[ARFC] Deploy stataUSDC GSM on Base

[TokenLogic]

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title: [ARFC] Deploy stataUSDC GSM on Base
author: @TokenLogic
created: 2025-02-05

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Summary

This publication proposes deploying a stataUSDC GHO Stability Module (GSM) on Base supported by a facilitator on Ethereum.

Motivation

This proposal recommends deploying a GSM on Base to enhance GHO’s price stability during market fluctuations and facilitate new circulating supply issuance.

Introducing a GSM shortly after launch will help mitigate volatility caused by thin secondary market liquidity while providing users with an alternative way to acquire GHO. Given the various yield opportunities for GHO on Base, limited supply could push GHO above $1.00, as seen during its launch on Arbitrum.

Deploying a stataUSDC GSM would allow users to exchange USDC for GHO, with USDC deposited into Aave Protocol. Each unit of GHO transferred to a user increases the circulating supply, helping to balance market demand.

The chart below compares USDC deposit rates across Aave v3 instances on Ethereum Core, Arbitrum, and Base. Notably, the USDC deposit APY on Base closely aligns with that of Ethereum Core.

All GHO issued by the GSM is backed 1:1, ensuring GHO is always over-collateralised.

The Aave DAO will receive the following revenue streams from the aUSDC GSM:

• Swap Fees;
• Surplus aToken Yield; and,
• Any incentives distributed to USDC deposit on Aave v3.

The aToken yield acts as a proxy for the GHO Borrow Rate. GHO issued by the GSM generates aUSDC yield and GHO Borrowed on Aave v3 generates interest.

The aUSDC revenue is available every block as it accrues, which is unlike the interest accruing from GHO debt that is only received when a user’s loan is repaid.

Specification

This instance of the GSM enables users to exchange GHO and USDC at a 1:1 fixed-ratio, with surplus USDC used to mint stataUSDC tokens to earn yield.

The GSM can mint and burn stataUSDC in exchange for USDC based upon user demand.

The ARFC shall incorporate feedback from the community and service providers and detail the final configuration setup before the Snapshot is submitted.

Ethereum <> Base Facilitator

A facilitator will be deployed on Ethereum specifically to support Base. GHO is considered to have entered circulating supply when users exchange USDC for GHO via the GSM on Base.

The initial configuration for the Base GhoDirectMinter facilitator as shown below:

Parameter	Value
Mint Cap	10M Units

This is to be implemented by setting the newFacilitatorBucketCapacity to to 10M.

Reference: GhoDirectMinter

CCIP Configuration

With the launch of GHO on Base now at AIP voting stage, the CCIP Bucket Capacity will be increased by 10M units, matching the GHO supplied to the GSM.

Paramater	Current	Proposed
GHO_Bucket_Capacity	20M	30M

This publication does not include any changes the CCIP Rate Limit Capacity (300,000) and Refill Rate (60/sec).

Reference: GHO Deployment

GSM Configuration

The below provides the initial configuration of the stataUSDC GSM to be deployed on Base.

Parameter	Value
GHO Bucket Cap	10.00M
USDC Exposure Cap	10.00M
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	0.00%

With GHO being minted on Ethereum and being transferred to the GSM, the Mint() function on the Ethereum instance of stataGSM is to be replaced by Transfer() functionality. Pre-minted GHO held by the stataGSM on Base is to be transferred when USDC is received.

GHO Steward

A new GhoGsmSteward role shall be deployed on Base enabling the GHO Stewards to tailor the GSM configuration to reflect the prevailing market conditions.

Reference: GHO Steward v2

stataUSDC Revenue

A bot, deployed as part of Dolce Vita will periodically claim the revenue to the DAO’s treasury.

Disclosure

TokenLogic 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.

[AaveLabs]

Aave Labs supports this proposal by @TokenLogic, aligned with the overall GHO cross-chain strategy. Aave Labs will offer technical assistance for this initiative and stands ready to help throughout the governance process to facilitate its successful implementation.

[LlamaRisk]

Summary

LlamaRisk supports the proposal to deploy a stataUSDC GSM on Base. GSM is a crucial stability component for GHO stablecoin, proving its utility in historical instances. Therefore, it is rational to enable it with GHO’s deployment on Base. We also support the proposed GSM parameters, including 0% swap fees. While no swap fees could introduce unexpected volatility of the GSM deposits, we could put the recently discussed hypothesis to the test without risking losing already accrued deposits which serve as a stability buffer.

The linked discussion explores the possible changes in the usage patterns of GSMs if the GHO burn fees were eliminated, suggesting that GSMs could be used as a “piggy bank” for users who want to be able to receive the deposited stablecoins in the future at the same 1:1 ratio, making the GSM more comparable to Sky’s PSM. Nonetheless, removing swap fees could introduce unwanted deposit fluctuations; therefore, if high variability in deposits is observed, we will reintroduce the GHO burn fee in a way that is similar to other existing GSM deployments.

GSM Utility

The stablecoin buffer available in the USDT/USDC GSMs on Mainnet has historically acted as a last resort peg safeguard, where at a -0.2% secondary market discount of GHO, it provided an additional GHO sell-side buffer, which helped to limit the extent of the extent of the pricing downturns. The correlation between GHO secondary market price and the GSM deposits amount is also visible in the charts below.

Source: Dune, February 7th, 2025

Source: Dune, February 7th, 2025

Asset Choice

The choice of stataUSDC token is motivated by USDC being the largest stablecoin on Base. Currently, the supply of USDC is at 3.6B, with the second largest stablecoin being USDS, with a supply of 100M. As a result, fluctuations in the USDC secondary market peg on Base are less likely, and therefore, the stability buffer is expected to be available for the long term. Depositing the underlying USD on Aave’s Base market will also provide additional capital efficiency for the DAO. A second GSM where GHO would be paired with another stablecoin is not needed.

Impact on Aave’s Market

Supplying the underlying USDC on Aave’s Base market would have a dilutive effect on the supply yield. At the time of writing, 183M USDC has been supplied at a current APY of 5.39%. If an additional 10M USDC were deposited, the supply APY would be reduced by ~0.7%, bringing the borrow APR down by ~0.8%. Nonetheless, the USDC supply yield on Base will remain similar to that of other Aave markets. In addition, a lowered borrow rate could attract new borrows. Therefore, after the market reaches a new equilibrium, the impact on the DAO’s revenues is expected to be positive.

Source: Aave Base, February 7th, 2025

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.

[Michigan_Blockchain]

As Michigan Blockchain, we support deploying stataUSDC GSM on Base, as this proposal introduces an efficient way to reduce volatility and manage supply during market fluctuations.

First of all, GHO currently has thin secondary market liquidity on Base, as GHO has very recently gone live on Base on February 10, 2025. We believe that it is essential to mitigate volatility - a result of thin liquidity - by offering a way for users to swap USDC for GHO, at a 1:1 ratio, on Base. This will increase GHO’s circulating supply on Base, therefore reducing volatility. Furtheremore, the GSM will help maintain GHO’s peg and also contribute to additional revenue to Aave DAO through swap fees, surplus yield, and USDC incentives. Low liquidity assets can pose threats as collateral assets - and GHO is a collateral asset on the Aave v3 Base market. Currently, to increase GHO supply on Base, it must be bridged from Ethereum. This process uses a lock-and-mint model enabled by Chainlink CCIP. The stataUSDC GSM will allow users to exchange USDC for GHO without having to bridge assets themselves, simplifying the process. The GSM on Base provides a direct and efficient way for users to acquire GHO using USDC which will enhance liquidity on the Base network, the main reason why we support this proposal. This will mitigate the initial liquidity problem.

Also, since the underlying USDC is going to be provided as collateral on the Aave v3 Base market. It is going to earn revenue for the Aave DAO and it will be capital efficient for Aave, creating a new revenue stream. That is another reason why we are in favor of the proposal. Over the last 6 months, average supply APR has been 7%. Assuming the proposed GHO Bucket Cap of 10.00M is reached, the $10m worth of USDC will generate more than $60k even considering the dilution in the supply.

USDC supply APR on Aave

We agree with LlamaRisk on the idea of choosing USDC as the stablecoin of choice. USDC has 92% market share among stablecoins on Base, so USDC should be the only option as the backing asset.

USDC dominance on Base, DefiLlama

For the reasons of reducing volatility, increasing GHO supply, generating revenue for the DAO, USDC being the right stablecoin of choice, and ensuring long-term stability for Aave’s ecosystem, Michigan blockchain fully supports the proposal do deploy stataUSDC GSM on Base.

-Kerem DIllice and nsks

[ChaosLabs]

Summary

Chaos Labs supports the proposal to create a stataUSDC GSM on Base.

Analysis

We note that this proposal follows previous proposals to deploy an aUSDC GSM, which we supported at the time. This was then augmented with a proposal to create stataUSDT and stataUSDC GSMs; we supported this proposal, finding that shifting the GSM to a yield-bearing token representing deposits on Aave created limited additional risk.

As discussed in the prior recommendation, any potential risk arising from high utilization, which could potentially prevent users who switch from GHO to stataUSDC from withdrawing the underlying USDC, has not been borne out in the data.

While available liquidity (the amount borrowed subtracted from the amount supplied) did hit a low of 10.8K in October 2024, USDC’s supply has grown roughly four-fold since then (note that the anticipated listing of sUSDe on Base is likely to further increase USDC borrow demand and thus drive new supply, reducing the yield-dilution effects of the GSM adding new USDC supply).

Since USDC’s supply first broke 150M, the amount of available liquidity has never been fallen below 18M and currently stands at about 60M. This is sufficient to support the proposed GSM Bucket/Exposure cap of 10M. Additionally, we support the increase in the CCIP Bucket Capacity to reflect the additional GHO supplied to the GSM.

Impact

It is also likely that the creation of a GSM will improve utilization dynamics in the market. The GSM is expected to grow when GHO is above $1.00, which generally coincides with higher demand for stablecoins. This new setup would ensure that a growing GSM would be reflected in new USDC supply, reducing utilization. The reverse is expected to hold true in an inverse scenario: the GSM would decline in conjunction with less stablecoin demand, helping to keep utilization close to UOptimal by removing USDC supply.

Disclaimer

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

Copyright

Copyright and related rights waived via CC0