Aave DAO voters have approved the creation of a new stablecoin GHO. What is GHO? How exactly will GHO work? How likely is it for GHO to go bust like TerraLuna? Let us try to determine the answers to these questions. 

Aave Companies’ proposal was backed by 99.9% of voters who pledged about half a million AAVE tokens to approve the creation of GHO. GHO will be a stablecoin backed by collateral consisting of other cryptocurrencies. 

Aave is positively a giant in the DeFi market with almost $9.8 Billion locked across multiple networks and markets it supports. Users can earn a passive income on Digital Assets locked in these markets. And now Aave plans to leverage this into the creation of GHO. 

What is GHO(st)?

There may have been a clever wordplay here. Given that staked asset ticker is pre-fixed with “st”, like stETH, or stAAVE, GHOst comes with a post-fix of st, meaning, you receive GHO against staked assets. Then again, there is always ghost, like privacy for you. Finding easter eggs though is not my forte. So let’s stick to what I can tell you about GHO itself. 

GHO is aimed to be a decentralised stablecoin. Decentralised stablecoin offers fiat-denominated currency on the blockchain, which also is fairly censorship resistant. In my country, India though, stablecoins are hardly stable[1] and the Reserve Bank seems to be worried about the Dollarisation[2] of the overall market, thanks to digital assets and their denomination of crypto. But that’s a topic for another letter. 

The decentralised stablecoin will be created by users. In order to mint GHO, users will have to deposit Cryptocurrencies supported by Aave. The deposits users allocate for minting GHO have to be higher in value than the value of GHO minted, i.e. the loans are over-collateralized. The collateral locked to mint GHO will continue to earn interest. The interest earned from loans taken out on GHO will go back to Aave DAO treasury. 

Correspondingly, when a user repays a borrowed position (or is liquidated), the GHO protocol burns that user’s GHO. 

GHO introduces something called Facilitators in its proposal[3]. A facilitator (e.g., a protocol, an entity, etc.) has the ability to trustlessly generate (and burn) GHO tokens. If this proposal is approved, then any facilitator would have to be approved by Aave Governance. Various facilitators will be able to apply different strategies to their generation of GHO.

For each Facilitator, Governance will also have to approve something that we call a bucket. A bucket represents the upward limit of GHO a specific facilitator can generate.

The Aave Protocol - the AAVE market on Ethereum will be the first facilitator. Governance will be able to determine and assign Aave a specific bucket capacity to bootstrap the GHO liquidity and the GHO market.

GHO Interest, Discount and Governance

The Borrow interest rates for GHO will be determined by Aave DAO, just like they do it with Aave Protocol. But of course, it can be changed to implement different rate strategies if there is a proposal and the community approves it.

There will be a “Discount Strategy mechanism” allowing Safety Module participants a discount on the GHO borrow rate. In the first implementation, the strategy will set a certain amount of GHO at discount per stkAAVE supplied, and a discount on the interest rates that can vary from 0% (no discount) to 100% (full discount).

The multichain implementation is not part of the current proposal, but we did get an idea of how it is envisioned. Aave V3 will allow GHO distribution across multiple networks whilst being minted on Ethereum. It will work on “portals” by messages instead of bridges.

GHO is envisioned to bring Aave DAO to receive a substantial amount of revenue in the form of fees as all the interest collected on GHO loans will be sent to treasury. This revenue can further be used to increase ecosystem support, and bolster treasury for market downturns.

According to the proposal, Aave wants a number of stablecoin pools on its protocol to include GHO, thereby not trying to treat other stables as a competition, but as contributors to the ecosystem.

Realistically, how will GHO maintain a peg?

After the fiasco in the market in 2022, it remains to be seen how strong can a decentralised stablecoin truly be. So here are some examples of how the GHO price will remain stable.

• If GHO is “above peg”: It is profitable to mint GHO with for example another stablecoin and “short it” on stableswaps and earn slippage.

• If GHO is “under peg”: It is profitable to pay back borrowed GHO. This will make GHO's total supply go down as debt repaid is GHO burnt as helping peg to be restored.

Now you may ask, wouldn’t this be like how DAI was maintaining peg long ago?[4]

And on this, I would like to borrow the answer of Mr Marc Zeller, the integrations lead at Aave.

Among other stuff, GHO allows position-based minting instead of collateral vault specific minting allowing a smoother and more balanced position management with very heavy gas optimization.

Aave specific features such as emode and portals allows for more use-case and makes GHO easier to integrate outside of L1 or to maintain peg than alternatives.

Marc Zeller, Integrations Lead - Aave

The E-Mode sort of acts as a new way of stabilising the GHO peg in case of a market downturn. With volatile assets, one needs to borrow GHO with over-collateralization, but users can borrow GHO with stablecoins at a near 1:1 ratio with zero slippage, hence allowing multiple stables to allow “repegging” of GHO without risking the loss of value in collateralized assets.

To be honest, the impact of market movements will only be truly understood once the protocol is live.

So I think, my dear readers (any Bridgerton fans out there?), all in all, I feel if anyone can risk launching a stablecoin today, it has to be Aave. With nearly 10 Billion USD locked in its protocol, Aave is right there to serve GHO to a huge audience.

Lastly, why choose a name like GHO instead of something with “USD” in it? Leaving this reply from Stani, the founder of Aave for your pleasure.

The reference to a currency has limitations over long term, potentially you might want to swap the peg from one underlying asset to another (for various reasons) or track something else and being bound to a USD in the ticker would be a limiting factor. On top of that everyone is doing that already which makes it a bit repetitive and restrictive from the messaging perspective. DAI follows the same path actually and has been helpful to build a narrative over the years.

Stani Kulechov

References:

[1] Sanghvi, Naimish. “Why does USDT Cost more than 80 Rupees in India?” YouTube, 20 April 2021, https://www.youtube.com/watch?v=i1rk8M7IKwA

[2] Reserve Bank of India. “Reports: Macrofinancial Risks.” Reserve Bank of India, https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1208.

[3] Aave Governance. “Introducing: GHO.” Introducing GHO, https://governance.aave.com/t/introducing-gho/8730.

[4] “How does the DAI maintain its peg? : r/MakerDAO.” Reddit, 24 January 2018, https://www.reddit.com/r/MakerDAO/comments/7sieau/how_does_the_dai_maintain_its_peg/.

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