$GHO or not, a study of AAVE new stablecoin

Published in
10 min readMar 8, 2023



(1) Aave overview, with a specific focus on new V3 version offers.

(2) the operational mechanism of the $GHO stablecoin, and its potential for future development.

(3) An analysis of the decentralized stablecoin market and an examination of $GHO’s competitors.

(4) An interpretation of the potential impact that the upcoming $GHO release may have on the stablecoin market and industry

1, Aave overview

Aave is a decentralized lending protocol on Ethereum. Users can deposit assets into the pool and borrow assets from it without needing a one-to-one match between lenders and borrowers. The platform supports a range of features, including basic deposit and collateral loans, flash loans (unsecured loans), and fixed/floating interest rate conversions. The platform participants include lenders (depositors), borrowers, and liquidators.

Recently Aave has upgraded to V3 and is now live on the Ethereum mainnet. so we will mainly introduce the new features and upgrades of the V3 version.

E-Mode(Efficiency Mode)

E-Mode is a solution developed by Aave to improve the efficiency of user assets. Under the E-Mode, the protocol categorizes assets into different groups based on their characteristics, such as stablecoins, ETH, and its collateral derivatives. Assets within the same group typically have similar underlying assets and price trends (for example, USDT, USDC, and DAI are all pegged to the US dollar). Aave believes that lending and borrowing between assets within the same group should be given higher borrowing power, such as a higher collateral factor (CF) or loan-to-value (LTV), as well as a lower liquidation penalty. Additionally, assets within the same group should use the same set of risk parameters.

This solution addresses the issue of low efficiency for some assets that belong to the same category.

Isolation Mode

In V2, once the Aave community agreed to include an asset as collateral, it meant that this asset could collateralize any other asset on the lending protocol. Therefore, every time a new collateral asset was added to Aave, it affected the overall security of the protocol. To address this issue, Aave introduced the Isolation Mode. Assets in this mode (Isolated Assets) can only collateralize a few stablecoins and have a maximum borrowing limit, ensuring that the debt pool has a limit.

This resolved the problem of long-tail assets serving as collateral, where the risk exposure could spread to the entire debt pool, further expanding the list of collateral assets.

Siloed Borrowing

This feature allows assets with potentially manipulable or illiquid price feeds, such as Uni V3 positions with low liquidity, to be listed on Aave as isolated assets, meaning if a user borrows the isolated asset, they cannot borrow any other assets. Currently, there are no assets marked as isolated in any V3 markets.

This helps mitigate the risks associated with such assets, so as to avoid affecting the overall solvency of the protocol.

Supply/Borrow Caps

Allowing for the adjustment of borrowing and supplying limits on each asset can reduce the risk of bankruptcy and limit how much of a specific asset can be provided to the Aave protocol. This helps to reduce exposure to a particular asset and mitigate attacks such as unlimited minting or manipulation of price oracles.


By collaborating with third-party cross-chain protocols, Portal allows users to transfer assets between various markets on Aave. When a user submits a request to transfer assets, the aToken in the original market will be burned and a new aToken will be minted on the target network. However, the underlying asset of the aToken will be transferred later through a third-party cross-chain bridge with some delay.

This solves the problem of cross-chain usage and interaction for users, primarily by reducing the barriers to using cross-chain interactions.

The ambitions of Aave

The ambition of Aave is to create a decentralized ecosystem and become the top DeFi protocol in crypto market. The release of GHO is crucial for this ecosystem as it serves as a financial bridge linking various dApps and protocols within it, making it an essential tool for achieving this goal.

The roadmap includes the release of V3 on the Ethereum mainnet, followed by the launch of GHO, and the activation of Portals.

2. The mechanism of $GHO

Aave’s lending mechanism allows you to deposit ETH and borrow USDC or deposit sETH and borrow ETH, but you can only borrow assets that have been deposited into the protocol by other users.

GHO, on the other hand, operates differently. Firstly, the contract sets the exchange rate 1:1 GHO/USD.

Secondly, the GHO borrowing and lending rates are determined by the Aave DAO. Aave Governance can periodically set the rates to help maintain supply and demand stability.

To mint GHO, users must provide collateral at a specific collateral ratio. Correspondingly, when users repay their borrowed position (or get liquidated), the GHO will send back to the Aave pool and burned. All interest generated from GHO minting will go directly to the Aave DAO treasury.


Facilitators act as the central bank of the ecosystem and can mint GHO in a trustless manner. Aave DAO allocates a bucket with a specified capacity to each facilitator, which represents the upper limit of GHO that a particular facilitator can mint, and this limit is defined by Aave governance.

Currently, Aave V3 Ethereum Pool and FlashMinter Facilitator are the first facilitators of GHO. Aave V3 has risk-reducing features, including Efficiency Mode (“eMode”), Isolation Mode, Isolated Borrowing and Upper Bounds, which will assist in guiding GHO supply in a decentralized and permissionless way.

The Aave protocol is a liquidity protocol available on Ethereum and various L1 and L2 networks. Aave allows users to supply a range of assets and borrow assets, while earning yields and participating in liquidations. The Aave protocol operates on an overcollateralized model, and as such, GHO will also be overcollateralized.

FlashMinting is particularly important for GHO as it will help facilitate arbitrage, provide instant liquidity, and enable the liquidation of users.

Since FlashMinting offers the same functionality as the current flash loan standard, its operation is very similar.

Multi-collateral: GHO is multi-collateral, meaning that users can mint GHO based on the entire set of collateral assets they provide in the Aave protocol. The collateral provided will earn interest, effectively reducing the interest paid by users for their borrowed position. Therefore, the collateral used to mint GHO will actively earn interest.

Trustlessness: GHO introduces the concept of facilitators. Facilitators (such as protocols or entities) can mint and burn GHO tokens without trust. Facilitators must be approved by Aave DAO and can apply different strategies to the GHO they generate.

$GHO’s benefits for Aave:

It will provide more utility for both Aave protocol users and the Aave DAO, strengthening Aave’s moat. This means that users can use decentralized, multi-collateral-backed stablecoins with competitive rates while earning interest on the collateral provided.

Furthermore, users who participate in the security module by staking AAVE tokens will benefit from discounted GHO borrowing rates. This incentivizes users to stake AAVE tokens to increase their GHO borrowing rate discount, reducing the circlation of AAVE in the market.

3. The Decentralized Stablecoins

GHO is a decentralized stablecoin in the Aave ecosystem, which is anchored to the underlying assets on the Aave protocol. As the Aave protocol operates on an over-collateralization model, GHO is currently also an over-collateralized stablecoin.

Currently, the main protocols in this field that offer stablecoins are:

  • $FRAX ($1 billion market cap)

Frax Protocol is a partially collateralized algorithmic stablecoin system. Collateral earns income for the protocol and FXS holders via AMOs (algorithmic market operations) utilized across DeFi protocols. The project is community-governed and emphasizes a highly autonomous algorithmic approach with no active management. On-chain oracles — Frax v1 utilizes Uniswap (time-weighted average price of USDT and USDC stablecoins) and Chainlink (USD price) oracles for price feeds.

Frax Finance offers a variety of products built around FRAX itself, including Fraxswap, Fraxlend, ETH liquid staking, and FPI (a stablecoin tied to the US CPI). The protocol further ensures deep liquidity for FRAX by owning a majority of CVX and partnering with Curve Finance.

  • $LUSD ($228 million market cap)

LUSD is fully backed by ETH alone, making it one of the most decentralized stablecoins in DeFi. Users deposit ETH (at a minimum collateral ratio of 110%) and borrow LUSD against it interest-free as collateral.

  • $sUSD ($53 million market cap)

Users can mint sUSD (synthetic USD) by collateralizing SNX and borrowing against it. As a result, sUSD is fully overcollateralized by SNX. However, with Synthetix V3 coming in Q1/Q2, there will be immediate categorization of the debt pool which will allow for more collateral to synthesize sUSD.

  • $crvUSD

Curve is set to release crvUSD, which will utilize borrowing and liquidation AMM algorithms to continuously and smoothly settle debt positions. This improves capital efficiency and the overall borrowing experience. All collateral available to borrow crvUSD will be paired in a Curve V2-style liquidity pool. According to its whitepaper, ETH will be the only collateral available at the launch of the stablecoin.

4. The landscape of stablecoins

The current decentralized stablecoin market is still in its early stages, with a much smaller market capitalization compared to centralized stablecoins, indicating significant growth potential in the future.

In crypto space, unlike in the traditional finance where governments can monopolize the power to mint coins, the supply of decentralized stablecoins can be provided through multiple decentralized institutions or protocols that compete with each other. These stablecoins are anchored to native crypto assets, and the assets they are pegged to in the crypto space can be adjusted based on the market’s demand for a more stable anchor. This mechanism can be considered as a native crypto asset standard, as opposed to the gold standard.

Users can freely swap stablecoins issued by different protocols, and thus, each protocol must compete to control the value of its stablecoin. If a protocol fails to meet the expectations of users, it may lose its market share, prompting it to maintain its stablecoin’s value stability and competitiveness.

The trust of market users in a protocol is the foundation on which all decentralized stablecoin protocols depend on their survival. Therefore, competition among decentralized stablecoins will revolve around maintaining stablecoin value stability, and whoever gains more trust from market users will have more market share. However, competition and cooperation will be the theme for each stablecoin protocol in the future development.

5. Summary

According to Aave’s roadmap, after the launch of Aave V3 on the Ethereum mainnet, the next tasks are to release the GHO stablecoin and later Portal V1.

The narrative behind the release of GHO

The release of GHO is expected to bring a new narrative to the DeFi market, as the current market has a strong demand for decentralized stablecoins due to concerns about government regulation of fiat-backed stablecoins and the need for decentralization to resist censorship.

This will increase the demand for decentralized stablecoins, and Aave’s issuance of a stablecoin based on its large loan volume could bring about a new narrative of borrowing + DeFi.

GHO is a stablecoin that is minted on demand and has no limit of max supply. The interest income generated by GHO will directly enter the Aave treasury.

Aave plans to expand the application scenarios of GHO to increase the market demand for the stablecoin. For example, GHO may be used as a payment token within the Lens community. For example, as a payment token within the Lens community. The issuance of GHO deepens Aave’s moat and provides expansion tools for building a larger ecosystem in the future.

The narrative of Portal V1

After the release of Portal, ross-chain lending will be possible. For instance, if you have some LINK on Ethereum and want to immediately access USDC on Polygon, you can activate Portal through a third-party dApp. Your debt will be on Polygon, while your collateral remains on Ethereum. This is Portal’s long-term vision. Additionally, once Portal is activated, cross-chain protocols certified by Aave will benefit from Aave’s cross-chain demand spillover. The most probable of these is Chainlink’s upcoming CCIP cross-chain interoperability protocol, as well as Layer Zero.

Investment suggestions and risks

Aave’s current market cap is around $1 billion, and the increase in its valuation is limited by the development of the DeFi market. Although it is currently the protocol with the highest TVL in the lending race, the competition in the lending race is fierce, and there is always the possibility of a new leader emerging in each cycle. Therefore, the protocol needs to continuously enhance its market competitiveness and deepen its moat.

Aave may launch its stablecoin GHO in Q2 of this year, which could drive a narrative of borrowing and stablecoins, resulting in a potential increase in valuation in the short term. Furthermore, the upcoming Portal release may also contribute to a positive price trend and higher expectations for the future.


GHO documentation, https://docs.gho.xyz/

Aave V3 development documentation, https://docs.aave.com/developers/getting-started/readme

Conversation with AAVE executives: protocol ambitions, StarkNet expansion, and the future of DeFi.

By Archimonde & Lizzie Lu

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