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Tempus Takes #9

AAVE enters MAKER’s turf

Just when the DeFi market was at its recent lows, Aave announced that it would be launching its own stablecoin, GHO.

DeFi protocol AAVE, last week, submitted a proposal to its DAO to create its native, collateral-backed stablecoin called GHO, which will be pegged to the US Dollar.

The proposal suggested that all lenders could mint GHO tokens against their supplied collateral on the platform which will be burned once they reclaim their collateral. This would make GHO backed by not a single asset or fiat currency but a basket of cryptocurrencies supported on Aave. These borrowers of the minted tokens will continue to earn interest on their underlying collateral.

Given that we already have popular stablecoins like USDC and USDT (combined market cap of $120 billion) along with DAI on the Ethereum network, the creation of a new stablecoin will make the market more competitive.

Additionally, all interest payments generated from GHO would go to the DAO.

So how is GHO generated?

Minting GHO

As mentioned above, a borrower on the Aave Protocol will be able to mint GHO when they supply collateral at a specific collateral ratio. On repayment (or liquidation) of the loan, the GHO protocol burns that user’s GHO. All the interest payments accrued by minters of GHO would be directly transferred to the AaveDAO treasury; rather than the standard reserve factor collected when users borrow other assets.

Source of GHO

If the proposal passes, then AAVE would become the first facilitator of GHO tokens, with the governance deciding the bucket or the upper limit of GHO that AAVE, especially the Ethereum market, will be able to generate.

Any protocol or entity can become a facilitator and generate GHO tokens. All they would need to do is write a proposal and get it approved on the forum.

Some possible facilitators include:

Potential facilitators of $GHO

Benefits of GHO

Talking about GHO, people might prefer minting GHO instead of borrowing other stablecoins because the interest payments collected go directly to the DAO. This increases the demand for AAVE tokens in case users predict more GHO tokens getting minted over time.

In addition, to increase awareness of GHO tokens, the borrow interest rates for GHO might be kept very low. This is because AaveDAO will be determining the borrow interest rates for GHO, keeping it stable but ready to be adapted depending on market conditions.

A discount model has also been proposed for all the stakers of AAVE. This discount varies anywhere between 0 to 100%. The following spreadsheet can help you visualise what the interest rate and the discount could look like.

Risks

The theory of the Impossible Trinity or the impossible trilemma suggests that it is not possible to achieve all three at the same time:

  • Free movement of capital
  • Independent monetary policy (includes money supply and interest rates)
  • Fixed exchange rate (Peg of GHO)

Expecting there will be a free movement of capital in the AAVE ecosystem, it is difficult to have a fixed interest rate and a pegged GHO at the same time according to the trilemma. If the GHO depegs, then the only way for it to get back to its peg would be by an increase in the borrowing rate as this would reduce more GHO getting minted and sold on the market.

UST tried to achieve all 3 but eventually failed!

Other Stablecoins In The Market

Alongside MakerDAO, some other protocols that have created their own stablecoin around the lending business are Liquity and Reflexer (borrow against your ETH).

Lastly, popular meme cryptocurrency SHIBA INU’s developers recently mentioned about the expansion plans of the ecosystem with a decentralized stablecoin.

Continue reading here:

Market Move

There have not been many changes in the interest rates in the past two weeks. We can however notice that the interest rates on the USDT and USDC pools have fallen significantly. This could possibly be due to the lack of borrowing activities on Yearn on the Fantom network. The interest rate for USDT on the Fantom network continues to be the highest i.e. 14.81% APR as compared to other pools on the protocols listed below.

The interest rate for the ETH pool on Tempus continues to offer a higher fixed APR as compared to Lido.

If you would like to fix your yields in this market of uncertainty then do check out our rates and deposit your tokens now!

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Disclaimer

The information provided in this article is provided for informational purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation to buy, sell, or otherwise transact in any investment, including any products or services, or an invitation, offer, or solicitation to engage in any investment activity. You alone are responsible for determining whether any investment, investment strategy, or related transaction is appropriate for you based on your personal investment objectives, financial circumstances, and risk tolerance. In addition, nothing in this article shall, or is intended to, constitute financial, legal, accounting, or tax advice. We recommend that you seek independent advice if you are in any doubt.

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