Summary
LlamaRisk supports the revised proposal to implement sGHO, a yield-bearing GHO vault, and the Aave Savings Rate (ASR) mechanism. This initiative represents a significant step in evolving the GHO ecosystem. It aims to enhance the stablecoin’s utility, simplify its integration into the broader DeFi landscape, attract users seeking predictable, lower-risk yield, and facilitate multi-chain expansion.
While LlamaRisk supports the strategic direction and potential benefits of sGHO/ASR, successful and safe implementation is contingent upon meticulous parameterization, robust ongoing management, and a clear understanding of the associated risks. Our analysis focuses on several critical areas: the long-term sustainability of the DAO funding model for the ASR, the intricate balance required between the ASR and GHO borrow rates to prevent adverse arbitrage while ensuring competitiveness, the implications of relying on a single market’s yield as the Index Rate, the potential impacts on GHO peg stability and broader Aave market dynamics, and the operational complexities inherent in the proposed multi-chain architecture.
Active monitoring and data-driven adjustments will be paramount for the risk providers and Aave’s growth managers. This document outlines these considerations in detail, highlighting areas requiring further refinement before final implementation.
ASR Mechanism Design
The proposed system introduces two core components, sGHO, and the ASR, interacting via the YieldMaestro contract. The core element of this mechanism is the sGHO vault earning yield determined by the ASR, which is dynamically calculated based on the supply yield of USDC on Aave v3 Ethereum (the Index Rate) and adjusted via Amp and Premium parameters. Yield distribution is managed by a dedicated YieldMaestro contract, funded by the Aave DAO Collector.
Source: Tokenlogic, April 10th, 2025
The origination of GHO deposited to the sGHO vault is made available via two different entry points: 1) GHO minted/borrowed on Aave’s lending markets, and 2) GHO issued via stataGSMs. These actions will result in revenue for the DAO, which will fund the ASR yield distributions.
Aave Savings Rate
As outlined, ASR determines the yield accrued by sGHO holders and is defined by the linear function:
Aave Savings Rate = Amp * Index Rate + Premium
- The
Amp factor adjusts the sensitivity of the ASR to changes in the Index Rate. An Amp > 1 would amplify market movements, while Amp < 1 would dampen them. An Amp of 0 and a non-zero Premium effectively creates a fixed rate.
- The premium rate adds a fixed component to the yield, allowing the ASR to be set consistently above the
Index Rate or providing a baseline yield even if the Index Rate approaches zero.
These levers allow the DAO to position sGHO’s yield relative to market conditions strategically, GHO’s borrow rate, and competitor offerings.
Index Rate
The proposal designates the supply yield rate of USDC supplied to the Aave V3 Core instance as the Index Rate. The rationale is based on USDC’s observed lower yield volatility and greater consistency than USDT across various Aave instances, coupled with its deep liquidity on Ethereum.
Source: Dune, April 10th, 2025
Source: Dune, April 10th, 2025
| Token |
Avg. Supply |
Max. Supply |
Avg. Rate |
Rate Volatility |
Rate Q1 |
Rate Q99 |
| USDC |
1.04B |
2.98B |
5.45% |
0.83% |
1.32% |
16.30% |
| USDT |
1.17B |
4.01B |
5.38% |
1.19% |
1.55% |
19.94% |
The Aave Core market observations from January 2023 to April 2025 reveal that although the average supply of USDC is smaller than USDT, USDC also exhibits a lower average rate and reduced rate volatility than USDT. Furthermore, the chart above indicates that the USDT supply has experienced sharper fluctuations, creating minor supply rate shocks. This supporting data suggests that USDC, with its more stable rate behavior, is more suitable to become the index rate. Anchoring the ASR to this rate ties sGHO yield to a fundamental DeFi market indicator.
Relation to GHO Borrow Rate
The relationship between the Aave Savings Rate (ASR) and the GHO borrow rate is a critical factor in the success of sGHO. The ASR is designed to exceed the GHO borrow rate to incentivize adoption and attract liquidity providers. However, the differential between the two rates must be carefully managed to prevent arbitrage opportunities that could destabilize the system.
If the ASR significantly exceeds the GHO borrow rate, users could borrow GHO at a lower cost and immediately deposit it into sGHO to earn a higher yield. This risk-free profit opportunity could lead to several adverse effects:
- Inflated Borrow Rates: Increased borrowing demand for GHO could drive up its borrow rate, making it less attractive for other use cases and reducing its competitiveness in the DeFi ecosystem.
- Peg Instability: Excessive borrowing could lead to an oversupply of GHO in the market, potentially causing positive deviations from its peg if demand for GHO does not match the increased supply.
- Financial Strain: The DAO would face higher costs to fund the ASR while earning lower revenue from the corresponding GHO borrow rate, creating an unsustainable expense-to-income ratio.
To mitigate these risks, the differential between the ASR and the GHO borrow rate must be kept small enough to discourage large-scale arbitrage while still providing a competitive yield to sGHO holders.
Since late 2024, the relationship between GHO borrow rates and broader market borrow rates has been unchanged. GHO’s borrow rate is configured to be at a slight discount or on par with the USDC and other stablecoins borrow rates on Aave’s Core market. Therefore, to achieve an ASR slightly above GHO borrow rates, exceeding the USDC borrow rate will be needed.
Source: TokenLogic Aave Dashboard, April 10th, 2025
Broader Market Rates
The ASR must be competitive with other yield-bearing stablecoin solutions in the DeFi ecosystem to attract users and liquidity providers. Sky’s Dai/Sky Savings Rate and Ethena’s sUSDe are prominent market indexes. Comparing the GHO borrow rates with these index rates indicates that GHO follows DSR/SSR closely, sometimes surpassing the rates.
Source: TokenLogic Aave Dashboard, April 10th, 2025
To position sGHO as a competitive alternative, the ASR must strike a balance between offering attractive yields and maintaining profitability and the stability of GHO.
Yield Generation and Funding
A crucial aspect of sustainability is balancing the DAO’s GHO-related income and the expense of funding the ASR. The ASR payout represents a direct liability for the Aave DAO, drawn from the Collector contract. The DAO’s income streams to offset this include interest paid by GHO borrowers and yield generated from the underlying assets deposited into stataGSMs when GHO is minted through them. The long-term viability of the sGHO program hinges on GHO’s overall success in generating sufficient revenue through these channels to sustainably fund the ASR payouts.
The two primary pathways for GHO to enter the sGHO vault contribute differently to the DAO’s funding capacity. Users who borrow GHO directly from Aave markets pay a borrow interest rate, which flows directly to the DAO Collector as GHO revenue. When GHO is minted via stataGSMs (e.g., by depositing USDC or USDT), the underlying stablecoins are deployed into Aave V3 markets, generating supply yield. This yield also flows to the DAO Collector, representing indirect revenue linked to GHO’s existence via GSMs. Both mechanisms contribute to the pool of funds available to finance the ASR. However, it is also important to consider that wider GHO and, consequently, sGHO adoption also attract more supply to Aave’s markets and generate additional indirect revenue.
Source: LlamaRisk, April 10th, 2025
sGHO Vault
The proposal outlines periodic funding from the DAO Collector to the YieldMaestro, which then manages the rate of yield distribution to the sGHO vault. While the YieldMaestro aims to smooth the payout rate, the periodic nature of the underlying funding from the Collector could potentially create minor timing discrepancies or arbitrage opportunities if funding events are infrequent or predictable. To minimize this and ensure the YieldMaestro can consistently meet the target ASR for the continuously accruing sGHO vault, DAO funding transfers should ideally be as granular and frequent as practical, reducing reliance on large, periodic top-ups.
The proposal specifies atomic convertibility with no cooldowns. While instant withdrawals offer optimal user experience and composability, they remove a potential risk management lever. Unstaking cooldowns, if implemented, could deter highly short-term arbitrage strategies attempting to capture yield around specific events (though less relevant with continuous accrual) and, more importantly, provide the DAO and market participants with advance notice of significant potential GHO outflows from sGHO. This foresight allows for better management of GHO liquidity across exchanges and GSMs, potentially mitigating peg pressure during large withdrawal events. While not proposed initially, adding a cooldown remains a potential tool needed for stability.
Multi-Chain Architecture
The multi-chain nature of sGHO introduces operational complexities, particularly regarding yield distribution. Since the DAO Collector funds the ASR, a mechanism is required to allocate and distribute this yield accurately to sGHO holders on L2s and sidechains. This will likely involve cross-chain messaging protocols and bridging solutions to transfer GHO funds or instructions from the central YieldMaestro contract on L1 to sGHO vault instances on other chains.
The introduction of sGHO on L2s and other networks where GHO is available is expected to increase GHO’s utility on those chains. By providing a native, yield-bearing savings option, sGHO gives users a reason to acquire and hold GHO beyond immediate transactional needs. This increased demand for holding GHO on L2s is likely to be met, at least in part, by users borrowing GHO from the respective Aave V3 markets. Consequently, sGHO can act as a catalyst, stimulating GHO borrow demand and increasing protocol revenue for the DAO on these L2 deployments.
Deploying stataGSMs on the same chains where sGHO is launched will facilitate adoption. These GSMs provide a direct, potentially lower-friction on-ramp for users to acquire GHO on their preferred network by depositing stablecoins like USDC or USDT to deposit into sGHO. This complements GHO acquisition via borrowing or bridging, creating more accessible pathways for users to directly enter the GHO/sGHO ecosystem on L2s and other chains, thereby potentially accelerating sGHO supply growth across the multi-chain landscape. In order to facilitate this, all stataGSM mint/burn fees should be lowered to 0, by the methodology and findings presented in the past governance thread.
Risk Management
Arbitrage Risk
The relationship between the ASR and the GHO borrow rate must be carefully managed. The proposal aims for ASR > GHO Borrow Rate, but with a small enough differential to discourage large-scale, low-risk arbitrage.
If the ASR significantly exceeds the cost of borrowing GHO (including interest and transaction fees), users can profit by borrowing GHO and immediately depositing it into sGHO. While this stimulates GHO to borrow demand, excessive arbitrage could:
- Inflate GHO borrow rates rapidly (except on Aave Core).
- Increase the net cost to the DAO, as it pays out a high ASR while potentially earning a lower borrow rate on the corresponding GHO loan.
It is important to note that the most direct form of this arbitrage loop (borrow GHO using GHO as collateral) is not currently possible on the Aave V3 Core market, as GHO is not posted as collateral. Furthermore, the GHO borrow rate on Core is directly controlled by governance, not solely market utilization. This provides a layer of control against runaway arbitrage, specifically on L1. However, the risk remains relevant for other deployments or if GHO’s collateral status or rate mechanisms change in the future. Careful management of the ASR relative to borrow costs across all networks remains crucial. Therefore, GHO supply caps on Aave’s should be set accordingly.
GHO Stability
sGHO demand creates a new GHO sink. Nonetheless, sudden withdrawals from sGHO could increase GHO supply pressure on secondary markets, potentially destabilizing the peg if DEX liquidity or GSM redemption capacity is insufficient. Adequate GHO liquidity across venues is critical.
The stability of the GHO peg during potential large sGHO outflows relies heavily on the capacity of both the GSMs and secondary market liquidity. Users exiting sGHO may seek to convert GHO back to other stablecoins. GSMs offer a direct path but are limited by their mint caps and the availability of underlying collateral. If GSM capacity empties, excess GHO sell pressure will flow to DEXs. Therefore, ensuring robust GSM functionality and adequate underlying USDC/USDT reserves are crucial buffers to absorb potential supply shocks from sGHO withdrawals and maintain the peg.
Moreover, minting GHO via GSMs alters the composition of GHO’s backing compared to GHO originating via borrowing against overcollateralized positions in the main Aave pools. GSM-minted GHO is backed primarily by the specific stablecoins (USDC, USDT) held within the GSM module and minted at a 1:1 ratio. This shifts a portion of GHO’s reliance on the stability and availability of those specific stablecoins. While not inherently riskier than overcollateralized borrowing, it represents a different risk profile – one concentrated on the peg integrity and liquidity of the GSM assets. The designated GSM mint caps serve as the primary tool for governance to manage the proportion of GHO supply originating from this source, thus limiting this specific dependency risk.
Source: LlamaRisk, April 10th, 2025
Aave Rates Stability
Large flows into and out of sGHO, particularly when facilitated by stataGSMs, could potentially influence the supply rates of the USDC deposited within Aave V3 markets when users mint GHO via a stataGSM using USDC, the GSM deposits that USDC into Aave V3 to earn yield. Significant inflows into sGHO via this route would lead to increased USDC deposits by GSMs into the Aave V3 USDC market. This increased supply could push down the USDC supply rate, especially if utilization decreases or rate curve inflection points are reached. Conversely, large redemptions from sGHO via GSMs would cause GSMs to withdraw USDC from Aave, potentially increasing the USDC supply rate. This creates a feedback loop, particularly relevant given that the USDC supply rate on Ethereum is the proposed Index Rate for the ASR itself. Therefore, very high sGHO adoption could exert downward pressure on its underlying benchmark rate.
Source: Llamarisk, April 10th, 2025
Parametrization
The successful launch and operation of sGHO/ASR will depend on careful initial parameterization and ongoing adjustments. Key parameters requiring governance decisions and active management include:
- ASR Parameters: Amp and Premium values, determining the level and responsiveness of the sGHO yield.
- GHO Borrow Rates: Management across all Aave deployments to maintain the target relationship with ASR.
- GSM Mint Caps: Limits per chain and underlying asset, managing GHO supply sources and dependencies.
- DAO Funding Mechanism: Frequency and logic for transferring GHO from the Collector to
YieldMaestro.
- Potential sGHO Parameters: Decisions on whether to implement supply caps or unstaking cooldowns, now or in the future.
ASR Rates
The core challenge in parameter setting lies in managing the interplay between the ASR; the GHO borrow rate, and the chosen Index Rate. The ASR must be set attractively relative to the market benchmark (Index Rate) using Amp and Premium. Alternatively, set a stable rate according to the market conditions. Simultaneously, the gap between the ASR and the GHO borrow rate must be managed to incentivize adoption without creating excessive arbitrage opportunities.
GSM Mint Caps
Managing the GSM mint caps is crucial for controlling the overall GHO supply and influencing the ratio of GHO minted via GSMs versus GHO created through borrowing in the main Aave markets. This ratio has implications for the DAO’s revenue mix (direct borrow interest vs. indirect yield earned on GSM collateral) and the overall backing profile of GHO (overcollateralized diverse assets vs. 1:1 stablecoin backing).
sGHO Unstaking Cooldown
While the current proposal favors no unstaking cooldown for better user experience and composability, implementing one remains a potential risk management tool. A cooldown period could help mitigate potential yield payout timing arbitrage (though less critical with continuous accrual) and provide the DAO and ecosystem participants with a warning of large impending GHO outflows from sGHO. This notice period allows for proactive liquidity management across exchanges and GSMs, potentially reducing GHO peg volatility during significant withdrawal events. The trade-off between user friction and stability enhancement should be considered.
sGHO Supply Cap
DAO should decide whether to implement an explicit supply cap for the sGHO vault or rely on active ASR management and GSM caps to control its size. An explicit cap offers a direct, albeit blunt, tool to limit the DAO’s total ASR payout liability.
Next Steps
The next steps involve finalizing the technical architecture, including vault contract implementation details and the cross-chain yield distribution mechanism. Concurrently, detailed parameter recommendations for the initial launch (ASR Amp and Premium, GSM caps, etc.) must be developed in collaboration with risk service providers and other relevant parties, supported by budget projections and risk assessments. LlamaRisk intends to provide further analysis and recommendations to the DAO and an update to the community alongside these specific launch proposals.
Disclaimer
This review was independently prepared by LlamaRisk, a community-led 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.
