What is GHO? Aave’s New Stablecoin
GHO (pronounced “go”) is a decentralized overcollateralized stablecoin that is initially only minted from assets supplied to the Aave Protocol. GHO’s value is programmatically aligned to the U.S. Dollar, which will be maintained through market efficiency.¹
As a decentralized stablecoin on the Ethereum mainnet (contract address), GHO is minted by users. As with all borrowing on the Aave Protocol, a user must supply collateral (at a specific collateral ratio) to be able to mint GHO. Correspondingly, when a user repays a borrow position (or is liquidated), the GHO is returned to the Aave pool and burned. All the interest payments accrued by minters of GHO will go directly to the Aave DAO treasury, in contrast to the standard reserve factor collected when users borrow other assets, and the principal is burned.¹
As of this writing (17 Jul 2023), GHO’s supply is 2.61M² tokens and is only available on Ethereum mainnet. If you want to see current GHO supply, go to xmc2’s Dune Dashboard.
How is GHO Pegged to USD?
GHO maintains its peg through overcollateralization and market efficiency. Unlike centralized stablecoins, which are always backed by $1 for every minted stablecoin, GHO uses collateralization as the source of its value. To keep the peg, Aave will always mint GHO on Aave at $1. Outside of Aave, GHO can fluctuate based on market conditions. When GHO loses peg, arbitrage is the main way GHO will return to peg.³
Wait a minute, market efficiencies? Arbitragers? Sounds like an algorithmic-stablecoin doesn’t it? Not quite. Algorithmic-stablecoins are undercollateralized assets that don’t have independent assets in reserves to back their value. One catastrophic example was UST and its linkage to Terra Luna. When UST lost its peg in May 2022, Luna was minted to counteract the depegging and never recovered. The so-called “death spiral” became a reality and Luna went from $90 to $.01 in a matter of days.
GHO is nothing like UST or the other algos. Its over-collateralized and use of real reserves is the same as if you put bitcoin into Aave and borrowed USDC. Any user that hits the liquidation threshold, is immediately liquidated.
Can Anything go Wrong?
Yes. There are one ways that Aave can get into trouble. During the Terra Luna crash, a few protocols were allowing Luna to be used as collateral and borrowed. When Luna went below $.10, ChainLink oracles stopped updating the price for these protocols. Attackers took advantage of this difference in price by buying Luna on the open market at $.01 and deposited the protocols at $.10. They then borrowed all the assets they could, and immediately made a 10x profit. Blizz Finance on Avax was one of these protocols and subsequently shutdown due to loss of all funds in the platform (RIP my Bitcoin).
This scenario is extremely unlikely with Aave but one to consider.
How Do I Get GHO?
If you are interested in getting some GHO, you will first need to deposit collateral on Aave on Ethereum mainnet. You can then click on the Gho Token and you will be able to click on the borrow button on the right side.
Congrats! You now have GHO. You can stake your GHO in liquidity pools if you want to earn yield on your GHO. There is already a Curve Factory Pool with $404,000 in TVL.
Conclusion
Aave’s entrance onto the stablecoin market brings a truly decentralized stablecoin based on DeFi assets. Since GHO is fully on chain, anyone can verify the reserves at any time. This has been the main concern regarding centralized stablecoins where transparency is at the discretion of the companies. My prediction is that GHO will gain in the stablecoin ratio as DeFi continues to gain traction.
-Just Another Crypto Analyst
P.S. Thank you xmc2 for building the GHO dashboards on Dune.
P.P.S Doing this for fun but if you want to leave a tip: 0xa33aE4207466cD866D13fA587067B1F824C06d4A
