Observations and personal views from Nothing Research Partner BonnaZhu; the following content does not constitute any investment advice.

Lending has always been the largest PMF outside of trading.
Growth does not necessarily depend on disruptive innovation.
It may also only need to serve a specific demand.

Morpho Labs started with interest rate optimization.
Fluid integration of lending and trading enhances efficiency.
Gearbox is revitalized by zero-slippage looping loans.

In my view, the recent gains for Gearbox are more sustainable than the Restaking and points frenzy of 2024. Taking this opportunity, I would like to share some thoughts on the Gearbox Protocol product.

  1. Bond Pledge-style Repurchase and Looping Loans

    Looping Loans in traditional financial markets actually have a counterpart—bond pledge-style repurchase, also known as Repo.

    In the interbank market, banks and institutions use highly liquid government bonds for collateral financing, then purchase similar bonds, and repeat the operation until the target leverage is achieved.

    This is essentially a strategy to amplify returns.

    Due to the excellent liquidity of government bonds and the high activity of the interbank borrowing market, this behavior is basically normal, and the market size is in the trillion-dollar range, representing a validated demand for decades.

    This demand translates to the crypto market.
    Correspondingly, this is looping loans and leveraged mining.

    Here, there are both the most primitive ETH staking yields (3–4%) and close to 10% funding rate arbitrage, as well as various yields derived from trading and lending. Although the scale is not as large as the traditional market, it is growing rapidly.

    As interest rate cuts progress, the spread between borrowing costs and strategy yields will become more attractive, raising the demand for looping leverage.

  2. The Pain Points of Looping Loans

    Taking ETH's LST assets as an example, the conventional looping loan process is:
    Collateral → Borrowing → DEX Purchase of LST → Re-collateralization…
    Until the target leverage is reached.

    Closing out is the reverse process.

    The entire process requires multiple transactions (although most platforms support one-click looping, the backend execution logic remains unchanged), incurs slippage, occupies liquidity, and can easily lead to forced liquidation when LST unpegs. During market panic, insufficient depth in the secondary market can amplify price deviations, greatly increasing liquidation risk.

  3. Looping Loans Based on Minting Contracts

    The uniqueness of Gearbox's looping loans lies in two points:

    - Credit Account
    - Contract-Based Looping

    Unlike other lending platforms where funds are lent to external accounts, in Gearbox, both the collateral principal and the borrowed funds are aggregated into a Credit Account that complies with the ERC-4626 standard, and all leveraged operations are completed within this account.

    This means that leverage can be achieved in one step: for example, if a user deposits 1 ETH as principal and opts for 10x leverage, the protocol will directly match them with 9 ETH, and the funds will always remain in the contract account during subsequent operations.

    Moreover, Gearbox does not use borrowed funds to purchase on DEX but directly calls the minting contract to gain asset exposure. For instance, even with nearly no DEX liquidity for DVstETH, users can directly call the Lido Finance minting contract to mint DVstETH in Gearbox's Credit Account without conducting transactions in the secondary market.

    The entire process utilizes a fundamental oracle for price conversion based on the pegging ratio, rather than relying on market price oracles for matching. The same applies during liquidation; the Credit Account calls the redemption contract to exchange stETH back for ETH, settling at the on-chain redemption price (Reserve oracle) without market sell-off, completely avoiding slippage and unpegging risks.

    Furthermore, since borrowing and investment are homogeneous (both ETH and DVstETH are ETH-denominated), even if redemption requires a 7-day wait, it only extends the liquidation time without weakening effectiveness or amplifying risks.

  4. Gearbox is a modular credit account.

    Since all borrowed funds remain in the credit account, they do not reach the user's wallet. This makes Gearbox more like a lending account service rather than a traditional lending platform. This has a natural appeal for institutional funds:

    The limitations of traditional lending protocols are:

    - The usage of funds cannot be restricted after withdrawal.
    - Lack of compliance control.

    Gearbox inherently solves the first problem: funds always remain within the contract account and can only be directed towards pre-approved targets. For institutions, this is equivalent to an on-chain 'custodial trading account', which allows for leveraged investment in target strategies while clearly tracking the flow of funds.

    This is also one reason why Morpho's Curation model is favored by institutions and B-end users: the income structure and risk exposure can be defined by the curator. Gearbox is actually on a similar path to the Curation model but takes it a step further: it not only allows for strategy customization but also enables leverage in one step.

    One can even imagine that in the future, Morpho's curation treasury may call upon Gearbox as the underlying leverage execution engine, eliminating the inefficiencies and risks of manual looping, as well as integrating with permission management, on-chain KYC whitelists, and other mechanisms to further meet compliance needs.

    At that time, the narrative ceiling of Gearbox will be lifted.

  5. In Conclusion

    As:

    One of the most OG teams in DeFi
    A product with 0 attacks and 0 bad debts since launch.
    $3M+ in safety/risk control investments, 10+ audits.
    Tokens fully circulating.

    Currently, Gearbox has a TVL exceeding $400 million, with an FDV of only about $40 million, of which approximately 35% is held by the DAO.

    Such a scale and valuation, placed on a protocol that has already achieved core PMF and whose narrative is gradually extending from DeFi players to institutional funds, I believe has long-term allocation and imaginative potential.