On July 7, 2020, the Aave community released a proposal for comments, proposing to introduce GHO, an over-collateralized stablecoin pegged to the U.S. dollar on Ethereum.
According to the proposal, GHO will be minted by user-provided collateral, backed by multiple types of collateral from the Aave protocol, and managed by the Aave community. All interest generated by GHO will be transferred directly to the AaveDAO treasury. The GHO borrowing rate will be determined by AaveDAO and can be adjusted according to market conditions. The initial implementation adopts a discount strategy mechanism, stkAAVE holders can mint GHO at a certain discount, and the interest rate discount ranges from 0% to 100%. In addition, GHO introduces the concept of facilitators, which are approved by Aave Governance and have the right to generate and destroy GHO trustlessly.
Over the past few years, stablecoins have reached the center stage of the space and now have a market cap of around $150 billion. Stablecoins provide a fast, efficient, borderless and stable way to transfer value on the blockchain. Decentralized stablecoins add transparency and censorship resistance to this list of benefits – an integral part of web3.
The use of stablecoins will only continue to grow as crypto assets further integrate with the non-crypto-native user base. Decentralized stablecoins provide censorship-resistant fiat currencies on the blockchain.
GHO is a decentralized multi-collateralized stablecoin that fully supports and is native to the Aave protocol.
How does GHO work?
As a decentralized stablecoin on the Ethereum mainnet, GHO will be created by users (or borrowers). As with all borrowing on the Aave protocol, users must provide collateral (at a specific collateral ratio) in order to mint GHO. Accordingly, when a user repays a borrowed position (or is liquidated), the GHO protocol destroys that user’s GHO. All interest generated by GHO minters will be transferred directly to the AaveDAO treasury; instead of the standard reserve factor charged when users borrow other assets.
GHO introduces the concept of Facilitator. Facilitators (eg, protocols, entities, etc.) have the ability to generate and burn GHO tokens trustlessly. If the proposal is approved, then any facilitators must be approved by Aave Governance. Different facilitators will be able to apply different strategies to their GHO.
For each facilitator, governance must also approve what we call a bucket. A bucket represents the upper limit of the GHO that a particular facilitator can generate.
If enacted, the proposal would activate the first facilitator: the Aave protocol — specifically the AAVE marketplace on Ethereum. Governance will be able to determine and allocate that facilitator-specific bucket capacity to bootstrap GHO liquidity and the GHO marketplace.
Aave – GHO integration
Aave – The GHO integration uses the same mechanism as any other asset listed in the Aave protocol – specific GHO aTokens and GHO debt tokens will be deployed. After the proposal is approved, these tokens can be registered as GHO tokens on the Aave Ethereum marketplace.
The borrowing rate of GHO will be determined by AaveDAO, and the interest rate can be adjusted according to market conditions. This design preserves the flexibility of the Aave protocol’s borrowing rate model and makes it possible to implement any interest rate strategy that the Aave community sees fit in the future.
GHO’s discount model
Given the nature of the asset, this integration allows for innovative features that provide greater utility to governance and community participants. The initial implementation of GHO includes a discount strategy mechanism. The initial discount strategy allows security module participants (stkAAVE holders) to receive a discount on the GHO borrowing rate. In the first implementation, the strategy will set a certain amount of GHO at a discount for each offered stkAAVE, and the interest rate discount can vary from 0% (no discount) to 100% (full discount). These parameters are controlled by Aave governance.
Aave V3 and GHO, the perfect combination
Using isolation mode, users can generate GHO using a wide range of assets currently supported by the Aave protocol, while maintaining collateral and reducing risk. Supply and borrowing caps also help reduce risk.
E-Mode has been a stabilizing factor in market volatility due to its higher LTV. For example, in a market downturn, GHO demand increases as collateral contract prices rise, and users borrow more GHO using other non-volatile collateral assets to repay their positions. This will increase the amount of GHO entering the market and reduce demand. Thanks to E-Mode, stablecoin holders can also access GHO at a ratio close to 1:1 with zero slippage.
Portal will provide the ideal path for scaling GHO in a heterogeneous multi-chain world. Using portals, GHO can be distributed trustlessly on the network, while minting on Ethereum with higher security through simple messaging, eliminating the need for bridges, reducing overall risk. While the implementation of GHO proposed here does not include this burning/minting and messaging implementation, the next facilitator implemented and activated by the Aave community may allow for the redistribution of GHO tokens across various networks and automatically provide them to those with The market activity of this feature.
While the Ethereum marketplace is still running the V2 version, an upgrade to the V3 codebase is expected in the coming months.
Further governance utility
stkAAVE holders can mint GHO at a discounted rate, which means they will pay a lower rate for the GHO they borrow. Therefore, there is an incentive to help secure the Aave protocol when AAVE is staked (stkAAVE) into the protocol’s security module.
As people mint GHO through the Aave protocol and any other facilitator, we expect the Aave DAO to generate a lot of revenue in the form of fees. Most of the borrowing interest paid by the GHO is not earned by the LP, but is collected in full by the DAO. The increase in revenue can be used to innovate, support contributors in the ecosystem, support the treasury during a market downturn, or anything else the DAO decides.
Following the introduction of GHO, DAOs will also be able to determine the native rate of GHO, which will change over time through a governance process, which will be outlined in an upcoming proposal. This means that GHO’s monetary policy will be controlled in a decentralized manner by AAVE governance.
It is important that the Aave protocol remains as inclusive as possible and offers a variety of stablecoins that can be used for supply and lending. Expanding the protocol’s stablecoin pool to include GHO will add optionality and diversification to Aave users and help promote the protocol’s sovereignty. GHO will also have stable interest rates, adding certainty to borrowers.
GHO goes to market
GHO will provide a degree of security and decentralization for crypto-native users, while also using a growth strategy that emphasizes its use case for a growing mainstream audience. The strategy should focus on use cases such as payments, while leveraging the growth and potential of L2. Grants and hackathons determined by the Aave Grants DAO will be a key part of the strategy to build these mainstream use cases.
If approved by the community, OpenZeppelin and PeckShield will undergo various audits in the coming weeks.