This ARFC proposes a further increase in the GHO borrow rate by 50 basis points (bps), raising it from 2.5% to 3%.
Motivation
The Aave community has previously recognized the importance of adjusting the GHO borrow rate to maintain the stability and health of the protocol. The motivations for this proposal are:
Strengthening the GHO Peg: The prior adjustment to the GHO borrow rate resulted in a stronger GHO peg. An additional increase is anticipated to further bolster the peg and get closer to the target value.
Enhancing GHO Revenue: By increasing the borrow rate, the protocol is expected to generate additional revenue from GHO borrowings.
Coordinated Effort: This proposal aligns with other initiatives, including the GHO buy program set of AIPs, as part of a coordinated effort to support the GHO peg.
The discount for stkAave holders remains unchanged at 30%.
This proposal also greenlights the ACI for a direct-to-AIP process for 50 bps increments every 30 days, as long as the GHO peg is outside 0,995<>1,005 monthly average price range, up to 5.5% borrow rate.
Correct me if i am wrong but after increasing the borrow rate of GHO to 3% it is still the cheapest stablecoin on Aave (v2 & v3) and also cheaper than DAI for example on Spark Protocol (excluding the token airdrop, as its not clear how much the value will be).
IMO raising the rate to strengthen the peg is a good move, although it could hurt growth. But i think people care more about peg than growth in the beginning. If more farms and usecases pop up for GHO growth will come by itself.
Having a non-working peg disqualifies GHO for many use cases - think of providing liquidity on an AMM and dealing with the volatility/depeg risk.
If we fix the peg, more people will be comfortable holding GHO and use it for farming, hence I am all for it.
While I support this increase, I’d urge the community to consider @ApuMallku 's input and make some of these changes fall within a threshold pre-aaproved by governance under certain parameters to make these changes more efficient
How could an automated system look like? I imagine we could only give something similiar like the risk steward access to change the parameter. This way it could be a bit faster, but i don’t know how it could be automatic. @ApuMallku maybe you can elaborate.
Echoing our comment on the previous GHO borrow rate increase, while it is hard to establish that the borrowing rate increase will have a strong impact on the GHO peg, increasing the GHO borrow cap does not introduce additional risk and we are supportive of the proposal.
Peg is determined by what someone is willing to pay you for the token. As it stands GHO has no function (that I’m aware of) outside of borrowing and/or parking on aave.
Is it not possible to create a redemption function to convert X number of coins into something else on aave with a set value of 1$? An entity out there willing to pay you 1$ for a GHO be it in btc/usdc/eth would there by make it worth a dollar and crate arbitrage opportunites keeping it at or close to peg.
We think it is unproductive to have a governance proposal constantly to increase the borrowing rate which won’t have any short-term effect on the GHO peg as @ChaosLabs stated. What kind of message are we sending to the market? changing parameters so often is not good at all. The focus should be on enabling GHO leverage and more utility and integrations across defi protocols. The decision to increase the GHO borrow rate should not be for improving the peg.
I think the proposed borrow rate change should have a positive impact on GHO peg. However, I don’t think 3% will be high enough to get GHO back to 1:1 parity with USD.
IMO the best course of action would be to either:
Raise GHO borrow rate directly to 5% (parity with DSR and Maker/Spark borrow rates, highly likely to push GHO up to price parity with USD, while offering a significant ~1.5% rate discount to stkAAVE stakers)
Adopt a formal plan to raise GHO borrow rates by 0.5% (or more) each month until GHO price is within 0.995<>1.005 USD monthly average price range
Proposal updated to allow a direct-to-AIP process for the ACI and increment GHO borrow rate by 50 bps every 30 days if GHO is outside of target monthly average price range.
Ultimately, I agree with @ApuMallku’s position: it’s a total non-sense that the Aave governance can vote on the GHO interest rates, as it hinders borrowers’ confidence in the product.
Interest rates are operational parameters; it’s utterly unfit to be managed by governance. I anticipated issues around this topic since the first announcement of GHO about a year before its launch in post published on my blog in August 2022:
The interest rate model for GHO is currently its most underwhelming component, as the initial post envisioned an interest rate directly determined by the Aave DAO, just like how it works on Maker. However, that would be inefficient and add unnecessary bloat to the governance.
When it comes to deciding which components of a protocol should fall under the governance umbrella, I think Hayden puts it very eloquently, and I fully align with his view:
The interest GHO falls in the first category: we’ve been able to set interest rates programmatically for more than three years on Aave’s money markets; I don’t see why we couldn’t on GHO.
I agree with @monet-supply suggestion, as this would, in one vote, provide a credible solution to the current interest rate vs. GHO interest rate conundrum, and would support such a proposal.
However, I urge Aave’s governance and service providers to consider, explore, and eventually formalize an algorithmic solution to this question. Building and sustaining trust with borrowers is essential for a stablecoin based on debt - the best way to achieve it is to offer the most predictable conditions to borrowers.
Borrowers should not have to check the governance every couple of weeks to anticipate the rate they will pay in the (short-term) future. They should be able to anticipate it based on a clear set of rules. It doesn’t prevent a solution/algorithm adapting to various market conditions, such as GHO’s price.
Gauntlet has contributed previously on raising GHO borrow rates. Further raising borrow rates does not bring excess risk and may help incentivize current GHO minters to repurchase GHO on market to repay GHO debt, helping bring GHO closer to $1.
However, do think that governance should consider if we want to kill GHO’s main current use case in the market.
Most GHO is sitting in liquidity pools, but this is because it has found product-market-fit as one on the cheapest ways to get exposure to leveraged sDAI yield. It is also the only straightforward way to do this trade with stablecoin collateral (not to mention sDAI collateral).
Savings DAI rate has pushed up rates on all other stablecoins, so it has been a profitable trade to loop borrowing GHO and swaping it for DAI.
This is naturally reflected in prices as there is minimal incentives for liquidity providers to bring other stablecoins to the system to support the GHO price. As a result, it has been trading around the spread of interest rate to sDAI yield.
We think this is a good use case for GHO, but no one seems to talk about this much when it comes to the forum here. If people want to leverage interest rate spreads using AAVE’s stable (it is one of the best ways to do this trade remember) then it seems like we should let them?
If we want to close the spread to make this trade less attractive or more difficult to execute that is fine. Raising the interest rate will do this and we should see GHO head back towards peg. Keep in mind it won’t reach peg until the rate spread is closed (either GHO rates go up or DSR rates come down).
The other option is that Aave can increase incentives for LPs to bring other stablecoins into the system. This will support price, but we doubt governance is willing to move fast enough or with enough money to satisfy the demand for leveraged rate trades.
We are in favor of increasing, but also looking into automated mechanisms or guidance in the longer term as TokenBrice suggested. Something like a slight discount to other stablecoin borrows could be an interesting mechanism.
We support @monet-supply’s suggestion, as we mentioned something similar in our voting action rationale on the last GHO Borrow Rate increase. It’s important to provide predictability on how GHO’s parameters are handled to foster trust among all market participants.
In our opinion, an algorithmic implementation like the one suggested seems to be the right approach to achieve the above, also allowing for the ability to swiftly handle a hypothetical overpeg scenario.
