How Gearbox Protocol Tackles Oracle Challenges in Defi

The presentation below is from Mikhail Lazarev, CTO at Gearbox Protocol. He presented the use cases of Gearbox Protocol in solving challenges with oracles.

Below is a glossary of key concepts mentioned during Mikhail’s talk, intended as a supplement to his video presentation.

GEARBOX PROTOCOL

Gearbox Protocol brings you onchain credit, allowing anyone to margin trade on Uniswap, leverage farm on Curve, leverage stake on Lido, and use 10X more capital on many DeFi protocols you love. Making decentralized leverage a reality thanks to Credit Account abstraction!

Gearbox Protocol uses Credit Account abstraction to bring together lending and prime brokerage in the same protocol. Lenders deposit assets to earn passive yield, while the composable leverage side users borrow these assets to create spot leverage positions, which can be used across DeFi. That could be margin trading on Uniswap, farming on Curve and Balancer, leverage staking on Lido and Rocketpool, and a lot more. All of that is made possible with Gearbox’s innovative Credit Account abstraction, creating the base layer of DeFi leverage.

CREDIT ACCOUNTS

Gearbox uses Credit Accounts which are isolated smart contracts with predetermined parameters. Credit Accounts encompass both the user’s funds and the borrowed margin funds. They can be deployed on any DeFi protocol and are designed to be non-custodial, ensuring that users retain ownership of their assets at all times. Users can close the account by paying off the debt or withdrawing any fund remaining. Lenders in this protocol benefit by getting high additional yield and risk tolerance.

ORACLES

Blockchain oracles act as bridges between the blockchain and external data sources, such as market prices, weather data, sports scores, and more. They collect data from these sources and make it available to smart contracts on the blockchain, allowing these contracts to react to real-world events and conditions. Oracles play a crucial role in enabling blockchain-based applications to interact with the broader world and expand their utility. Oracles can also help to transfer data from one isolated blockchain environment to another, thus enabling cross-chain communication.

Chainlink is one example of an oracle network. It is an open-source protocol with a proof-of-stake consensus mechanism and runs on the Ethereum Network. Chainlink recently introduced an interoperability protocol, CCIP, which is used for cross-chain transactions.

PRICE ORACLE ATTACK

Price oracle attack is a form of cybercrime where attackers use flash loans to exploit blockchains due to vulnerabilities in smart contracts. It is one of the most common attack methods in DeFi.

Flash loans allow users to borrow funds without the use of collateral. In a flash loan scenario, the borrower is required to repay the loan within the same transaction, or else the smart contract will automatically reverse the entire transaction. Thus, the fund is reverted automatically if the loan cannot be repaid.

Flash loans can be used to artificially move a token’s price, allowing the attacker to exploit the anomalous pricing. Dive into more details of past flash loan attacks and how to prevent them in this article.

CURVE LP TOKENS

Curve liquidity pools are reserves of tokens on smart contracts in Curve Finance. They are maintained by liquidity providers that stake their assets and earn Annual Percentage Yield (APY) in return, depending on the volume of transactions. This post by Curve Founder, Michael Egorov, provides full details on the inner workings of the protocol.

PRICE FEED

A price feed is a mechanism used to source price data of assets. They usually aggregate prices from several sources. They may also relay updates to the blockchain when prices change or a certain period has elapsed.

Popular price oracles include Chainlink Price Feeds, Compound’s Open Price Feed, and Uniswaps TWAP. Recently DeFi Wonderland have released Price Oracle, in order to provide a truly permissionless and decentralized solution for price feeds.

stETH

Lido Staked Ether (stETH) is a token that was created to represent Ether (ETH) that has been “staked” or deposited onto the DeFi platform, Lido Finance. When users stake ETH on Lido, they get the derivative, stETH, which can be used to perform the regular activities of Ether. Staked ETH on Rocketpool is known as rETH. More information about the effects of staked ether can be found here.