Thank you, @stani, for raising this important point regarding the GSM’s fee structure and its broader implications on liquidity and arbitrage dynamics. The 0.2% GHO burn fee provides a buffer of peg protection at a 0.2% depeg level, attracting arbitrageurs to buy back GHO from the secondary market and burn it once this buffer is reached. GHO supply benefits when it trades at a premium or when USDT or USDC trades below GHO. In the current instance, the depeg of USDT caused the USDT GSM to be fully refilled.
USDC GSM Holdings vs GHO Price. Source: Dune, January 17th, 2025.
The USDC GSM chart shows that its last two emptying events, in July and November 2024, coincided with GHO’s downward depegs. If exposure caps reach 100% for USDC (8M) and USDT (16M), the GSM will represent 14.7% of the 163.2M circulating GHO, consistent with the previous 10-15% supply ratio. However, there is a risk of depeg with just 3M GHO available within a 1% price impact.
Removing the 0.2% burn fee would allow arbitrageurs to sell freely and encourage minting or redeeming GHO on small secondary market price fluctuations of USDT, USDC, or GHO, weakening the GSM’s “peg stability buffer” property. This may reduce the time USDC or USDT stays in the stability module, leading to future revenue loss from the proposed stataToken yield. Retaining these funds without fee sharing from the GSM module is unlikely, as all revenue currently flows to the Aave Treasury.
While the primary utility of the GSM is to serve as a GHO peg stability buffer, the impact of lost revenue cannot be ignored. To strike a balance, the burn fee could be reduced by 5 bps to assess whether the increased GHO-stable volume in the GSM could offset the loss in future yield revenue while properly monitoring how the liquidity in existing LPs reacts to this change.
Notably, the Balancer GHO/USDT/USDC pool has a 0.05% fee. Reduced fees below 0.1% could divert volume from some high-fee GHO LPs, potentially reducing DEX liquidity due to lower APRs. In the future, this liquidity crunch might aggravate a GHO depeg.
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.