[ARFC] GHO - Increase Borrow Rate

Governance
1

title: [ARFC] GHO - Increase Borrow Rate
author: @TokenLogic - @MatthewGraham & ACI - @MarcZeller
created: 2023-10-30

Summary

This publication proposes increasing the GHO Borrow Rate from 3.00% to 4.72%, the proposed sDAI rate.

Motivation

Over the past week, the GHO peg has been gradually declining, while the supply has been increasing. Users have been minting GHO and subsequently exchanging it for other assets.

Incremental interest rate hikes have not had the desired effect, evident by GHO price continuing to trade lower. The GHO borrowing rate remains significantly lower compared to other stablecoins.

This publication suggests aligning the GHO borrowing rate with the proposed sDAI rate, 4.72%. The aim is to reduce the borrowing discount of GHO relative to other stablecoins before returning to periodic 50bps increases.

The chart below shows the general GHO price downwards trend.

The below shows the borrow rate of GHO relative to other stable coins.

The main types of collateral backing GHO are wstETH (29.68%), wETH (28.84%), wBTC (20.44%) and rETH (8.94%). For reference, sDAI makes up 2.07% of the collateral supporting GHO debt with a current APR of 5.0% which is expected to adjust lower to 4.72%. A large portion of the collateral backing GHO is generating yield which acts to offset borrowing costs.

By increasing the borrow rate to 4.72%, the goal is to improve the peg by reducing the incentive to mint GHO relative to other stable coins. As a result, GHO’s growth is expected to slow. This publication prioritises returning GHO to peg over growth.

After implementing this proposal, the community can continue with the current plan, 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.

Specification

Asset: GHO
Contract Address: 0x40D16FC0246aD3160Ccc09B8D0D3A2cD28aE6C2f
Current Borrow Rate: 3.00%
Proposed Borrow Rate: 4.72%
New discounted Borrow Rate: ~3.31%

The discount for stkAave holders remains unchanged at 30%.
The Aave Facilitator Bucket Level is to remain at 35.00M units

The AIP will be submitted by @marcZeller and the ACI team.

Next Steps

  1. Gather community feedback on this ARFC.
  2. In 5 days scalate this proposal to the Snapshot ARFC stage.
  3. If the snapshot outcome is YAE, escalate the proposal to AIP stage.

Disclaimer

TokenLogic receives no compensation beyond Aave protocol for the creation of this proposal. TokenLogic is a delegate within the Aave ecosystem.

Copyright

Copyright and related rights waived via CC0.

6 Likes
2

Yes, I agree that its very very hard to hold the peg, if people can just arb the interest difference between sDAI and GHO borrowing rate and thereby generating GHO sell pressure. Hence, the adjustment makes sense to me and reflects the sentiment in this thread: [TEMP CHECK] Community Plan for GHO Stability and Peg - #9 by 0xSpartan.

Even after this rate increase, it will be hard enough to hold the peg, given that people will use the discounted rate to arb. Let’s see. But its definitively the right direction to regain the peg.

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Raising GHO borrow rates does not add excess risk to the protocol. We’ve shared our view on the relationship between GHO borrow rates and peg in our community plan for GHO stability. Current GHO conditions emphasize the need for organic demand for GHO.

2 Likes
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the first attempt at increasing borrow rate did not improve peg.

surely increasing utility is a better option?
look what crvUSD did with SILO finance.
SILO finance has more crvUSD on the protocol than curve.

increasing borrow interest will do 2 bad things:

  1. it will punish early adopters of GHO
  2. it will reduce new minters of GHO
2 Likes
5

We are supportive of this proposal as increasing the GHO borrow rate does not introduce additional risk to the protocol.

6

with respect that’s pretty half baked. surely you can expand more than that? are you guys not a bunch of quants?

is there merit to increasing interest rate to match sDAI to mitigate ppl looping GHO-DAI-sDAI?
is there evidence of ppl actually doing this? like onchain?

i would think more ppl actually just borrowed GHO when interest rate was low, and market was weak to leverage up.
market pump = ppl leverage and GHO is below peg.
market dump = ppl buy GHO to cover LTV, GHO price goes up

is the issue here there is no way to arbitrage the peg?

surely integration of GHO into other protocols is a more sustainable solution?

1 Like
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Gauntlet and chaos labs are reviewing these proposals from a risk mitigation standpoint.

It is important to understand that when chaos and gauntlet support a proposal, they are not in agreement with the predicted outcome, but simply stating the lack of risk to the smart contracts, such as vulnerabilities to attacks.

1 Like
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ok that makes absolutely no sense.

firstly i was referring to @ChaosLabs and not @Gauntlet. @Gauntlet reply was perfect. They did not show support for the proposal. they simply kept to their mandate and said that it does not increase risk. @ChaosLabs explicitly showed support for the proposal but did not give a reason. (NOTE: saying it does not increase risk is invalid; the point of this proposal is to try and restore peg to GHO byt decreasing supply - i.e. less people will mint as cost to borrow is higher, and those that have minted may look to repay loan as the cost to borrow has increased)

if @ChaosLabs supports the proposal then they need to give a reason.

don’t mean to be argumentative/hostile/aggressive etc but if what you say is true (which it can’t be as it makes no sense) I want to hear this directly from the horses mouth otherwise it is just simply he said she said.

my experience with DAO’s is they are circle jerkers. minimum participation and all you need is a couple of mates to come along and support the proposal.

peace

9

From what can be observed, they are supportive BECAUSE it does not introduce risk. They are not supportive because of the affects on token price.

We invite @ChaosLabs and @Gauntlet to provide deeper insights and to clarify their reasonings for support.

10

bro, that doesn’t make sense.

there are lots of things that don’t add risk but are dumb ideas. just because it doesn’t add risk doesn’t mean you support something. if it doesn’t add risk then they can just say that. they don’t need to say they support it.

11

You are encouraged to re-read the thread until it makes sense.

1 Like
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There are currently several ongoing initiatives aimed at supporting the GHO peg and improving growth. These initiatives include adjustments to borrow rates, the introduction of a GHO stability module, the listing of wGHO as a collateral asset, and additional community-driven efforts to enhance GHO utility and stimulate demand. Chaos has played an integral role in this initiative, providing comprehensive recommendations and analyses. This is an ongoing effort, and we are collaboratively working with other contributors to realize the community’s goals.

Concerning the proposal to increase borrow rates, this marks the third iteration of rate adjustments for which we have previously provided comments and analyses. Given that GHO is still in its early stages, with limited historical data and usage, our current GHO-related recommendations do not exclusively rely on extensive quantitative analysis. Instead, we base our recommendations on theoretical and economic reasoning, taking into account observed usage patterns and trends. At this point, we support the idea of raising borrow rates to align with those of other stablecoins. This adjustment has the potential to contribute to the restoration of the peg, with the rationale articulated in the various forum posts and discussions promoting the rate increase. Our short comment on this thread reiterates this stance and highlights that no additional risk is introduced with this proposal.

Finally, as we’ve emphasized in various discussions, such as those found here and here, it is essential to recognize that increasing the borrowing rate by itself may not suffice in restoring and maintaining the peg. Increasing the utility of GHO and fostering organic demand remain the primary drivers for the sustainable restoration and maintenance of the peg in the long term.

2 Likes
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thanks @ChaosLabs.

i think if they are to raise interest rates then they should only do it if they are working on other aspects of the peg like integration. i think if GHO was used as collateral in something like SILO (as per crvUSD) and SPARK then that could boost the peg. Aave have already increased the interest rate and it did not help the peg. since they increased the interest rate the peg got worse. it is pretty simple when the market dumps the peg will be restored.

as far as i understand there is no way to arbitrage the peg on a fast time period.

I don’t think using GHO as collateral in Aave makes sense unless it is in isolation mode. currently GHO is pegged to 1 USD on the system, would this be the case if it was used as collateral? wonder what stable coin e-mode would be like with GHO as collateral, using GHO actual market price. Probably lots of liquidations.

I don’t think it makes sense using GHO in the safety module. They should use assets individually.

1 Like
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i have no problem with GHO being under peg and cheap to borrow. if Aave is worried about regulation as per @EzR3aL and do not want to work on parternships etc i think it is unfair to just raise interest rate as i believe raising interest rate alone will not restore peg. but it will hurt early adopters of GHO. which i think strategically could be a mistake. all the increased interest rate will result in is more money being paid by early adopters into Aave.

if it is critical to improve peg then i think increasing GHO utility should be the next move. the team have already doubled the interest rate and it did nothing. market is moving too fast. next lever they pull on should be utility.

example:

  1. Aave funds a compound fork using GHO as base asset, then use LM to incentivize depositors? if you could get GHO at low interest rate, use as collateral to farm another token then perhaps that would decrease sell pressure. maybe there could be other synergies with an app and token like this. I think Compound v3 codebase might be under business license but i think it is worth exploring.
  2. integrate GHO into SILO as per crvUSD into SILO LLAMA edition. see:
    https://silodao.fyi/what-is-silo-llama
  3. integrate GHO into SPARK protocol as per DAI into Aave
  4. @ApuMallku suggestion about RWA is interesting. not sure how that could work.
  5. not sure what implications of using GHO on Aave as collateral. perhaps in isolation mode it could work but i think suggestions like this need to vetted by quants and risk experts. also wonder what price/oracle you would use for GHO when used as collateral vs price for debt? probably would need market price for GHO when used as collateral?
  6. @EzR3aL and others suggestion on using GHO BLP in SM is a bad idea imo. Yes, it is better than using Aave token but using assets individually makes more sense to me. I think if ppl are throwing out this suggestion then it needs proper quant/risk analysis and comparison to other options and not just a comparison to current solution. GHO BLP holds balancer protocol risk, risk of all assets that BLP is composed of, and all assets that GHO is composed of. I think if Aave had a big issue then GHO price would plummet. I think if Aave had a big issue related to one of the assets then I think Aave token would plummet, GHO would plummet, the asset with an issue would plummet, but the other assets that GHO is composed of would not; therefore using assets individually makes more sense. My logic is something along those lines.
15

Hi @chippervan really appreciate you here being so active.

Upfront, the main goal is to get GHO to peg and stay there. Different actions have been taken for this to happen:

  • raise interest rate
  • setup strategies with Maverick, Sommelier Finance, Balancer and more to come

Raising interest rates was and always will be an option, this has been outlined from the beginning
It even says on the aave.com UI

Static interest rate that is determined by Aave Governance. This rate may be changed over time depending on the need for the GHO supply to contract/expand. Learn more

Of course these jumps aren’t the best and yes they will hurt some people following longterm strategies. But thats the way, you sometimes have to adjust your strategy, even i had to. When Tradi rates come down, RWA will see a big decline and Maker (for example) won’t be able to hold up that interest rate for sDAI with Spark. Then rates will change everywhere, at least thats what im guessing.

Regarding your points:

  1. Cannot tell much, have never really been into compound.
  2. How would this integration look like? How would it benefit GHO and what would be needed? I know Mich has a big position in Silo LLAMA after the CRV drama a few months ago.
    Remember not to compare GHO to CRVUSD, as CRVUSD has dex liquidity to grow.
  3. Could be an idea, but don’t know if this fork would do so and what would be the great benefit. Maybe you can explain?
  4. RWA could be a second facilitator in the future, this way GHO would have another kind of backing. Its interesting but probably too far away atm, although first steps into RWA are being done by Centrifuge
  5. iirc risk provider Gauntlet had some good arguments against using GHO as collateral atm with a wGHO version.
  6. Why would GHO being used in the SM be bad? It is overcollaterized by many different token, most staked ETH variations so very decentralized. SP and risk provider of course check all possibilites and tell us if there would be some kind of attack vector.
    Balancer has been a longtime standing partner and stkBPT is already being used in the SM for years without any problems.
    Of course its not limited to GHO being used in the SM but to other assets which could follow step by step to decrease AAVE emission by 100%.

I greatly appreciate any answer from you and if you do have some great idead to share, do not hesitate to get in touch with me and then i could get in touch with any SP or tag them directly.

16

thanks @EzR3aL .

so yeah i think deep liquidity is 1 part of the solution to restoring peg.

they have already increased interest rate on GHO and it did not improve the peg.

there is no way to arbitrage GHO as per fiat back stable coins so i think peg will always be an issue as long as it doesn’t have utility.

how can you give it utility? only options i can think of:
a. collateral to allow one to borrow other assets, or
b. collateral for derivative trading
c. part of SM (i think this is dodgy)

regarding your responses to my points:
1 to 3. is about giving GHO being used as collateral on a lender that is OUTSIDE Aave. i think it makes sense for it to be outside of Aave. (i am not a risk expert but to me that makes sense intuitively. i suggest checking out Compound v3 (use GHO as base asset in place of USDC); SILO (similar thing, do some deal with SILO do run a “GHO” edition as per what crvUSD did with Llama edition; not comparing with crvUSD it is just a clever way to get utility).
4. RWA perhaps a thing but don’t know much about this. that was just a shout out @ApuMallku who made the suggestion.
5. i agree that wGHO as collateral inside of Aave is a bad idea. i think it would be dodgy to rehypothecate wGHO unless it was in some isolation mode with special features. i am not risk expert. it just seems intuitively a bad idea
6. anyone proposing using GHO in safety module really needs to do a proper risk assessment. for me it just seems common sense that it would better to use assets individually instead of using an asset that is composed of many assets. it seems like risk layered on risk. BUT again as mentioned this needs to be done by proper quant. Anyone throwing this out there without providing a proper detailed risk assessment is really foolish imo.

AGAIN i think it is very unfair for Aave to just increase interest rate on GHO to try get it back to peg. this hurts early adopters who will literally be paying out of their pocket into Aave’s pocket. of course increasing interest rate can be part of solution but they have already done that and it did not help. as you mentioned they have worked on liquidity strategies and that is great but that is not utility. they need to work on utility now imo.

17

what bs! to increase the interest rate again!!! interest rate is not going to do anything!!!

@MarcZeller

they need to work on integration! i.e. being able to use GHO as collateral on other lending platforms, and the incentivize with some LM rewards.

raising interest only hurts early adopters as they are paying out of their pocket into Aave’s pocket. such BS. and i know i have started looking elsewhere and i am sure others willl too, i.e. COMPOUND v3

they have already raised interest rates and it did nothing.

and if somebody says “why don’t you come up with a solution instead of critizing the devs/DAO etc”. i am not being paid. these DAO ppl etc are all rinsing it.

this proposal surely did not pass the temperature check

18

Given that interest spike has not helped, can we please deactivate the GHO staking discount?

Initially, this staking discount made sense, given that it would drive the adoption. But given that the peg is so much off, its usefulness is in doubt. People can just arb GHO vs the other huge interests in the ecosystem and thereby hurting the peg.

I am all in for giving the loyal DAO members a discount, and reward them for their loyaltiy. But it should not come at significant cost to the credibility of our products(GHO).

If I get a certain amount of positive response, I am happy to write the dune queries to actually verify that the GHO discount is abused and hurts the peg.

19

Fixed rate borrows are going to be attractive regardless of discount or not because of the very high variable rates in DeFi right now. This is down to utilization and demand on the stablecoin markets and results in demand for GHO staying very high.

At this point it is going to do little more to continue bumping the interest rate for regular users or stakers.

We think focus should now turn to driving demand for liquidity through further incentive programs (Curve and Balancer votes for example haven’t been taken advantage of) as well as fast-tracking the GHO utility that will come from listing wGHO and implementing sGHO for yield.

2 Likes
20

Thanks for your answer!

Fixed rate borrows are going to be attractive regardless of discount or not because of the very high variable rates in DeFi right now.

Yes, its attractive, but not if one has to sell GHO this far off the peg. I think it would help recover the peg at least a little bit.

as well as fast-tracking the GHO utility that will come from listing wGHO and implementing sGHO for yield.

I think we all agree that this helps the best. Would love to see here more action from the developers side.

We think focus should now turn to driving demand for liquidity through further incentive programs (Curve and Balancer votes for example haven’t been taken advantage of)

I think this does not help. Many GHO holders don’t wanna LP at these prices, as impermanent loss will be too high, if the community works on the peg. I mean if we would be able to restore the peg in two months, then the APY of buying GHO is 4%*6=24%. I guess people don’t risk that for some LP reward, unless its very very high.