Gearbox Protocol: K3 Capital instance on the DeFi Credit Layer
Today, countless DeFi protocols are being built on different L1s and L2s, offering permissionless, decentralized, and more secure infrastructure. However, institutions require more than just access to liquidity — imagine a lending infrastructure that is customizable, risk-adjusted, and capital-efficient without fragmentation. Gearbox Protocol has emerged as a leading solution, providing a robust and modular credit layer that enables institutions to scale their lending and borrowing operations efficiently.
Since its launch in 2021, Gearbox has redefined on-chain leverage, maintaining zero bad debt while undergoing over ten audits and investing more than three million dollars in security measures. The protocol ensures sustainability by applying borrowing rates based on a collateral’s risk profile, creating a more precise and efficient market.
The protocol has been battle-tested for over three years without experiencing any exploits. Its security framework combines rigorous audits, whitehat bounty programs, and AI-powered monitoring tools designed to mitigate potential risks.
In this blog post, we will cover the design of Gearbox Protocol, what makes it stand out from other DeFi protocols, its unique Credit Account mechanism, with our decision to launch an instance on Gearbox.
Into Gearbox Protocol
Gearbox Protocol enables users to access leverage while seamlessly interacting with other DeFi protocols. Unlike traditional lending markets, Gearbox allows for external leveraged strategies, making it a unique player in the space. Gearbox empowers users to integrate leverage into their favorite strategies without restrictions.
With Gearbox, users can:
Margin trade on Uniswap.
Leverage farm on Curve.
Leverage stake on Lido.
Restake with EigenLayer derivatives.
Use 10x more capital to amplify opportunities across DeFi.
How Gearbox Stands Out among different DeFi protocols
While many DeFi lending protocols, such as Aave or Compound, allow users to borrow against their collateral, Gearbox takes leverage a step further by offering composability, modularity, and capital efficiency. Here’s why Gearbox is different:
Composable Leverage: Gearbox enables leveraged trading and farming across external DeFi protocols like Uniswap, Curve, Convex, and Lido.
Modularity: A flexible smart contract system that integrates with multiple DeFi platforms for yield farming, staking, and trading.
Risk Adjusted rates: Gearbox Credit Accounts can determine the strategy you borrow for and interest rates are applied depending on the risk associated with the strategy.
No liquidity fragmentation: Multiple isolated markets can be created through the same USDT lending pool
Leverage as a Service: Other protocols can integrate Gearbox's leverage, allowing governance to adjust borrowing rates via GEAR staking.
Permissionless Strategies: Users can execute advanced DeFi strategies like delta-neutral positions and structured hedging without restrictions.
By leveraging these innovations, Gearbox combines the best of decentralized lending, trading, and risk management into a seamless, composable protocol that enhances capital efficiency while safeguarding liquidity providers.
Gearbox Protocol Design
Gearbox Protocol operates as a generalized leverage infrastructure, where users interact with two key roles: Liquidity Providers (Passive Lenders) and Leverage Users/Traders(Active Borrowers). The protocol facilitates capital-efficient lending and borrowing through its Credit Account Architecture.
1. Liquidity Providers (Passive Lenders)
Liquidity providers deposit assets into Gearbox’s lending pools, earning passive yield while enabling leveraged borrowing for active users. Unlike traditional lending markets, lender funds remain within the protocol and cannot be withdrawn by borrowers, meaning they are not directly exposed to the risk of borrower strategies. Their main role is to provide liquidity to support leverage in the system.
Earn APY based on borrowing demand and utilization rates.
Funds remain within Gearbox’s lending pools, ensuring risk isolation from leverage users.
Benefit from automated interest rate adjustments based on supply-demand mechanics.
2. Leverage Users/Traders (Active Borrowers)
Leverage users borrow assets at multiples of their collateral through Gearbox’s Credit Account system. Gearbox’s model keeps leverage within DeFi strategies, ensuring borrowed funds remain within the ecosystem.
Open a Credit Account, which functions as an isolated smart contract wallet.
Borrow up to 10x leverage for margin trading, farming, staking, and hedging.
Only interact with whitelisted DeFi protocols, ensuring controlled risk exposure.
Credit Accounts: The Core of Gearbox’s Leverage Mechanism
At the heart of Gearbox’s design lies the Credit Account, an isolated smart contract wallet that bridges passive lenders and active borrowers. It acts as a secure leverage hub, ensuring that borrowed funds remain within the DeFi ecosystem while giving users full control over their leveraged strategies.
In traditional borrowing, where users withdraw funds freely, Credit Accounts keep all leveraged funds inside the protocol for preventing misuse. When a leverage user opens a Credit Account, they deposit collateral, which determines their borrowing power. The account then allows them to access up to 10x leverage, which can be deployed into whitelisted DeFi protocols such as Uniswap, Curve, Lido, and Convex. These funds are used directly within integrated platforms, making Gearbox a seamless leverage layer across DeFi.
A key feature of Credit Accounts is risk isolation. Because all borrowed assets remain inside the Credit Account and are never rehypothecated, lenders are protected from borrower risk. If a borrower's Loan-to-Value (LTV) ratio drops too low, an automated liquidation process ensures that outstanding debt is repaid, preventing the accumulation of bad debt within the system.
Instead of deploying a new contract for each user, Gearbox allows users to borrow pre-existing Credit Accounts, reducing operational costs to provide more gas-efficient and composable solutions. This model mirrors the efficiency of renting a vehicle—users "rent" a Credit Account, execute their strategies, and return it when they close their positions.
Allowed List - Whitelisted Protocol
To ensure security, composability, and risk management, Gearbox enforces a whitelisting mechanism for all DeFi integrations. Unlike fully permissionless protocols, Gearbox only supports a selected set of DeFi protocols that have undergone rigorous security and risk assessments ensuring that borrowers interact only with reliable, liquid, and well-audited platforms, reducing exposure to malicious contracts, low-liquidity assets, and governance risks.
Whitelisting is managed through Gearbox DAO governance, where token holders vote on adding new integrations, modifying risk parameters, and adjusting core mechanics. The community plays a crucial role in ensuring that the protocol evolves sustainably while maintaining capital efficiency and security.
DAO Governance & Voting Parameters
Gearbox’s governance model enables decentralized decision-making over key protocol parameters, including:
Collateral onboarding – Determining which assets can be used as collateral for leverage.
Liquidation thresholds – Adjusting safety margins for leveraged positions.
Allowed token/protocol list – Controlling which DeFi protocols and assets are available for leverage.
Protocol fee model – Establishing interest rates, borrowing fees, and governance incentives.
TVL Caps – Setting maximum liquidity limits to manage systemic risk.
Gearbox is a DAO, run by various contributors and initiatives. The protocol and assets are never in custody of any one single person. This approach ensures that leveraged users can operate within a secure and composable DeFi ecosystem while preventing exposure to high-risk or untested protocols.
K3 instance Launching on Gearbox
The K3 instance is launching on Gearbox with a focus on Maker (sDAI), Ethena (sUSDe) and Pendle strategies, leveraging stablecoin-based yield opportunities. These two strategies form the foundation for the protocol’s capital-efficient and delta-neutral yield generation approach.
Maker (sDAI) Strategy :
sDAI is a yield-bearing stablecoin that accrues interest through MakerDAO’s DAI Savings Rate (DSR).
By integrating sDAI, the K3 instance enables users to borrow against yield-bearing collateral, amplifying potential returns while maintaining stability.
This approach allows users to optimize capital efficiency, leveraging sDAI within Gearbox for yield stacking and liquidity provision.
Ethena (sUSDe) Strategy :
sUSDe is a synthetic USD stablecoin backed by delta-hedged staked ETH, offering a high-yielding alternative to traditional stablecoins.
The K3 instance incorporates sUSDe to enable users to take leveraged positions in Ethena’s ecosystem, capitalizing on its yield dynamics.
The integration of sUSDe into Gearbox allows for recursive borrowing, enabling traders and DeFi yield farmers to maximize capital efficiency.
At launch, the K3 instance on Gearbox will support the following key assets including
USDe – Ethena’s delta-neutral yield stablecoins
USDC, USDS, DAI – Non-yield-bearing high circulating supply fiat stablecoins
sUSDe, sDAI, sUSDS – Yield-bearing stablecoins
PT_sUSDe_27Mar, PT_sUSDe_29May – Pendle's yield tokenized Ethena positions
Loan-to-Value ratio (LTV)
The K3 instance on Gearbox applies a structured Loan-to-Value (LTV) ratio framework to ensure efficient capital utilization while maintaining risk isolation. In this case, the instance that we launch on Gearbox does not expose users to forced liquidations. Instead, the deposited assets are optimized for yield generation within a controlled environment.
Each asset's LTV is determined by its liquidity, market adoption, and role within the vault's strategy. Yield-bearing stablecoins such as sDAI and sUSDe are assigned higher LTVs due to their predictable returns and strong market adoption. PT_sUSDe_27Mar and PT_sUSDe_29May, representing tokenized yield-bearing positions, have slightly lower LTVs to account for their structured nature within fixed-income strategies. Meanwhile, highly liquid and widely accepted stablecoins like USDe, USDC, and DAI maintain high LTVs to support various DeFi markets.
Interest Rate Model (IRM)
The K3 instance on Gearbox utilizes a dynamic Interest Rate Model (IRM) to adjust interest rates based on real-time market conditions, striking a balance between liquidity supply and demand.
The IRM follows a two-kink model, where interest rates remain relatively low at lower utilization levels to incentivize borrowing and capital deployment. The first kink occurs at 70% utilization, where the interest rate starts to increase more noticeably to encourage additional liquidity supply. As utilization approaches 90%, the second kink introduces a steeper rise in rates, discouraging excessive borrowing and ensuring the protocol remains solvent and capital-efficient.
Looking ahead, we’ll exclude the roadmap and list the current collaterals instead. As time goes on, we will be adding new stables.
Conclusion
Gearbox Protocol has established itself as a critical infrastructure for on-chain credit markets, redefining leverage in DeFi with its modular, composable, and capital-efficient design. By integrating risk-adjusted borrowing rates, Credit Accounts, and a permissioned strategy execution model, Gearbox ensures a secure and scalable lending environment for both individual users and institutions.
The protocol’s commitment to security is evident in its zero bad debt record, extensive audits, and proactive risk management framework. With its whitelisted protocol integrations, Gearbox enables leveraged users to maximize capital efficiency while protecting lenders from exposure to untested strategies.
Building on this foundation, K3 is launching an instance on Gearbox, leveraging its customizable credit infrastructure to introduce stablecoin-based leveraged yield opportunities. This collaboration marks a significant step toward expanding Gearbox’s reach and cementing its role as a fundamental layer in the DeFi credit market.
K3 Gearbox market: https://app.gearbox.fi/pools?chain=ethereum&curator=k3 X: @k3_capital For latest update: @k3alpha For contact: @K3Capital