Summary
LlamaRisk supports the propositions and parameters listed in this ARFC and believes that onboarding GHO to Aave Lido instance is a rational decision that will further promote the growth of Aave’s stablecoin. Moreover, providing initial GHO liquidity from the Treasury will help optimally bootstrap the borrow interest ensuring more stable borrow conditions. Further analysis also indicates that this measure would not impact the risk profile of GHO stablecoin or Aave’s Lido market.
Lido Market
After a successful period of growth, Lido market is now the second largest Aave market with a total size of $1.55B. This market is particularly suitable for ETH LST looping use case where most of the borrow volume is consequently attributed to wstETH and ETH assets.
Source: Aave, 8th November, 2024
Therefore, while stablecoin demand is not high at the moment, as outlined in a related proposal onboarding yield-bearing stablecoins to this market would increase stablecoin utility in this market. It can also be observed that GHO has high borrow interest using wstETH and stablecoins like USDS and USDC. Given the availability of these same assets on Lido market, this interest would be replicated, especially if the borrow rate of GHO is lower than of other stablecoins.
Source: TokenLogic GHO Analytics, 8th November, 2024
Moreover, Lido market is deployed on the Ethereum Mainnet and therefore benefits from the 28.4M GHO liquidity available there. Currently, GHO liquidity levels are sufficient and continue to grow. Additionally, the liquidity has remained stable, even amid recent market volatility.
Source: TokenLogic GHO Analytics, 8th November, 2024
It is important to note that all collateral assets in the Lido market already back GHO, meaning that this new GHO market deployment would not provide additional collateral diversification for GHO. Therefore, GHO’s risk profile would remain unchanged, aside from potential shifts in collateral composition. However, GHO could add ezETH as a new collateral type if a Liquid e-Mode is established or if the previously mentioned yield-bearing stablecoins are onboarded.
GHO Borrowing Patterns
It is important to distinguish two current setups where GHO is available:
- On-demand GHO minting on Aave Mainnet market
- Standard supply-and-borrow setup on Arbitrum (where GHO cannot be used as a collateral)
Until the recent expiration of GHO incentives on Arbitrum market, incentivized GHO borrowing resulted in extensive looping which made the borrow behaviors differ between these two setups. Quickly after the incentives expired, the borrows have traced back to usual levels. Currently, the risk levels of GHO loans on both markets are similar and no extensive risk taking is observed.
These observations indicate that optimal conditions to profitably loop GHO can only be established by using incentives. It is important to underline that if GHO looping would re-emerge, it would not necessarily impact the GHO risk profile since:
- GHO looping is more capital intensive because GHO cannot be directly used as a collateral backing GHO loans. This poses a limit to the extent of possible looping.
- Sufficient GHO liquidity and a supply/borrow buffer for Flashloans are maintained to cover the liquidations in case of unexpected health reduction.
Taking into account the learnings from this recent situation on Arbitrum, we believe that it is rational to onboard GHO with a supply-and-borrow setup where GHO collateralized loans are not allowed. This setup would bring more opportunities to the end user while ensuring minimal risk.
Recommended Parameters
The parameters for GHO have been aligned internally in collaboration with different DAO service providers and are presented as part of the original proposal.
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.