Scaling AAVE: The Stablecoin GHO
AAVE is a crucial leader in DeFi protocol innovation.
AAVE is a protocol where users can deposit and borrow with their assets. Users can deposit their assets to earn yield, but they also have the option to borrow against their assets. These borrows can be overcollateralized (perpetually) or undercollateralized (one-block liquidity).
AAVE has been one of the stable DeFi protocols in the recent months of market instability. Now they are expanding their product market into stablecoins.
They have announced a proposal to create their native stablecoin: $GHO
What is GHO?
GHO is a decentralized stablecoin that is fully native to the AAVE protocol.
The stablecoin would be launched with the backing of the community and DAO. Users could mint GHO by borrowing it against their assets. It will run on the Ethereum Mainnet. This is a big jump for AAVE as there is bad stigma around stablecoins after the Terra collapse.
People want to be sure the stablecoin is properly backed by physical, non-algorithmic, dollars.
How GHO works
GHO will be created by users who borrow assets on the protocol.
To borrow on the protocol, users must supply collateral at a healthy ratio to be able to mint GHO. After a user repays this loan, their GHO will be burned. All the interest payments that accrue from minters of the stablecoin will go to the AaveDAO treasury.
This is different from most protocols when borrowing assets.
AAVE has introduced a different concept with GHO called Facilitators.
A facilitator can be a protocol, entity, dApp, or anything else. These facilitators can generate and burn GHO tokens. These facilitators would have to be approved by Aave Governance before receiving this ability.
These facilitators will need to apply with a well-thought out strategy for their GHO minting.
After their strategy has been submitted, governance will still need to approve a new feature called a “bucket”. These buckets will feature an upward limit bound for how much GHO a specific facilitator can generate.
The Aave protocol will be the first facilitator activated if the proposal goes through.
Future for GHO
As Aave has numerous opportunities to scale, so does GHO.
Currently the interests rates for GHO are voted on by the AaveDAO. This is subject to change based on market volatility. This should come as no surprise, considering Aave develops all it’s interests around this model.
This is decentralization and community-driven projects at it’s best.
Discounts on GHO
GHO also comes with discounts. Who doesn’t love discounts?
Aave wanted GHO to come with features enticing users to join. The first discount offer to come through focuses on Safety Module participants. This would be participants who hold stkAAVE. If you hold stkAAVE, you can receive a discount on your GHO borrow rate.
This discount could be 0% (full price) or it could be 100% (completely free). The DAO will determine this rate.
GHO revenue is dependent on how many people mint GHO through the protocol or any facilitators.
Usually when people mint a stablecoin, the Liquidity Providers receive most of the borrower paid interest. But GHO that is not the case. Aave DAO will collect 100% of the borrower paid interest on the loans.
They can use this revenue for scaling, security purposes, or whatever else the DAO wishes.
The community is still in the process of voting to continue with GHO.
If the process is approved they will begin deciding on a starting rates. These starting rates will be just that, as these can be changed anytime with the approval from the DAO.
The plan is to start the facilitators only on the main stream Aave platform, then move on to reading third party facilitator proposals.
Aave is paving the way in the DeFi space, and a stablecoin is their next way of staying at the top.