This article mainly introduces GHO, Aave’s native decentralized USD stablecoin, and hopes to get feedback from the community.
GHO has the following important characteristics:
- Over-collateralized by assets that continue to provide yield;
- Backed by various types of collateral in the Aave protocol;
- Governed by the Aave community.
The Aave community publishes an Request for Comment (ARC) proposal to the DAO to introduce GHO, a natively decentralized, collateral-backed stablecoin pegged to the U.S. dollar.
With the support of the community, the stablecoin GHO can be first launched on the Aave protocol, which will allow users to mint GHO based on the collateral they provide. GHO will be backed by a variety of cryptoassets of the user’s own choice, while borrowers will continue to earn interest on the underlying collateral, although all GHO-related decisions will be made by Aave Governance.
If approved, the introduction of GHO would make stablecoin lending on the Aave protocol more competitive, giving stablecoin users more options. The interest generated by borrowing through GHO will all be handed over to DAO, and Aave DAO can therefore obtain additional income.
Over the past few years, stablecoins have become one of the hottest spots in the cryptocurrency space, with a current market cap of around $150 billion. Stablecoins provide a fast, efficient, borderless, and stable way to transfer value on the blockchain. In addition to the above advantages, decentralized stablecoins can also increase transparency and resistance to censorship, which is an important part of Web3. The adoption of stablecoins will continue to increase as crypto-assets further integrate with non-crypto-native users. Seeing this trend, the lending protocol Aave plans to launch the native decentralized stablecoin GHO, which will be backed by a variety of collaterals.
How GHO works
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 rate) in order to mint GHO. Accordingly, when a user repays the loan (or is liquidated), the GHO protocol will destroy that user’s GHO. All interest generated by GHO minters will be transferred directly to the AaveDAO treasury instead of paying a standard reserve factor like when users borrow other assets. Note: The reserve factor allocates a portion of the protocol revenue to the ecosystem reserve, which is used to maintain the DAO and reward contributors.
GHO introduces the concept of a “facilitator”. Facilitators (such as a protocol or an entity, etc.) can generate and destroy GHO tokens without trust. If the proposal is approved, any facilitators must be approved by Aave Governance. Different facilitators will be able to apply different strategies to generate or destroy GHO.
For each facilitator, Aave Governance must also approve so-called “buckets.” Buckets represent the upper limit of GHO that a particular facilitator can generate.
Once live, the proposal will activate the first facilitator, the Aave protocol, specifically the AAVE market on Ethereum. Protocol governance will be able to determine and assign a specific bucket capacity to this facilitator to bootstrap GHO liquidity and the GHO market.
Aave <> GHO
The Aave – GHO integration uses the same mechanism as other assets supported in the Aave protocol, namely the deployment of specific GHO aTokens and GHO debt tokens. After the proposal is approved, these tokens can be registered as GHO tokens on the Aave Ethereum marketplace.
GHO’s borrowing rate will be determined by AaveDAO, which remains stable but may be adjusted based on market conditions. This design preserves the flexibility of the Aave Protocol’s borrowing rate model, and can 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 supports innovation and provides greater utility for governance and community participants. The initial deployment of GHO includes a discount policy mechanism. The original discount strategy allowed security module participants (stkAAVE holders) to receive a discount on the GHO borrowing rate. In the first deployment, the strategy will set a certain amount of GHO discounts for each offered stkAAVE, as well as interest rate discounts ranging from 0% (no discount) to 100% (full discount). These parameters are controlled by Aave governance.
Aave V3 and GHO – a match made in heaven
Through the isolation mode, users can generate GHO using a variety of assets currently supported by the Aave protocol, while reducing risk through collateral security. Supply and borrowing caps also help reduce risk.
- Mode acts as a stabilizing factor in market volatility due to its high LTV. For example, in the event of a market downturn, as the price of collateral contracts increases and GHO demand increases, users will use other non-volatile collateral assets to borrow more GHO to repay their positions. This will increase the amount of GHO flowing into the market and reduce demand. At the same time, E-Mode can also enable stablecoin holders to exchange GHO at a ratio of nearly 1:1 with zero slippage.
Portal will provide the ideal path to expand GHO in a multi-chain world. Using portals, GHOs can be distributed across the network without trust, while being created on Ethereum with greater security. The entire process requires only simple messaging without the use of bridges, reducing overall risk. While the GHO deployment proposed here does not include such burning/minting and messaging, the next facilitator deployed and activated by the Aave community may allow for the redistribution of GHO tokens across various networks and automatically supply them to functions being activated market.
While the Ethereum marketplace is currently still running the V2 version, an upgrade to the V3 codebase is expected in the coming months.
Further uses of governance
stkAAVE holders can mint GHO at a discounted price, which means they will borrow GHO at a lower interest rate. Therefore, when AAVE is staked (stkAAVE) in the protocol’s security module, they have an incentive to protect the Aave protocol.
When people create GHOs through the Aave protocol and any other facilitator, the Aave DAO will be able to earn substantial income in the form of fees. Most of the borrowing interest paid by GHO is not to LPs, these interest will all be obtained by DAO. The increased revenue can be used for innovation, supporting contributors in the ecosystem, funding during market downturns, or for other DAO decision-making purposes.
With the introduction of GHO, the DAO will also be able to determine the GHO’s native interest rate and adjust it over time through a governance process, which will be outlined in the next proposal. This means that GHO’s monetary policy will be controlled in a decentralized manner by the AAVE governance.
Importantly, the Aave protocol should be as inclusive as possible, supporting the offering and lending of multiple stablecoins. Expanding the protocol’s stablecoin pool, including GHO, will increase the selectivity and diversity of Aave’s users and help promote the protocol’s sovereignty. GHO will also introduce a stable interest rate, adding certainty to borrowers.
Market Application of GHO
It is expected that GHO can be applied not only to the native encryption community, but also to more scenarios. Given the low transaction fees and growing trend of Layer2, GHO is expected to be widely used on Layer2. Additionally, the development and integration of GHO payment methods can be encouraged in the form of cash rewards and hackathons for both crypto-native and more mainstream users.
GHO will provide a degree of security and decentralization for native crypto users, while using a growth strategy to develop use cases for an increasingly mainstream audience. This strategy should focus on use cases such as payments, while leveraging the growth and potential of L2. Cash prizes and hackathons determined by the Aave Grants DAO will be key enablers for building these mainstream use cases.
Snapshots will follow this ARC to determine if the community wants to move forward with GHO. If the community votes to deploy a protocol that allows users to mint GHO, an initial rate and a discount rate are proposed, both of which can be adjusted over time through governance such as Gauntlet and other contributors who may play a key role .
Cross-chain deployment of GHO on the Aave protocol requires further governance approval. In the future, the community will also decide whether to offer retroactive bonuses to those who have contributed to the creation of GHO, and the amount of funds provided.
If approved by the community, OpenZeppelin and PeckShield will undergo various audits in the coming weeks.
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