Summary
Aave will produce a gated credit line with GNO and wstETH as collateral that can initially be used to mint up to 5M GHO. Only Aave DAO and Gnosis DAO will be able to access this facility. The borrow rate will be set at the sUSDS savings rate (currently 6%). Caps will be raised as needed by risk providers, and an Aave entity will manage liquidations.
LlamaRisk endorses both this proposal and the parameters @ChaosLabs has put forward. We also commend the @ACI, @Karpatkey and GnosisDAO for pioneering the first large-scale DAO-to-DAO credit line. Some risks remain (such as borrow rate fluctuation and usage), but these can be mitigated.
Potential risks
Counterparty risk
GnosisDAO is a reputable counterparty with a long history of high quality contributions to DeFi and Crypto. Aave has a long history of collaboration with the DAO, and generally speaking, there are few DAOs that are less suitable for such a credit line. This makes counterparty risk low in this instance. This is an excellent first partner with whom to launch this initiative. Counterparty risk is, therefore, low.
Borrow rate fluctuation risk
Source: Stability Scope Parameter Changes, Sky Forum, October 2nd, 2024
As Sky continues to establish further and incentivize users to migrate away from DAI, the sUSDS supply rate may continue to fluctuate - see above. As this credit line plans to match that, this interest rate will likely deviate further. Parameter changes must be regularly updated to ensure interest rate parity, introducing a small amount of risk.
Incremental Credit Limit Liquidity Risk
Should this credit line see significant usage, the credit line will be increased incrementally. While this is evidence of a successful market, careful attention should be paid to the collateral used. GNO is an asset with limited liquidity, so if 10M GHO is being borrowed against primarily GNO, Aave’s liquidation agent may find itself holding an asset it will find difficulty in exchanging. This risk should be of limited concern on the condition that a significant amount of collateral is wstETH borrowed against at the same time as GNO. Chaos Labs’ parameter recommendation - with which we are aligned - will enforce this. A 1.65 health score mitigates this particular risk.
GHO peg stability risk
GHO is still a growing asset. Despite reaching $150M recently with no signs of slowing down, if GnosisDAO plans on swapping every GHO minted, then there will be significant sell pressure on GHO, which may induce consequences. This will become increasingly important if the credit line increases and GHO continues to be sold. GHO liquidity remains robust thanks to the considerable efforts of TokenLogic and Karpatkey, and it would be preferable that this remains the case. This risk could be mitigated by outlining how GnosisDAO plans to use the GHO.
Conclusion
While the above risks are identified, mitigations are possible. The significant revenue and additional GHO this proposal will produce present an opportunity that outweighs the risks.