for its substantial DAI reserves that is not subject to the whims of various token prices or incentive programs.

Benefits for Olympus DAO:

  • Exceptional organic yield generation on the DAO's substantial DAI reserves, outperforming most other available options for yield, and not dependent on any token inflation or incentives from other projects.
  • Strategic diversification of treasury investments, mitigating risk and exposure to market volatility
  • Opportunity to support the growth and development of a promising DeFi protocol, fostering ecosystem collaboration and innovation
  • Olympus DAO would be additionally farming $GEAR, which represents some level of upside (as long as you don’t dump on us😏), giving Olympus a level of influence and governance sway over Gearbox DAO (note: $GEAR tokens will likely only be a small portion of the total yield for Olympus, vast majority of the yield is organic)

Benefits for Gearbox Protocol:

  • Help with bootstrapping Total Value Locked (TVL) in the newly added DAI pools on the lending side, bolstering the protocol's liquidity and stability
  • Enabling a greater number of leverage side users, driving platform adoption and growth
  • Forging a strong, mutually beneficial partnership with Olympus DAO, a highly respected, well capitalized and influential player in the DeFi space
  • Opportunity to co-market with Olympus and outreach to the OHMies (who are mostly grizzled DeFi veterans at this point)

Conclusion

By working together on this collaboration, Olympus DAO and Gearbox Protocol have the opportunity to unlock significant value for their respective communities and the broader DeFi ecosystem. Through the proposed seamless OHM deposit → DAI yields, and the direct DAI deposit from Olympus DAO itself, the Olympus community can enhance the utility of its native token, provide attractive yield opportunities for its members, and generate substantial returns on its DAI reserves. In turn, Gearbox Protocol will benefit from increased TVL, user growth, and the establishment of a strong partnership with a pioneering DeFi protocol.

We firmly believe that this proposal represents a win-win scenario for both Olympus DAO and Gearbox Protocol, and we are committed to working hand-in-hand to ensure its success. We value the feedback and insights of the Olympus DAO community and look forward to engaging in constructive discussions to refine and implement this proposal.

Let’s work together to make DeFi great again.

    Thanks amplice for the proposal. I'm all in favour to move this proposal forward and definitely let's make DeFi great again!

      I am for it, but because of cooler loans requirements and so we have some left over for other stuff I would limit it to 4 million exposure for now. And for safety I would put 2 million in to start and then add another 2 million later and only add more if Olympus ends up with a big surplus of funds in the future.

      Love the Cooler Loans integration part!

      Regarding the OHM vault, I would propose two feature enhancements for consideration;

      1. A looping feature. I.e. the deposited OHM is looped x number of times (at user option) before the remaining DAI goes into your vault

      2. rewards / yield is paid (accrued) in OHM by periodically taking DAI yield and market buying OHM

      Re the treasury depositing funds… I think this part is more challenging due to the capital requirements of Cooler Loans and need to stand up minimum POL on ethereum plus strategic layer 2s. Query whether this is needed as part of the proposal because your product idea should draw in material DAI from OHM holders if successful.

        ruby33

        Could you elaborate on how would this looping work? It's certainly possible but to me this would almost defeat the purpose of the relatively safe/secure flow of deposit OHM, borrow DAI, deposit DAI to Gearbox (OHM is backed by lots of DAI, risk is therefore very minimal).

            amplice looping simply means taking borrowed DAI from Cooler Loans to buy OHM and repeat the Cooler Loan process

            So hypothetically if a user wanted to loop 3 times, they would have enhanced OHM price exposure (up and down) and a lesser amount of residual DAI deposited in the DAI gearbox strategy.

            Note, this assumes custom vaults for each user, so might not work.

            If there is a single vault taking in the OHM then perhaps there is a tiered risk option offered… i.e. 1 loop vault which takes OHM, borrows DAI, and deposits direct and then a (say) 3 loop vault which takes OHM, borrows DAI, buy OHM, borrows DAI, buys OHM, borrows DAI and deposits to DAI vault

            I think this product would get great adoption because it will reduce gas costs for individual users and automatically manage Cooler Loan extensions

                ruby33
                To support WAGMI's statement here, this might help illustrate if there's a PMF:

                Currently 32% of total Cooler users are Looping
                83% of borrows in the most recent clearing house are Looping

                Source:
                https://papaya-finance.web.app/analytics

                This shows that the market has an appetite for leverage, typically when the OHM premium is small enough that there's limited downside risk and large upside reward.

                In support of creating this option for users and will vote in favor.

                  ruby33

                  I think this is a good idea but probably outside of the scope of what we are aiming to do in this proposal, and probably also would not make sense as a function on the Gearbox website. As a feature on the Olympus website it makes sense, but that would be more of an internal DAO decision for you guys I guess?

                  In any case, appreciate the feedback.

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