An Analysis of Aave's Decentralized Stablecoin GHO
GHO will be designed as a native decentralized multi-collateral stablecoin on Aave.Author: Karen, ForesightNews
Last night, Aave released a proposal to the community for the introduction of the stablecoin GHO, with the name GHO derived from GHOsts. GHO is a native decentralized multi-collateral stablecoin on Aave, featuring the following characteristics:
- Decentralized and fully pegged to the US dollar;
- Governed by the community;
- Allows collateralization of various crypto assets supported by Aave for minting, thus GHO is over-collateralized;
- Borrowers can continue to earn interest on their collateralized assets, and users can burn GHO when reclaiming their collateral.
In addition, the interest from GHO borrowing will be 100% allocated to the DAO, generating additional income for the Aave DAO. If the proposal is approved by the community, OpenZeppelin and PeckShield will conduct multiple audits in the coming weeks.
How GHO Works
According to the proposal, GHO is created by users (borrowers), and like all loans on the Aave protocol, users must provide collateral (at a specific collateralization ratio) to mint GHO. When users repay or are liquidated, the GHO protocol will destroy the user's GHO. The interest generated by GHO minters will be directly transferred to the AaveDAO treasury.
GHO introduces the concept of a Facilitator, where a facilitator (such as a protocol or entity) has the ability to generate (and destroy) GHO tokens in a trustless manner. Of course, any facilitator must receive approval from Aave governance. Different facilitators will be able to apply different strategies to their GHO, while there will also be a cap on the amount of GHO that a facilitator can generate, determined by governance. The cap is primarily set to maintain collateralization and reduce risk.
Once the proposal is passed, the first facilitator will be the Aave protocol. Like other assets on Aave, once integrated with GHO, Aave will also deploy GHO aToken and GHO debt tokens. Additionally, the GHO borrowing interest rate will be determined by AaveDAO, and while the rate is stablecoin-based, it can also be adjusted according to market conditions. In the initial implementation, stkAAVE holders can mint GHO at a certain discount, with the discount parameters determined by Aave governance, meaning they will pay a lower interest rate for borrowing GHO, thereby incentivizing more AAVE to be staked to protect the Aave protocol.
Aave V3 & GHO
In the first quarter of this year, Aave launched V3 on Polygon, Arbitrum, Avalanche, Fantom, Harmony, and Optimism, while deployment on Ethereum may take a few more months. Aave stated that features such as isolation mode, Portal, and E-Mode in V3 are a perfect match for GHO. Furthermore, Aave intends to promote the adoption of GHO on Layer 2.
The isolation mode in Aave V3 allows users to mint GHO using various assets currently supported by the Aave protocol while maintaining collateral and reducing risk. Additionally, the isolation mode operates with DAO governance controlling supply and borrowing exposure limits.
The Portal feature will drive GHO's expansion across multiple chains (without the need for bridges), supporting users in seamlessly moving assets between Aave V3 markets across different networks. For example, users can destroy aToken on Ethereum and then mint on the target network.
Aave V3 also includes an efficient mode called Aave V3 "E-Mode," which maximizes capital efficiency and borrowing capacity when the prices of collateral and borrowed assets are correlated. Stablecoins like DAI, USDC, USDT, and GHO are all pegged to the US dollar, so these stablecoins belong to the same E-Mode category. Due to E-Mode, stablecoin holders can access GHO at a nearly 1:1 ratio with zero slippage.
Aave team member Marc Zeller also pointed out that if GHO becomes unpegged, it would create some arbitrage opportunities to protect the system. If GHO is above the peg for any reason, it can be minted using another stablecoin and then sold through stablecoin exchange. Aave V3's E-Mode provides the operational conditions for this arbitrage. If GHO becomes unpegged, users can repay their debts, and as more users choose to repay their debts, the total supply of GHO will decrease, helping to restore the peg.
In summary, especially the core features in Aave V3 such as E-Mode, Portal, and isolation mode will provide GHO with more use cases and scenarios, and are expected to create broader synergies with Curve, Maker, Frax Finance, Balancer, and others.
