Thank you to Aave Labs for bringing forward the Aave Institutional ARFC. We support the proposal and appreciate the care taken to address the operational and peg considerations directly.
The facility would add a genuinely new category of backing to GHO. Its loans are secured by BTC and ETH held at qualified custodians, with conservative loan-to-value ranges, active margining, no rehypothecation, and custodian-handled collateral enforcement. That gives GHO access to institutional borrowers and externally generated yield with minimal smart contract risk and strong demand for the same collateral base. It is a channel with room to grow if the initial facilities perform as expected.
The first loans are funded by borrowing against DAO balance-sheet assets, without drawing on the Stability Module. This is necessary because the Stability Module’s redemption inventory is not sufficient to carry a loan of this size. A loan of this duration asks more of GHO’s backing than it can provide unless the exposure is sized and managed against the liquidity available to support it. This applies equally to every other component of GHO’s backing, each of which has its own duration and must be sized against the liquidity the rest of the book can provide. TokenLogic is developing a holistic approach to managing GHO’s backing, including duration risk, which we will set out in a forthcoming post.
The Aave Finance Committee, led by TokenLogic, will manage the balance-sheet position, while TokenLogic monitors its health, including the limit on AAVE within the pledged collateral. We will provide additional information on the initial collateral selection on a Funding Update closer to the origination of the loan.
The economics are attractive. At 25M of lending, the ARFC’s indicative borrower pricing of 6.0% to 8.0% would generate roughly $0.6M to $1.1M more gross annual revenue than the roughly 3.5% currently earned by supplying USDT on Aave Core. Custody, operating, execution, and credit costs still need to be paid from that amount. The funding cost differs by route. The GHO route carries the rate paid to sGHO depositors, whose savings sit behind the GHO minted and lent. The balance-sheet route carries the variable rate the DAO pays to borrow USDC or USDT on Aave V3, expected at 4.0% to 5.0%. Each route earns the loan rate less its funding cost. The balance-sheet route has no effect on the peg.
The peg deserves particular care as the facility moves toward implementation. GHO’s principal redemption anchor is the Stability Module inventory that holders can exchange for dollar stablecoins at near-par, subject to the redemption fee. That inventory supports the arbitrage that keeps the price stable. Since GHO can move across its deployment through CCIP, the relevant resource is the aggregate redemption inventory. New GHO entering circulation can increase the claim on that resource, while conversions through the Stability Module reduce what remains available to defend the peg.
GHO’s peg has been weak in recent weeks. The discount widened through the first half of September before recovering, showing how quickly strong borrow-side demand for GHO can pressure the peg. This demand is positive for GHO, but it requires careful liquidity management.
This facility adds a distinct form of pressure because its collateral sits outside the protocol’s incentive levers. Once GHO is minted and converted into the lending currency, any Stability Module execution draws on the same inventory that guarantees redemptions. The custodian monitors the collateral, issues margin calls and liquidates automatically through its regulated trading desk, which keeps each loan over-collateralized and the GHO behind it safe. Its rate is fixed by contract, so it has to be actively managed, and it can stay stale for up to the contractual notice period, typically 90 days. We agree with the ARFC that the effect on the peg is the material question for this proposal.
Matched sGHO inflows are the right first route for funding. They source the lending currency without consuming Stability Module inventory, so the proposed order of execution is strong. However, they alone are not a complete answer. The matched inflow must respect an equal or longer duration than the borrower draws in order to solve, and not only delay, the liquidity stress.
We strongly support agreeing on a maximum acceptable peg deviation in advance. With the peg only recently recovered and redemption inventory modest relative to the size of the facility, there is limited headroom. TokenLogic will approach each conversion from that starting point when agreeing the route, timing, and size with Aave Labs.
The ARFC also assigns the deployment of the facilitator contract to TokenLogic, and we are supportive of conducting that work.
TokenLogic has spent the past months building an allocation framework for GHO backing, which this allocation asset will be part of. Its purpose is to support safe allocation rules across the assets and channels that back GHO. Viewed against that work, we are comfortable with the ARFC’s initial parameters, including the initial bucket capacity of 25M GHO, and with the GHO Stewards managing expansion of the GHO Borrow Cap within their existing mandate. Any later increase should be assessed further against the peg and the backing available at the time.
We will publish a broader post in the following weeks that develops the next steps for GHO and its considerations. In the meantime, we support progressing this ARFC and look forward to working with Aave Labs and LlamaRisk on its implementation.