ARFC: GHO Genesis parameters

[AaveCompanies]

GHO Genesis Parameters

Aave Companies’ Risk Team has investigated historical data to guide the launch of GHO, leading to the following recommendations for the genesis parameters of the asset.

	Borrow Rate (BR)	stkAAVE Discount Rate (DR)	Facilitator Bucket Capacity	DEX liquidity pool 50/50 GHO/3Pool
Launch	BR 2% to 2.5%	DR 25% T=4 max 25% of GHO supply for stakers	minimum of 50M or 25% of active borrows on V3 Ethereum Market	Need to seed DEX liquidity ⇒ Target stable liquidity pool of $15M GHO

Supply

The GHO supply includes all GHO minted through DAO approved Facilitators. Each Facilitator is granted a specific minting cap, with the resulting amount of GHO minted by each Facilitator dependent on demand. The market availability of GHO is therefore directly influenced by these minting caps, which can be adjusted to balance the supply and demand. For instance, if the token price exceeds its peg, minting can increase the supply, which creates downward pressure on the price.

Rates

The net minting rates of GHO compete with the Ethereum DeFi Dollar Borrow Index, a measure of stablecoin borrow demand across DeFi. Currently, the average cost of borrowing a stablecoin is around 1% after accounting for stablecoin borrow rates, collateral supply yield, and incentives. Based on the yield of assets supplied to Aave Protocol, the recommended rate range for GHO to remain competitive is between 1.5% and 2.5%.

The GHO minting rate has a direct impact on the demand and can be recalibrated as a peg stability tool. A cautious approach at launch could be to set a higher rate, at 2% or above, which can be later adjusted as needed. This also gives some margin for adjustments which would create new data to validate assumptions on user behavior and fine-tune rate choice.

Staking

To incentivize and reward community members for protecting the Aave Protocol, AAVE stakers are eligible to mint GHO at a discounted rate. This 25% discount gives AAVE stakers a highly competitive net borrow rate compared to other markets.

To promote decentralization of GHO token holders, it is proposed that a maximum of 25% of the GHO supply should be minted by AAVE stakers. In the current market conditions, this would enable each $stkAAVE to mint 4 $GHO. In case the minting cap was to increase over time, while the number of $stkAAVE was to remain stable, stakers would be able to to mint more $GHO tokens.

Redeemability

To maintain GHO’s stability, a dedicated Stability Module should be established to pool backstop liquidity. While utilizing the Aave V3 eMode or direct minting and redemption may provide some degree of stability, GHO will benefit from a tailored approach.

This module has the potential to become a major Facilitator, much like Maker’s PSM, which accounts for over half of the minted DAI.

Liquidity

Liquid secondary markets are critical for leading stablecoins, typically with 15-30% of their supply on exchanges. As GHO aims to become a resilient stablecoin, it will require a significant share of liquidity on DEXs, although this share can decrease as supply levels rise.

The Aave DAO has amassed 300k BAL in governance power through Balancer. To bootstrap liquidity, these holdings could be used to incentivize a Balancer GHO pool providing attractive yield opportunities for GHO liquidity providers.

Progressive growth

As the operations of Aave Protocol make GHO successful in the long term, it is crucial for the DAO to prioritize risk mitigation. Additionally, market conditions have meaningfully changed since the launch of prior stablecoins which necessitates validating underlying assumptions through observations. Therefore, we support adopting a slow growth plan to contain risks until GHO contracts are thoroughly battle-tested, and the market for GHO is highly liquid.

	Borrow Rate StkAAVE Discount Rate	Facilitator Bucket Capacity	DEX liquidity pool 50/50 GHO/3Pool
Launch	BR 2% to 2.5% DR 25% T 25% of supply	minimum (50M, 25% borrows)	Need to seed DEX liquidity ⇒ Target stable liquidity pool of $15M GHO
After 1 month	BR 1.5% to 2.5% DR 25% T 25% of supply	minimum (100m; 25% borrows)	⇒ Target stable liquidity pool of $25M GHO
When DEX liquidity pools reach previous target	BR 1.5% to 2.5% DR 25% T 25% of supply	250M	⇒ Target stable liquidity pool of $50M GHO
When DEX liquidity pools reach previous target	BR 1.5% to 2.5% DR 25% T 25% of supply	500M	⇒ Target stable liquidity pool of $100M GHO
When DEX liquidity pools reach previous target	DAO Review	1B	⇒ Target stable liquidity pool of $400M

GHO Stability Toolbox

The primary characteristic of GHO is its stability, and any deviation from its peg could lead to a loss of trust in the stablecoin. It is crucial for the DAO to take measures to maintain the stability of GHO. We have identified several tools that can be utilized to safeguard the peg of GHO, and we welcome input and suggestions from the community.

Tools	Depeg	Risks	Notes
Overcollateralization	Over/Under peg	N/A	This arbitrage has not proven sufficient for DAI’s stability in volatile market conditions → before PSM it went significantly over peg in deleveraging situations
Deep DEX Liquidity	Over/Under peg	N/A	Many stables have attempted to reach escape velocity via liquidity, maybe the winner is FRAX
Interest Rate Management	Over/Under peg	In GHO’s case, slow	Significant monetary policy changes are slow and need governance to get involved
GHO Borrowable on Aave (eMode)	Overpeg	Possible non-GHO stablecoin liquidations → Need time to unwind positions, actors need to be willing to take time risk, the only people that can actually do the trade are people with positions open on AAVE, there could be an issue in the beginning if borrow cap are met	97% LTV ~ 30x leverage for arbitrage
GHO Collateral on Aave (eMode, isolation)	Under peg	Couple of quarters before GHO can be a collateral GHO liquidations if GHO:STABLE falls → Need time to unwind positions	97% LTV ~ 30x leverage for arbitrage GHO as collateral could be risky in the near future. Further, we would not recommend it as collateral on the market it can be minted on. Still, cascading liquidations on Aave are less likely due to $1 hardcode
Custom Stability Module	Over/Under peg	Depends on the design	A new facilitator offering redeemability between newly minted GHO and stable assets.

Conclusion

In conclusion, GHO has the potential to become a leading stablecoin and a valuable addition to the Aave ecosystem. To ensure its success, the DAO must consider uncertainties, focus on risk mitigation, and validate assumptions with a cautious approach to growth. The stability of GHO is critical, we have identified several tools to strengthen the peg, including a stability module and minting rate adjustments.

The full research and analysis can be found here.

The aim of GHO is to be reliable, secure, and accessible to all, and working together as a community is the best way to achieve this goal. We encourage the community to share their thoughts, ideas, and concerns on GHO. We have provided a range as a basis, and count on the community responses to this post to align on specific rates and growth targets.

[Codeknight]

@AaveCompanies

To maintain GHO’s stability, a dedicated Stability Module should be established to pool backstop liquidity. While utilizing the Aave V3 eMode or direct minting and redemption may provide some degree of stability, GHO will benefit from a tailored approach.

I am very interested in how this will work. Would it operate like MakerDAO’s, where people could exchange 1:1 with another major stablecoin like USDC?

[AaveCompanies]

We are currently researching designs for a potential GHO Stability Module (GSM), and would be excited to share more at a later date!

In practice though, any stability module would likely share similarities to what has been implemented for DAI.

[MarcZeller]

We would like to thank @AaveCompanies for writing this ARFC. We agree that creating strong secondary liquidity is the most important aspect of launching a stablecoin. However, we believe that the proposed genesis parameters are simply not fit for a launch, as they appear to be too conservative.

The Borrow rate in current market conditions would make GHO minting at best as expansive as borrowing other stablecoins, limiting its attractiveness significantly.

The bucket capacity is also too conservative; even with 100% of the 50M cap minted and provided in stableswaps, the secondary liquidity of GHO might not be good enough.

In the early days of a stablecoin launch, scalability is the most important factor in order to reach secondary critical mass. It’s more important than peg-resilience (by design, there’s incentives to profit from underpeg GHO and only over-peg is a likely scenario) and it’s more important than protocol revenue.

While the ACI thinks that a fixed fee model is simply a bad design and will only lead to risk teams, Llama, and ACI publishing AIPs every other week to adjust the rate and lagging behind the free market, we acknowledge that a low fixed fee model is a good Kickstarter for a stablecoin to reach the secondary critical mass needed before switching to more efficient models such as an interest rate strategy curve model. However, these benefits can’t simply happen if the fixed fee is equal or superior to the competition rate. As the ACI, we think that 1% should be a maximum pre-StkAAVE discount. For bucket capacity, we think that anything below 150-200M$ is too conservative. For DEX liquidity pool targets, we would like to query the opinion from DAO risk service providers such as @ChaosLabs & @Pauljlei to define what stableswap liquidity levels allow for significantly important exchanges to happen with minimum slippage impact.

Lastly, for the StkAAVE discount rate, as stated earlier, protocol revenue should not be the early days’ priority, and the DAO should favor attractivity over revenue. We kindly encourage AaveCompanies to reconsider their genesis parameters, opting for a more efficient approach that would better facilitate GHO’s successful launch. We appreciate the hard work and dedication that AaveCompanies have demonstrated thus far and believe that, together, we can create a more effective launch strategy for GHO to thrive in the DeFi ecosystem.

[ChaosLabs]

We agree with the importance of reaching critical mass and finding ways to facilitate this. While reaching critical mass is the primary concern, maintaining the peg may also play an important role in achieving this goal under the current environmental settings.

Since the increase in bucket size depends on pool liquidity targets, we believe it will not hinder growth, as it can increase quickly, given that there is pool liquidity. Therefore, we support starting with the second tier, i.e., a bucket size of $100M, originally planned one month after launch, or even $150M. This way, it can facilitate initial growth, and as mentioned, it is designed to grow quickly. The bucket size will increase once pool liquidity hits the set target.

Given the current interest rate environment, the upper limit of the proposed borrow rate (2.5%) may be less attractive. We recommend setting the borrow rate at 1.5%, which will provide a good balance between an attractive borrow rate and a sustainable one, especially in the current global market setting of growing interest rates.

Finally, regarding DEX liquidity, the proposed amounts by Aave Companies for the corresponding buckets are adequate. We will happily follow up with pool parameter recommendations once the initial bucket size is agreed upon.