The Aave teams have presented a new stablecoin project called the GHO to their governance. With its over-collateralisation mechanism, it would then fit into the functioning of the protocol, which has already shown its resilience in the past.
Towards a native Aave stablecoin (AAVE)
The Aave protocol teams have opened a discussion on the governance forum of their decentralised autonomous organisation (DAO), about the creation of a new stablecoin. This stablecoin, dubbed the GHO, would be pegged to the dollar and has some interesting ideas that need to be detailed.
1/ Calling all GHOsts
We have created an ARC for a new decentralized, collateral-backed stablecoin, native to the Aave ecosystem, known as GHO.
Read more below and discuss your thoughts for the snapshot (coming soon)!https://t.co/P7tHl9LbBe
– Aave (@AaveAave) July 7, 2022
The GHO would be generated by the borrowers themselves in exchange for an over-collateralisation of their debt. That is, one comes to deposit cryptocurrencies as collateral, for a higher value than what one wishes to borrow. As with any debt, the GHO will involve paying interest. This interest will then be returned in full to the DAO’s treasury.
With this new stablecoin, Aave would also introduce the concept of a ‘Facilitator’. These would be actors such as decentralised finance protocols (DeFi) or even fully centralised entities that would be pre-approved by governance. The role would allow them to create GHOs according to their own mechanisms.
These mechanisms could be varied, such as securing the GHO through an algorithm or through bank reserves. The advantage of this diversity is that if one method fails, the whole edifice does not rest completely on it.
Each facilitator will also have a maximum GHO limit, which it can allow to be hit. By definition, Aave would therefore become the first GHO Facilitator with his over-collateralisation mechanism.
The GHO will be minted on the Ethereum blockchain (ETH) and can be sent to other networks through the V3 Bridge Portal of the protocol.
The Aave community at the heart of the project
It is important to stress that this project will only be implemented if the DAO agrees. The same goes for all future decisions on stablecoin. Depending on the governance votes, stkAAVE holders will be able to benefit from an interest reduction on the GHO loan. To obtain stkAAVE, Aave tokens must be stored in the treasury that secures the protocol: the Safety Module.
In the governance thread, a user asked how investors would be incentivised to maintain the dollar peg. Marc Zeller, head of developer relations at Aave, responded to this question:
“If the GHO is above its peg for some reason, it is profitable to hit GHOs with, for example, another stablecoin and short it [against other stablecoins]. If the GHO is below its peg, it is profitable to pay off the debt. This allows the total supply of the GHO to fall as the debt is repaid and the burned GHO helps to restore the peg. “
So if the price of GHO falls against the dollar, this mechanically reduces our debt. As a result, it becomes in our interest to pay it back to take advantage of the arbitrage. If on the contrary its price rises, the idea will be to exchange the GHO for other stablecoins and make a capital gain on this occasion.
As with any debt, an investor will have to pay attention to its collateralisation to avoid being liquidated. If this happens, the “under-collateralised” GHO will be burnt and the borrower will be penalised on his collateral. This principle therefore remains similar to the rest of the protocol.
While the idea of the GHO is interesting, it will have to face the opinions of the community for the time being. However, the Aave protocol has, so far, shown its resilience in times of crisis, so it has some legitimacy for a stablecoin project.
