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Michaël van de Poppe - 14 July 2022

Aave proposes decentralized GHO stablecoin

The stablecoin industry remains massive at a total current mcap of $153 bln, although it is still dominated by centralized versions such as USDC and USDT. Even though they are deemed safe, many still seek for a decentralized and trustworthy alternative. In comes Aave, the DeFi lending giant, with their GHO proposal.

GHO proposal

Aave has proposed the introduction of a decentralized, collateral-backed stablecoin called GHO, which will be pegged to the dollar. Users of the Aave protocol will be able to mint GHO against their supplied collateral. In practice GHO will be backed by a basket of crypto assets that are chosen by the users. The user’s supplied collateral will continue to earn interest. 

Industry and opportunity

The decentralized stablecoin market is highly competitive with many projects trying to become the number one, yet it proves to be difficult to gain trust and widespread adoption.

The collapse of UST, which used to be the largest decentralized stablecoin, did not contribute to the prosperity of decentralized stablecoins, however it did leave a gap waiting to be filled by a competent competitor. 

GHO features

As mentioned before, GHO will be minted by users of the Aave protocol by depositing collateral at a certain ratio. Correspondingly, when a user repays a loan (or is liquidated), 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. It is important to note that the collateral supplied by the user continues to earn yield while deposited. 

One feature includes the possibility of receiving a discount on the GHO borrow rate for holders of stAave, to further the utility of staked Aave as well as incentivizing the use of GHO over other stablecoins by its community. 

Finally GHO will also introduce ‘Facilitators’, which are protocols/entities that have the ability to trustlessly generate and burn GHO tokens. Various facilitators will have different strategies to their generation of GHO. If enacted, this proposal will activate the first facilitator: the Aave Protocol - specifically the AAVE market on Ethereum. Governance will be able to determine and assign this facilitator a specific capacity to bootstrap the GHO liquidity and market.

Final thoughts

Seeing as Aave is well known in the DeFi space as the #1 lending solution it can easily leverage its brand to achieve mass adoption of the GHO stablecoin. In addition to that, implementing GHO as an asset on Aave would drive demand, while simultaneously adding value to the Aave ecosystem itself.

For now it is just an initial proposal but could end up to be a beneficial move from Aave, should this proposal get accepted. If properly implemented we see GHO having a solid future ahead.