[ARFC] Further increase GHO Borrow Rate

[stickletti]

I want to share my experience as a new member of the AAVE ecosystem.

I joined approximately 2 months ago and was really fascinated by the premise of GHO being promoted as a native stablecoin with a fixed borrowing rate.

Like many other users, I borrowed a substantial amount of GHO (7 figures) and then converted it into assets that I had purchased as part of my strategy.

It is very important to emphasize that when I borrowed, the rate was ~1%. Because of the rate difference between it, USDT and USDC, GHO was in low demand and I ended up paying a “premium” on the conversion which resulted in an immediate loss of ~3% on the total amount.

The notion of doing it was in the context of locking on to the borrowing cost up-front.

1 month later I realized that the publicly promoted “Fixed rate” had changed to 2.5%.

Today I see that the same “Fixed rate” has changed to 3%. Tomorrow maybe it will go up to 10%? From what it feels, GHO is just an extension of USDC and USDT with a fake promise of stability.

The takeaway of this whole experience has left a very bitter taste. What I believed was that the borrowing rate would be stable, at the expense of the market rate of GHO which can be dynamic and not necessarily with a strong peg, as the market demand shifts the rate based on the relationship of the GHO rate vs the USDC and USDT. Trading off permanent borrowing costs, for impermanent loss risk management.

This model turned it into a long-term instrument for onboarding new investors and facilitating stickiness which from my perspective can build vasts amount of TVL onto the protocol.

If it hadn’t been for the GHO, I would have probably deposited my collateral on Compound due to the better overall rates that were at the time.

From a user experience, the whole orchestration of the rollout of GHO is a disaster, because it is mostly based on fake promises of fixed borrowing rate. GHO borrowing rate is highly dynamic as we can see and the DAO just acts as an unpredictable price oracle. Each rate change being the result of someone’s idea coming out of the blue.

Believing in the fixed borrowing rate, I accepted paying 3% “up-front” in costs through the 0.97 rate at the time of converting, only later to find GHO having identical borrowing APR as USDC. Essentially doubling the cost. Right now USDC is offered at 3% and I ended up with a 6% cost for my GHO.

If I had borrowed in USDC, I would ve saved myself tens of thousands of dollars in losses.

Being an early adopter of GHO and having believed in the “fixed rate” promise, It turns out that I get penalized for that.

This is a huge blow to the trust factor in the protocol for me.

Please update your UI to stop luring people into believing GHO has a fixed borrowing rate. This is highly deceptive and not worth the reputational risk. Once this thing hits a 10% borrowing rate, it will be a shitstorm. There are probably 3-4 key UI elements that outline that GHO is offered at a fixed rate.

As arguments for managing the tentative peg:

• when the supply is depleted, the rate will get back as LPs will be incentivized to buy
• LPs will be willing to buy GHO if they know the DAO can’t front-run them by changing the market rate
• Create an incentive for LPs
• Leave the peg a bit loose, as there’s no issue in having a ~5% deviation. It’s transparent, its predictable and it allows borrowers to do their own strategy. IT self-adjusts based on the market and is a fair system with no centralized intervention.
• Most importantly it corresponds with the message that has been conveyed so far to the users who borrowed 25M+ of GHO

I had a 2-year plan related to GHO, which turned into a disaster. I will now have to buy much higher than I sold, because of the intervention of the DAO and the deceptive UI.

You can either have a fixed borrowing rate or a fixed peg. You can’t have both. And you already promised one of them.

[josojo]

Hi stickletti,
thanks for sharing your experience. I can understand your frustration.

But believe me for everyone being on your side, there are others being on the opposite side: They bought the stablecoin below peg, because the team promised that it will repeg and advertised it as a stable coin 1:1 to the dollar throughout the documentation. They are equally frustrated.

You can either have a fixed borrowing rate or a fixed peg. You can’t have both.

I agree. But I think the peg is long-term much more important, as the borrowers need stablecoin holders to be their buyers. And stablecoin holders need a stable peg to have a useful coin. Stablecoin holders do not want to pay the one day 2 GHO and the next 2,2 GHO for their cup of tea.

To resolve this frustration conflict between “peg-believers” and “constant interest-rate believers”, I think its a fair to not restore the peg immediately, but gradually via interest rate increases(as proposed 50 basis points each month), such that all parties the time to position themselves.

[JosepBove]

I completely agree with you, the main feature of a stable coin it’s being stable. We should not forget that and work to recover the peg.

[0xTogbe]

Unfortunately stickletti is right which is also why it’s important to bring it back to peg.

If users had been trading out of GHO at par because liquidity was well managed at launch, a clear plan to manage the peg was in place, etc. then all of this would have been avoided.

As it is the plan is mostly clear though likely many degens don’t spend time on governance forums so have no idea about the planned raises. The liquidity committee situation and plans is less clear to us but we assume it is slowly getting worked on.

Probably also worth warning users in a few ways that the interest rate is planned to raise again until GHO is back to peg. Luckily it won’t be to 10% as stated above but there will be more frustrated forum posts without better communication on the DAOs plans for liquidity and rates.

[ApuMallku]

That’s why an algorithmic solution is much more needed now than ever, why do we need to rely on governance proposals to increase/decrease the rates? let’s keep building more decentralized toolings for AAVE and less human intervention, especially with an important product like GHO which didn’t have the impact we all wanted.

[ApuMallku]

One thing that we would to gather feedback is that now that we know that monthly rates are going to be higher, and early borrowers are going to be mad, why don’t we give some more discount for AAVE stakers? Currently the discount sits at 30% what if we lever up to 40 or even up to 50%?