GHO Depeg and Liquidity Analysis

[ChaosLabs]

Summary of Events

On October 26th, between 9:15 AM and 10:15 AM UTC, a significant de-peg of GHO occurred, dropping its price from $0.962 to $0.946. This event represents the most substantial de-pegging observed since the token’s inception. The decline is attributed to a liquidity drain from the main pool, Uni V3 GHO/USDC. Although prices have since rebounded, the issue of liquidity inadequacy necessitates careful consideration.

Price Analysis

At 9:15 AM UTC, the GHO token encountered an abrupt price decline, reaching a low of $0.946. Subsequently, it has rebounded to its pre-drop price level.

Since its inception, GHO has generally traded below its peg, though consistently above $0.96. The recent price dip has led to an unprecedented low for GHO, well below its previous trading levels.

Liquidity Analysis

The primary liquidity pools for GHO are Uniswap V3 and Balancer. However, due to the pool’s composition on Balancer compared to the higher liquidity concentration on Uni V3, the primary source of liquidity has been the Uniswap pool.

Balancer pool composition

Uniswap GHO/USDC pool liquidity concentration on 26.10

Until September 23rd, over $2.7 million worth of USDC tokens were locked in the GHO/USDC pool. However, in the subsequent two weeks (between September 23rd and October 6th), approximately $2.5 million in USDC tokens were withdrawn from the pool, primarily through a combination of liquidity removal from LP positions and GHO-to-USDC swaps. This trend of decreasing liquidity persisted over the following weeks, and by October 17th, it had fallen below 100,000 USDC. This period was marked by heightened price volatility, culminating in today’s significant price drop.

Uniswap V3 GHO/USDC pool

Conclusion

The consistent withdrawal of USDC from the Uniswap V3 pool has led to a significant decline in GHO’s price, reaching its lowest point since its inception. Maintaining a stable peg is critical for accepting stablecoins, so we want to emphasize to the Aave community that the current liquidity levels may jeopardize GHO’s stability. We will collaborate with community members to propose proactive measures to enhance liquidity, reinforcing GHO’s peg and instilling confidence in its widespread adoption. This concerted effort will contribute to the steadfastness and trustworthiness of the GHO peg.

[ApuMallku]

Thanks for the deep analysis @ChaosLabs; much appreciated that you took the lead on that. When can we expect to have a coherent and integral solution? A broader solution between all the SPs is needed. The lack of trust (and strategy) that GHO is receiving from the market is damaging the long-term vision for GHO as a key product. As a GHO borrower we are now drastically considering not borrowing more GHO until we understand who owns the GHO strategy, why @AaveLabs is not commenting on anything related to GHO, and why it was released without a further plan, etc. It’s incredibly scary to think that GHO is now in the hands of the community without having more context of the situation.

[EzR3aL]

Hi all,

first of all thank you Chaos Labs for this analysis. GHO is definitely looking for help.
I think with the current proposed things like the SM upgrade including GHO and the Liquidity committee we are on track to help GHO reaching and holding its peg and restoring faith or establishing it. It is crucial to have different liqudity pools for GHO (see the graphics above).
@ApuMallku we still have to consider, that GHO is just a few months old.
GHO doesn’t have the benefits of being a dex liquidity based stablecoin like CRVUSD. Which is also heavily subsidized by Mich.
GHO has the benefit of being multicollateral backed and has a high collaterization rate (2,79). This has to be advertised and actively used as a benefit.

Also i think the whole DeFi space is vulnerable to regulatory risks at the moment. Which could be a reason why Aavecompanies is more passive. Don’t get involved too much to not risk anything. Its better to stay in the background instead of being actively watched by SEC for example. This is probably going to be better in the future, but for now it is a risk. Just some idea of myself, don’t know if its true but could be. I mean some protocol interface already prohibit user to use them.

[ApuMallku]

I see what you mean but it seems that the market is not looking for a highly collateralized stablecoin, everyone is chasing yield. If we can’t offer yield by subsidizing LPs maybe is time to offer GHO <> RWA like what Frax is doing with sFRAX and attract yieldooors who can also want a highly collateralized stablecoin. We are far from reaching PMF because it’s too early, we know, but we need to understand who is our target. Thats why we’ve been asking who owns GHO’s strategy and if there is/was a plan when launching the product. We think these questions are fair and the community deserves to know and have more transparency in order to make better governance decisions.

[EzR3aL]

the market is not looking for a highly collateralized stablecoin

Yet

The strategy has to be defined by the DAO. GHO is in our (Aave holder) hands. And we are the ones defining it.
We will definitely have to offer yield in any way. And RWA could be a way but i also think RWA are dangerous. You are basically combining the danger offchain and onchain together.
I think GHO could be a great usecase for perp trading protocols. Use GHO as counter part with high collaterization similiar to Gains network with DAI. The protocol could be whitelisted as an facilitator and have a bucket size. GHO would get deep liquidity and the protocol would immediately have access to great liquidity, which is heavily needed to offer leverage.
GMX is already struggling with GLP and GHO as a stablecoin would be perfect. Also it would be cheaper.

[TokenLogic]

Hi Everyone,

Earlier today @TokenBrice and the GLC created the following pools on Maverick. Both pools are currently receiving GHO incentives in effort to attract deposits.

Pool 57 provides greater USDC depth in liquidity as the price falls. This is in stark contrast to Uni v3 which has linear liquidity distribution over defined ranges. More deposits into the Maverick pool will help support GHO recovering the peg. The pool has been live only a few hours and has 553k in TVL.

GHO-USDC #57

Pool 58 is a tight range pool that is offering greater capital efficiency and is attracting a lot of the current trading volume. The pool has been live only a few hours and has 520k in TVL.

GHO-USDC #58

The Sommelier vault and the Aave DAO provided some buying support around the 22th October which started to move GHO’s price higher. However, the volume swaps from GHO to USDC was greater and the relief was short lived. The current Uniswap v3 pool is majority Sommelier’s Turbo GHO vault. 2.83M of of 3.09M. We are in touch with the Sommelier team as this liquidity is out of range.

Author: @MatthewGraham

[chippervan]

i have no problem with GHO being under peg and cheap to borrow. if Aave is worried about regulation as per @EzR3aL and do not want to work on parternships etc i think it is unfair to just raise interest rate as i believe raising interest rate alone will not restore peg. but it will hurt early adopters of GHO. which i think strategically could be a mistake.

if it is critical to improve peg then i think increasing GHO utility should be the next move. the team have already tweaked the interest rate and it did nothing. market is moving too fast. next lever they pull on should be utility.

example:

1. Aave funds a compound fork using GHO as base asset, then use LM to incentivize depositors? if you could get GHO at low interest rate, use as collateral to farm another token then perhaps that would decrease sell pressure. maybe there could be other synergies with an app and token like this. I think Compound v3 codebase might be under business license but i think it is worth exploring.

2. integrate GHO into SILO as per crvUSD into SILO LLAMA edition. see:
   https://silodao.fyi/what-is-silo-llama

3. integrate GHO into SPARK protocol as per DAI into Aave

4. @ApuMallku suggestion about RWA is interesting. not sure how that could work.

5. not sure what implications of using GHO on Aave as collateral. perhaps in isolation mode it could work but i think suggestions like this need to vetted by quants and risk experts. also wonder what price/oracle you would use for GHO when used as collateral vs price for debt? probably would need market price for GHO when used as collateral?

6. @EzR3aL and others suggestion on using GHO BLP in SM is a bad idea imo. Yes, it is better than using Aave token but using assets individually makes more sense to me. I think if ppl are throwing out this suggestion then it needs proper quant/risk analysis and comparison to other options and not just a comparison to current solution. GHO BLP holds balancer protocol risk, risk of all assets that BLP is composed of, and all assets that GHO is composed of. I think if Aave had a big issue then GHO price would plummet. I think if Aave had a big issue related to one of the assets then I think Aave token would plummet, GHO would plummet, the asset with an issue would plummet, but the other assets that GHO is composed of would not; therefore using assets individually makes more sense. My logic is something along those lines.