Glad to see the Snapshot passed!
I wanted to provide some perspective on the GHO peg, based on prior experience working on DAI. Apologies for the long-ish post
As @MarcZeller mentioned, GSM will only provide peg support if overall GHO demand is greater than supply (this pushes price up to $1 or slightly above, which creates incentives to mint GHO with the GSM). Introducing a GSM is useful but not really a short term fix.
This leads to a related point, which is that stablecoin growth can only be led sustainably via the demand side, not the supply side.
If incentives to increase supply (eg low fixed GHO borrow cost) are greater than incentives driving demand (liquidity incentives, other organic usage drivers / supply sinks), the peg will tend to break downwards. This ends up curtailing growth because at a certain point, borrowers will not be willing to mint and sell GHO at a discount given the risk that price will return to peg later and they will lose money on the spread between when they opened their loan and when they eventually repurchase GHO to close out. We’ve seen other cases of supply side growth strategies and TLDR is they never work unless there is an equal or greater level of demand (idk if anyone remembers GUSD minting incentives from last cycle, which backfired severely when these tokens were quickly returned to Gemini to be redeemed or dumped on the market).
GHO needs to drive demand to achieve sustainable growth, and ideally we want to create organic unincentivized demand (people who are holding GHO mainly for utility, rather than to purely for earning yield). Organic demand is where the true benefits of making a stablecoin emerge, as the issuer can earn a spread between the average yield earned on GHO backing (primarily GHO borrowers but potentially also GSMs and RWAs in the future) and yield demanded by GHO holders.
How to get organic demand? There are a lot of factors here, but I believe the most important are trust and liquidity.
When users trust a stablecoin, they assign it a lower implicit risk premium. And if a stablecoin is highly liquid, it provides users a greater level of convenience yield (basically, a way of thinking about the utility value of an asset, like how people are willing to carry some cash around in their wallet earning 0% for convenience) as they can use it for trading or commerce purposes more easily. Both of these factors (lower risk premium and higher convenience yield) improve the all in value of holding a stablecoin like GHO, without the issuer needing to pay for it.
GHO’s current under peg state is negative for trust, as users have uncertainty on when the price will return to $1 and are exposed to volatility. And trading under peg is also negative for liquidity, as the swap market impact per unit TVL is much greater within stableswap pools like Curve and Balancer when an asset is trading off peg. With this being said, returning GHO to peg should be a top priority even if it leads to a contraction in supply in the short term, as this is a necessary precondition for building up the organic demand that will make GHO succeed over the long term.
The current proposal to increase GHO minting costs from 1.5% (1.05% with stkAAVE) to 2.5% (1.75% with stkAAVE) is a great starting point. But I think Aave DAO can consider additional actions if this change alone is insufficient to bring GHO back to peg (as I suspect will be the case).
Forward Guidance and Primitive Rate Automation
If users expect borrowing costs may increase in the future, they should be less likely to contribute to over-supply by minting and selling GHO while it remains under peg. Creating credible expectations of maintaining GHO peg can even help achieve supply demand balance without needing to raise borrowing rates as high as otherwise might be necessary.
While this could be automated in the future, for the intermediate term Aave governance could commit to a set rate adjustment plan when GHO is under peg, such as raising GHO borrow cost by 0.5% each month until GHO price is >= $0.995 for 90% of the previous monthly period. (Specific parameters and thresholds are up for debate of course)
While I don’t think Aave should directly spend tokens to incentivize GHO liquidity, the DAO does have significant amounts of CRV / CVX / BAL etc that can be used more effectively to direct liquidity incentives towards GHO pools. This should help create some demand pressure to bring GHO back towards peg.
Protocol Owned Liquidity
GHO trading below peg presents an opportunity for Aave DAO to purchase some at a discount using existing stablecoin reserves, and then provide into LPs on Balancer/Curve/etc to improve GHO market depth and earn fees and liquidity incentives.
I think Aave DAO should refocus the GHO growth strategy on the demand side, as this (combined with introducing a GSM to prevent over peg situations) will allow GHO to achieve the trust and liquidity needed to begin building a base of organic users.
While I know this may not be a popular view, I personally expect that GHO won’t be able to find a sustainable supply demand balance until GHO borrow costs are close to as high as the DSR, as otherwise there will be too great of incentives to participate in looping strategies which push GHO price down below peg (supply sDAI, mint GHO, sell for DAI, deposit to sDAI, repeat).
It’s time to put the supply side growth strategy out to pasture, so GHO can achieve its true potential.