[ARFC] Increase Bucket Capacity of GHO FlashMinter on Ethereum

[ChaosLabs]

Summary

With this publication, Chaos Labs proposes to increase the bucket capacity of the GHO FlashMinter on Ethereum.

Motivation

Following significant growth in the supply of GHO this year, it is appropriate to address a parameter that has not been updated since GHO’s launch: the FlashMinter bucket capacity.

Currently, the capacity is set to 2M GHO, indicating that users are able to flashmint up to 2M GHO; this has the potential to be an important feature given that GHO cannot be flashloaned from Aave like a traditional ERC-20 on Ethereum.

However, since August 1, 2024, we have observed just four transactions worth over 1M GHO, with the largest being a 1.45M GHO Swap Debt transaction; the user repaid USDT debt (likely because borrow rates exceeded 40% APY) and borrowed GHO.

The ParaSwapDebtSwapAdapter, as described on Github and by BGD Labs on Aave governance, allows users to swap their debt assets without affecting collateral or requiring the sourcing of the debt asset, primarily utilized to arbitrage borrow APY and exit illiquid debt positions.

This time period encompasses multiple highly volatile market events, especially including August 5 (866K worth of transactions total, 2 transactions) and December 11 (1.974M total, 2 transactions)

Additionally, we have observed no blocks with multiple addresses flash-minting GHO, indicating that there is not significant and varied demand to do so.

While there is no direct indication that the current bucket capacity is not sufficient, the increased usage by the ParaSwapDebtSwapAdapterV3GHO contract, the growth of GHO circulating supply and the growth of the overall stablecoin market and stablecoin-denominated debt positions, lead us to recommed doubling the GHO FlashMinter bucket size on Ethereum. This could continue to become more highly utilized as other stablecoin borrow rates are elevated and users wish to debt swap into GHO.

Specification

Facilitator	Current Capacity	Recommended Capacity
FlashMinter	2,000,000	4,000,000

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this ARFC.

Copyright

Copyright and related rights waived via CC0

[LlamaRisk]

LlamaRisk supports the proposal to increase the GHO FlashMinter bucket capacity from 2M to 4M GHO. Given the continued growth of GHO’s market cap and the rising use of the ParaSwapDebtSwapAdapter, as highlighted by @chaoslabs, expanding the bucket capacity
will help accommodate the growing demand for GHO, mainly as stablecoin borrow rates remain elevated.

Stablecoin Borrow APR vs. Flash Mint Facilitator Volume. Source: AAVE, Dune, December 17th, 2024.

The comparative analysis of variable borrow APRs for USDT, USDC, and DAI alongside GHO Flash Mint Facilitator volume highlights the increasing utility of GHO flash mints as a response to elevated and volatile borrowing costs in the stablecoin market. While USDT, USDC, and DAI experienced average borrow rates of 7.29%, 7.78%, and 9.29% this year, respectively, borrow APRs spiked significantly during periods of market stress, particularly in April and late Q4 2024, surpassing 20% in some cases. This coincided with a noticeable GHO Flash Mint volume surge, particularly in Q4 2024, where multiple instances exceeded 2M GHO being flash minted daily, reflecting growing demand for cost-effective debt optimization mechanism like flash mint-driven debt swaps.

GHO Price Depeg. Source: ChaosLabs, December 17th, 2024.

We note that a potential drawback from increasing FlashMints capacity is their potential to temporarily impact GHO’s liquidity on DEXs, creating sell pressure that can push the price below the peg.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit 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.