Summary
Chaos Labs supports the creation of a GHO Facilitator to mint 10 million GHO tokens, which will be deposited into the Lido instance of Aave v3.
The primary objectives are to enhance liquidity within the Lido instance and generate substantial revenue for the Aave DAO.
Liquidity
The initial listing of GHO on the Arbitrum instance highlighted challenges in attracting sufficient liquidity without offering aggressive incentives. Despite the availability of GHO, user participation remained low because staking GHO (stkGHO) and providing liquidity in DEX pools on Ethereum offered more attractive returns. A notable increase in GHO supply on Arbitrum was observed only after the introduction of substantial incentives.
By depositing 10 million GHO into the Lido instance, the Aave DAO can bootstrap liquidity effectively, allowing users to borrow GHO without first requiring expensive incentive campaigns to attract GHO supply to the market.
Backing
This proposal presents minimal risk as GHO is fully backed by the collateral used to borrow it. While the facilitator allows selected entities to mint uncollateralized GHO, the minted GHO is deposited directly into the Lido instance as supply, ensuring it remains within the Aave ecosystem until borrowed against collateral. Moreover, all assets approved as collateral for GHO in the Lido instance are already authorized in the main Ethereum Facilitator, and as such, they have been previously approved as GHO collateral from the Aave DAO. This structure guarantees that each GHO token is backed by equivalent assets held within Aave, preserving the integrity of GHO’s backing. Consequently, this approach does not introduce significant risk to the DAO or its users.
Demand
Most of the anticipated demand for GHO borrowing is expected to originate from WETH depositors in the Lido instance, who are currently restricted from borrowing due to the LTV ratio being set at 0%. Plans to increase the LTV for WETH, as outlined in this proposal, will unlock significant borrowing capacity, enabling these users to borrow GHO against their WETH holdings.
Additional demand may come from wstETH, which is the most widely used collateral for minting GHO in the Ethereum main market, representing approximately 22% of GHO’s supply. Borrow demand against wstETH collateral is expected to come from users of the main GHO Ethereum Facilitator who could earn additional yield by depositing wstETH in the Lido instance.
Furthermore, the anticipated addition of sUSDe to the Lido instance could boost borrowing demand. The potential introduction of a sUSDe/GHO E-Mode would allow users to engage in yield-looping strategies, borrowing GHO against sUSDe to leverage returns.
Together, these factors indicate that the 10 million GHO deposit will encounter substantial borrowing demand, promoting rapid utilization and supporting the growth of DAO revenue.
Revenue
The proposed initiative has the potential to generate significant revenue for the Aave DAO. Assuming that the 10 million GHO deposited into the Lido instance is borrowed quickly and considering a utilization rate of 92% with an interest rate slope of 6.5% as recommended in the GHO Lido listing, the DAO could earn up to $600,000 per year on the minted GHO.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
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