In a move that may disrupt the stablecoin market, Aave, the leading money market protocol, is poised to create a fully collateralized stable token called GHO.
On July 31, more than 99.9% of Aave’s community members voted to launch the coin. It was the first of three governance votes that will take place over coming weeks to determine the design and roadmap for the token.
Aave will now engage a security firm to audit the code for GHO. Its community will next vote on a proposed starting interest rate GHO and discount rate for AAVE stakers that mint GHO.
Aave is the third-largest DeFi protocol by cross-chain total value locked (TVL) with $6.55B, according to DeFi Llama. Users can earn a yield on assets deposited into the protocol, and also use their deposits to back self-managed, overcollateralized loans on the platform.
In a July 30 appearance on Bankless, Stani Kulechov, the founder of Aave, described GHO as “the first stablecoin which is overcollateralized, but also at the same time you can earn yield on your collaterals that you are supplying into the Aave protocol.”
The proposed coin comes as regulators are scrutinizing stablecoins following the spectacular collapse of Terra’s algorithmic stable token, UST, in May. The implosion erased an ecosystem worth $60B in market capitalization and triggered a cascade of failures across crypto, including the bankruptcies of Three Arrows Capital and Voyager Digital.
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If it goes live, GHO will enable Aave users to mint the stablecoin against collateral assets deposited into a “facilitator” protocol. The July 31 snapshot also paved the way for Aave’s v2 deployment on the Ethereum network to become the stablecoin’s first facilitator.
All interest generated from borrowed GHO will be sent to the Aave DAO as revenue. That contrasts with other assets supported by Aave, from which liquidity providers collect the majority of interest. All GHO repaid from borrowed positions will be burned from supply.
In a July 7 governance post that first proposed GHO, Aave noted that its Ethereum deployment is expected to upgrade to the v3 codebase “in the coming months.” The post highlighted v3’s design is expected to enable stronger risk management features for GHO minters.
Marc Zeller, head of developers relations at Aave, tweeted that the Aave team expects to publish a governance forum post proposing initial parameters for GHO next week, including interest rates, facilitator caps, and supported collateral assets. He also predicted that code audits will be ready at the same time.
Aave also hopes to foster GHO adoption on Ethereum’s burgeoning Layer 2 ecosystem, noting that grants and hackathons could be mobilized to promote development leveraging the token, such as for payments.
Kulechov told Bankless that there is great potential for stablecoins to become the dominant currency of the internet and to also solve real-life payment problems through increased adoption on Layer 2.
He noted the increased stablecoin usage in countries suffering from chronic hyperinflation such as Argentina, highlighting that many individuals are bypassing their local currency and executing payments by transferring stablecoins between accounts held with major centralized exchanges.
Aave has stopped offering incentives to Ethereum v2 users in its native token, AAVE. At a total value-locked (TVL) of $8.57B, Aave is the third-largest DeFi protocol and the largest decentralized money market. Aave had incentivized adoption on its v2 deployment since April 2021 by offering AAVE tokens to those that borrowed or supplied crypto. … Continue reading
“We want to change that,” he said in the interview. ”We want to ensure that these transactions can happen on Layer 2, and we want to see more developers building payments applications on top [of L2].”
Community members and representatives from other DeFi protocols are buzzing about the prospect of GHO.
Sam Kazemian, the founder of Frax, said he would like to support GHO’s liquidity at launch using Frax’s base pools on Curve.
“The idea is basically to pair stablecoins with a FRAX-USDC base pool and FRAX will incentivize the [pool] proportional to its size/demand,” Kazemian posted on Aave’s governance forum. He noted that the system would not require matching contributions from Aave, and also expressed interest in Frax becoming a facilitator in future.
Truco of Yeti Finance asked about becoming a facilitator to use GHO in trading delta neutral trading — strategies that are designed to hedge against directional movements in the price of underlying assets. Kulechov responded that “delta neutral strategies could be one option down the line.”
A representative of Paladin protocol inquired whether stkAAVE holders would need to deposit the tokens on Aave to receive a discount, or if the discounted rate would be available to stkAAVE holders.
“As a protocol controlling 50,000 + stkAAVE, we want our community to benefit as much as possible from these new opportunities,” they posted.
In the forum, Zeller also emphasized that Aave is seeking to “grow the decentralized stablecoin market” rather than compete with industry incumbents through the launch of GHO.
“The power of DeFi is that GHO allows more liquidity for decentralized stablecoin in the market, more fees for Aave, more volume and fees for Curve, more stability for other stablecoins, more attractiveness of DeFi in general compared to CeFi,” Zeller said. “With GHO, Aave wins, but also Curve, Balancer, Convex, MakerdDAO, QiDao, Frax, and so on. Synergies define our ecosystem.”