Overview
Chaos Labs supports the proposal to onboard GHO to the Lido instance of Aave v3, but we provide alternative parameters for the supply/borrow cap and interest rate curve. Our analysis considers the rapid growth in GHO’s liquidity, the strong demand driven by staking and liquidity incentives, and the potential for increased revenue and efficiency for the Aave DAO.
GHO Liquidity and Demand
The primary driver of GHO demand has been stkGHO, currently holding over 115 million GHO. This growth is largely attributed to the attractive combined deposit APY, which reaches 17% when including Merit rewards.
The second major demand factor is GHO’s growing DEX liquidity, which recently reached approximately $50M TVL and $10M of buy liquidity within a 1% range. This growth is supported by competitive incentives across major DEX platforms, including Curve, Balancer, and Maverick, with APYs ranging from 7% to 15%.
With these high APYs being among the most consistent on-chain yields, we believe they will continue driving GHO borrow demand.
Borrow Distribution
wstETH currently is the collateral used to borrow approximately 22% of the GHO from the Main Ethereum Facilitator, amounting to around 38 million GHO. Three of the users using wstETH collateral rank among the top 10 GHO borrowers.
wstETH has been the primary collateral for wstETH since the launch of the GHO Ethereum Facilitator.
The average collateralization rate for GHO borrowers on the Main Ethereum Facilitator is 220%. Notably, among the top 10 borrowers, only those with highly correlated collateral maintain health scores below 1.2. This reflects prudent borrowing behavior, supporting the case for elevated initial listing parameters.
Given the high amount of wstETH collateral used to borrow GHO and because of the higher supply APY for wstETH in the Lido instance, we expect borrowers who use wstETH collateral to transition to the Lido instance to take advantage of the more efficient borrowing experience and lower resulting rates.
Benefits
Implementing the recommended parameters for listing GHO in the Lido instance is expected to generate multiple benefits, such as increased DAO revenue, improved capital efficiency, and further growth of the Lido instance.
One key advantage is the new Facilitator, which enables the DAO to initialize GHO liquidity within the Lido instance. This initial GHO liquidity will be minted solely for depositing in the Lido instance and backed by the collateral used to borrow it.
The liquidity in the GHO market will enable WETH in the Lido pool to be utilized as collateral, fostering further market growth and enhancing DAO revenue. Additionally, we anticipate that a portion of the wstETH collateral currently used in the facilitator will migrate to the Lido instance. This shift will also contribute to increased revenue, as the GHO borrow rate will be partially offset by the wstETH supply rate, maximizing yield potential in the Lido market.
Using Merit to optimize incentives will help reduce inefficient allocations, benefiting users who utilize the pool as intended. This will enhance supply liquidity and improve the overall user experience for the pool’s intended audience.
Interest Rate Curve and Borrowing Costs
To ensure that GHO borrowing in the Lido instance remains consistent with the Ethereum Facilitator, we recommend adjustments to the proposed Base and Slope 1 parameters. As the Lido instance’s GHO pool will initially function similarly to a Facilitator but is expected to evolve into a standard market with user deposits, we suggest implementing an interest rate curve that reflects both the initial and future use cases. Specifically, we propose a Base rate of 3.5% to ensure that GHO minted through the Lido Facilitator isn’t borrowed below the minimum rate used by the Ethereum Facilitator. Additionally, a Slope 1 of 3% aligns with the initial target rate of 6% at UOptimal, keeping borrowing attractive when factoring in the yield on wstETH and WETH collateral.
We also recommend maintaining a Reserve Factor of 10%, in line with similar stablecoin markets in the Lido instance, given the future likelihood of user deposits.
Migrate Service Provider Streams
Chaos Labs supports the proposed migration of Aave DAO service provider streams to the Lido instance. This migration enhances treasury efficiency and improves the liquidity available on the market hence generating additional revenue for the DAO.
Supply and Borrow Caps
To accommodate the initial 10,000,000 GHO liquidity minted via the Lido Facilitator, as outlined in this proposal, along with approximately 8,300,000 GHO for the service provider streams that are to be migrated, we recommend an initial supply cap of 20,000,000 GHO. This cap provides a buffer for additional user deposits, although we don’t expect the additional buffer to gain significant traction in the initial period after listing.
For the initial borrow cap, we suggest 18,500,000 GHO to support the UOptimal of 92%. This aligns with other stablecoins in the Lido instance, allowing slight overutilization if borrow demand surpasses expectations.
Recommendation
Chaos Labs supports the proposal to onboard GHO to the Lido instance of Aave v3 with the following listing parameters:
| Parameter | Value |
|---|---|
| Chain | Ethereum Lido |
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | No |
| Supply Cap | 20,000,000 |
| Borrow Cap | 18,500,000 |
| Debt Ceiling | - |
| LTV | - |
| LT | - |
| Liquidation Bonus | - |
| Liquidation Protocol Fee | - |
| Variable Base | 3.50% |
| Variable Slope1 | 3.00% |
| Variable Slope2 | 50.00% |
| Uoptimal | 92.00% |
| Reserve Factor | 10.00% |
| Flashloanable | Yes |
| Siloed Borrowing | No |
| Borrowed in Isolation | No |