[ARFC] Deploy aUSDC GSM on Ethereum

[karpatkey_TokenLogic]

---

title: [ARFC] Launch aUSDC GSM on Ethereum
author: @karpatkey_TokenLogic
created: 2024-10-18

---

Summary

This publication proposes deploying a new aUSDC GHO Stability Module (GSM) and migrating USDC from the existing GSM on Ethereum.

Motivation

After a successful TEMP CHECK, the existing USDC GSM is to be replaced with an aUSDC GSM. Migrating to an aUSDC GSM is expected to improve the overall investment prospects of GHO by introducing a new aToken revenue stream for the DAO.

With 8M of USDC from the existing GSM deposited into Aave v3, it would represent less than 10% of the available liquidity in the USDC Reserve. With sufficient growth upside remaining for the aUSDC GSM on Ethereum, the DAO can increase the amount of USDC backing GHO. In addition, separate instances of non USDC aToken GSMs can be deployed to diversify GHO’s collateral across other reserves on Aave.

The existing GSM implementation has USDC exposure capacity set at 8M units. When combined with another 8M of USDT, this represents over 10% of GHO’s supply not generating any revenue for the DAO. The GHO Stewards elected to not pursue increasing the Exposure Capacity of USDC and USDT to encourage new GHO entering circulating supply via the main market. As a result, GHO traded above peg and it tooks several weeks for newly borrowed GHO to enter circulating supply.

With the introduction of yield generating assets within the GSM, the GHO Stewards are much more likely to increase the Bucket Capacity and Exposure Capacity of the aToken GSMs to support newly minted GHO entering circulating supply. This is expected to enable GHO to grow more freely whilst partially mitigating GHO trading above/bellow peg. In addition, the more capital is accrued there, the better safeguarded from an extended de-peg GHO is. GSM protects deviations on both sides

Specification

The below details the configuration of the aUSDC GSM.

Parameter	Value
Bucket Capacity (GHO)	16.00M
Exposure Capacity (USDC)	8.00M
Price Strategy	1:1
Freeze Lower Bound	$0.990
Freeze Upper Bound	$1.010
Unfreeze Lower Bound	$0.995
Unfreeze Upper Bound	$1.005
Mint GHO Fee	0.00%
Burn GHO Fee	0.20%

The Exposure Capacity is to be increased by the GHO Stewards upon successful upgrade/migration.

The previous version of the USDC GSM is to be disabled and all liquidity migrated to the new version.

Disclosure

TokenLogic and karpatkey receive no payment for this proposal.

Next Steps

1. Gather feedback from the community.
2. If consensus is reached on this [ARFC], escalate this proposal to the Snapshot stage.
3. If Snapshot outcome is YAE, escalate this proposal to the AIP stage.

Copyright

Copyright and related rights waived via CC0.

[LlamaRisk]

Summary

Different GSM modules help reinforce GHO’s stability, and the opportunity to improve Aave’s capital efficiency makes it even more of a net positive for the DAO. Llamarisk supports this ARFC and believes that this change will not impact GHO’s risk profile.

GHO was recently trading at an upward peg in comparison with other stablecoins, which resulted in the GSM being fully replenished with USDC. Further factors indicate that USDC GSM shall retain the high exposure to USDC for the time being.

GSM Analysis

GSM Performance

At the time of writing, both USDC and USDT GSMs have exhausted the exposure caps of 8M tokens each. The USDC GSM has been at the cap limit since the 15th of August, 2024 (~60 days).

Source: Tokenlogic GHO Analytics, October 7th, 2024

USDC GSM has been performing as expected for a price stability mechanism. In July, when the GHO price dropped 0.2% (the buy fee) below the peg, it became profitable for arbitrageurs (or swap aggregators) to redeem GHO for USDC, lowering GHO supply and consequently reducing secondary market sell pressure. The correlation between GHO price and GSM fill rate can be observed clearly:

Source: Dune Analytics, October 18th, 2024

One more factor affecting the secondary market price of GHO amount of USDC and, in turn, GSM fill rates is GHO borrow rate. As GHO was trading at a premium (of up to 1%), the borrow rate underwent multiple reductions, pushing the GHO price back to normal levels. As the DAO continues to use balanced push-and-pull measures, the GHO pricing is expected to stay above the 0.2% arbitrage threshold.

Source: Tokenlogic GHO Analytics, October 7th, 2024

Projected Opportunities

As @tokenlogic_karpatkey has summarized it, the current opportunity cost for USDC that could be instead supplied as a collateral on Aave Mainnet market currently is 81.9k USDC.

Source: Tokenlogic GHO Analytics, October 7th, 2024

The average 6-month supply APR for USDC on Aave Mainnet markets is 5.18% with the APR trending slightly below average for the past 2 months.

Source: Aave, October 7th, 2024

If an additional 8M USDC are supplied to Aave’s lending pool, this portion would represent 0.5% of total current USDC supply on Aave and therefore, at current borrow levels, the USDC borrow APY would only be lowered by 0.03%. Therefore, it can be assumed that USDC borrow/supply utility would be impacted insignificantly.

The following graph summarizes the projected yearly gains for different GSM fill levels and USDC APR levels:

Recommendation

We recommend new aUSDC GSM parameters to be identical to the current USDC GSM parameters.

Parameter	Value
Exposure Cap	8,000,000 USDC
Buy Fee (GHO → USDC)	0.2%
Sell Fee (USDC → GHO)	0%
Price Strategy	Fixed 1:1 Ratio
Underlying Price Range for Swap Freeze	[0.99 - 1.01]
Underlying Price Range for Swap Unfreeze	[0.995 - 1.005]
Bucket Capacity	16,000,000 GHO

[ChaosLabs]

Summary

Chaos Labs fully endorses this proposal to migrate USDC from the existing GHO Stability Module on Ethereum into a newly designed aUSDC GSM. By moving to an aToken-based structure, the DAO can optimize yield generation while maintaining the safeguard of GHO’s peg during periods of market volatility.

Motivation

Since its inception, the GHO GSM has proven to be a crucial tool during times of price fluctuation. As illustrated in the accompanying data, the GSM effectively captures up to 90% of the daily mint/burn activity when the price depegs by more than 0.2% as it becomes profitable to do so, accounting for the mint/burn fee.

However, the module’s supply cap has been a significant limiting factor. Once the cap was reached during a depeg, the GSM was unable to provide further stabilization. Given that the GSM is the first choice for new depositors, it’s essential to manage the caps effectively to prevent the module from becoming an oversized portion of the circulating GHO supply.

As this proposal has pointed out, the current USDC GSM incurs significant opportunity costs, as almost 10% of GHO’s total supply sits idle, not generating yield. Our own calculations, using an average USDC APR of 4.15% over the past 30 days, show a missed revenue opportunity of approximately $338K from USDC alone on an annualized basis. Although our figures differ slightly from those reported by TokenLogic, we agree that this opportunity cost is significant and must be addressed.

Source: TokenLogic reported opportunity cost

While the USDC allocated within the GSM would not currently impact the USDC interest rate in a meaningful way if deposited into aUSDC, after the recent adjustment to Slope 1 in September, we anticipate sustained demand for USDC. Market data shows that demand frequently surpasses the 90% utilization, which suggests that additional USDC supply generated through this GSM transition will be absorbed quickly by borrowers, further maximizing yield opportunities.

Moreover, the USDC vault remains large, with over $138M in available liquidity, making it more than capable of handling the inflows and outflows from GSM-related activity. In the highly unlikely event that USDC market utilization reaches 100%, resulting in the GSM being unable to provide liquidity, this would not introduce additional risk. Arbitrageurs would simply refrain from using the GSM until utilization levels normalize. While this represents the most extreme scenario, we do not anticipate it occurring. Chaos Labs will closely monitor the USDC market to ensure that both the GSM and the broader market remain healthy and liquid, especially during times of heightened volatility.

Recommendations

We recommend aUSDC GSM parameters identical to the ones proposed:

Parameter	Value
Bucket Capacity (GHO)	16,000,000
Exposure Capacity (USDC)	8,000,000
Price Strategy	1:1
Freeze Lower Bound	$0.990
Freeze Upper Bound	$1.010
Unfreeze Lower Bound	$0.995
Unfreeze Upper Bound	$1.005
Mint GHO Fee	0.00%
Burn GHO Fee	0.20%

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this recommendation.

Copyright

Copyright and related rights waived via CC0