Aave’s teams have presented a new stablecoin project called the GHO to their governance. With its over-collateralization mechanism, it would then fit into the operation 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 decentralized autonomous organization (DAO) about creating a new stablecoin. This stablecoin, dubbed the GHO, would be pegged to the dollar and offers some interesting ideas that should be detailed.
The GHO would be generated by the borrowers themselves in exchange for an over-collateralization of their debt. That is, one comes to deposit cryptocurrencies as collateral, for a higher value than what they wish 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 decentralized finance protocols (DeFi) or even fully centralized 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 by an algorithm or by 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 limit of GHO, which it can allow to be hit. By definition, Aave would thus become the first GHO Facilitator with his over-collateralization mechanism.
The GHO will be minted on the Ethereum blockchain (ETH) and can be sent to other networks through the V3 protocol’s Bridge Portal.
The Aave community at the heart of the project
It is important to note that this project will only see the light of day if the DAO gives its approval. The same goes for all future decisions on stablecoin. Depending on governance votes, stkAAVE holders will be able to receive an interest reduction on the GHO loan. To get stkAAVE, you have to store Aave tokens in the treasury that secures the protocol: the Safety Module.
In the governance thread, a user asked how investors would be incentivized 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 pays to hit GHO with, say, 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 GHO to fall as the debt is repaid and the burned GHO helps restore the anchor.”
So if the price of GHO drops against the dollar, it mechanically lowers our debt. As a result, it becomes in our interest to pay it off 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 realize a capital gain by this occasion.
As with any debt, an investor will have to pay attention to its collateralization in order not to be liquidated. If this happens, the “under-collateralized” GHO will be burned and the borrower will be penalized on his collateral. This principle 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 moment. However, the Aave protocol has, so far, shown its resilience in times of crisis, so it has some legitimacy for a stablecoin project.