GHO Stability Module Update

[AaveLabs]

GHO Stability Module - Development Update

Summary

Following the positive outcome of the recent TEMP CHECK for the GSM (GHO Stability Module) we are pleased to share a number of recent developments around the GSM in this Development Update along with the GSM codebase, which is now public on GitHub.

The GSM is a peg stability mechanism inspired by MakerDAO’s PSM designed to exchange between two tokens at a pre-set ratio.

The GSM will be undergoing a number of security audits from a number of DAO and external service providers:

• SigmaPrime for a security audit

• An independent third-party security auditor

• BGD Labs for a security review

• Certora for formal verification

We encourage the community to inspect the codebase and provide any security related issues through our appropriate channels.

Modifications in Design

We took the chance to make some optimizations from the initial specifications described in the original TEMP CHECK.

The primary changes center on the design of the “Capital Allocator”. The Capital allocator as a component of the GSM was removed, and an additional type, GSM4626, which can hold 4626 vault shares as its underlying asset was added. These changes allow the DAO to harvest yield from the vault shares over time.

Moreover, “fee strategies” which distinguish their logic from the “price strategies” were added. These fee strategies are configurable at launch and can be set by the DAO.

Next Steps

Following the audits, we will share an ARFC based on the facilitator onboarding process framework.

We look forward to welcoming feedback and discussion from the community in this upcoming ARFC around how the following parameters should be configured:

• Initial Debt Ceilings

• Initial Exogenous Assets

• Initial Pricing Strategy & Fee Strategy

• Price Bounds for Swap Freezes

The GSM is not just a technical advancement, but a strategic tool designed to maintain the peg of GHO. Through allowing users to exchange two tokens at a preset ratio, the GSM will ensure that the price of GHO remains stable and adheres to its intended peg.

[ChaosLabs]

Overview

Ahead of the launch of the GSM, Chaos Labs has reviewed a list of candidate assets and explored the impact of various levels. Our recommendation is to launch GSM with USDC and USDT with an exposure cap of 5M each.

Exposure Cap and Fees To Accommodate Growth

As GHO is still in its early growth stages, with a market cap of $20M at the time of writing, we recommend setting the total exposure caps to 10M for both USDC and USDT together. While this accounts for 50% of the circulating supply, which is much beyond the desired ratio, caps should be set with a forward-looking approach to accommodate for growth. As the main focus for GHO right now is to grow quickly, we recommend setting both Buy Fee and Sell Fee to 0, as it is unlikely to generate significant yield in the short term and is more likely to promote better the peg stability of GHO, which is of greater importance at this stage.

A Conservative Approach to Assets and Pricing

As with other recommendations for new deployments, we take a prudent approach in setting the initial parameters. Therefore, we recommend starting off with USDC and USDT, which account together for more than 85% of the total market cap and over 85% of the trading volume of all stablecoins. Given the peg stability of USDC and USDT, we recommend starting off with a Price Ratio of 1 for both.

Recommendations

Asset	Exposure Cap	Price Ratio	Buy Fee	Sell Fee
USDC	5M	1	0	0
USDT	5M	1	0	0

[Gauntlet]

At the current supply of GHO, Gauntlet supports 5m USDC, 5m USDT as exogenous assets in the GSM. As GHO supply grows, the debt ceiling for USDT and USDC may need to grow as well, for comparison, DAI PSM capacity is ~15% of total DAI capacity, while minted DAI from PSM is ~17% of total minted DAI.

Gauntlet also recommends price bounds for USDT and USDC at 0.975 in the event of USDT/USDC depeg. Freezing swaps in GSM between GHO and depegged USDC/USDT can prevent the buildup of depegged exogenous assets, thus helping mitigate GHO depeg.

Developing optimal fee strategies is an area that can be further explored. The fee strategy can both incentivize GHO repeg and prevent adversarial GHO depeg. One way is for the fee strategy to depend on GHO price in order to mitigate adversarial actors from causing further GHO depeg. For instance, the sell fee (user swap GHO for USDC in GSM) is 0 if GHO < $1, but the buy fee should be significantly higher.

[WintermuteGovernance]

Hey @Gauntlet @ChaosLabs @AaveLabs,

we’ve been thinking about the GHO PSM and just wanted to flag some potential cases in which adverse PSM conditions may persist.

1. With sDAI now onboarded as collateral and if the GHO PSM were to launch with USDC with 0/0 Buy/Sell Fees the USDC pool could get drained fairly quickly.

For example, a user deposits sDAI → borrows GHO → swaps to USDC for free (GHO PSM) → swaps USDC to DAI for free (DAI PSM) → deposits into sDAI → add to their collateral on Aave → repeat.

This ends up draining the USDC side of the GHO PSM (assuming the rate arb between sDAI and GHO persists).

2. USDT more often than not trades at a premium to USDC specifically on Binance

If the fees in the GHO PSM for USDC and USDT are set to 0/0 BUY/SELL, a user can swap USDC to GHO → swap GHO for USDT → sell USDT on Binance.

This ends up draining the USDT side of the GHO PSM.

We’d advise against having a 0/0 Buy/Sell fee at launch to help avoid the PSM getting drained.

[ApuMallku]

@WintermuteGovernance

having a 0/0 Buy/Sell fee at launch

We support Wintermute recommendation.

[WintermuteGovernance]

Hey @ApuMallku,

Thanks for your support, just wanted to clarify that we are against having a 0/0 Buy/Sell fee at launch.

[ApuMallku]

Yes, we are on the same page; we used the wrong quote, apologies for that.

[ChaosLabs]

We will share updated recommendations for the initial launch parameters for the GSM closer to its launch. There are several variable factors that will impact these recommendations, including GHO market cap, borrow rate, competing stablecoin borrow rates, DSR, and more.

[ApuMallku]

@AaveLabs whats the status of this development?

[Gauntlet]

GSM Launch Conditions and Parameter Recommendations

Gauntlet and @ChaosLabs recommend the following GSM launch conditions and parameters. We recommend GSM launch after GHO is consistently trading within ($0.995, $1.005) to avoid GSM reserve depletion.

GSM Launch Conditions

We recommend the following to hold before GSM is launched, most importantly the price condition (> $0.995).

• GHO should consistently be trading > $0.995, i.e. hourly moving average > $0.995 (price at peg)
• 30-day period with GHO trading consistently above $0.97 before launching the GSM.
• GHO annualized volatility < 10% (price stability)
  • Current GHO annualized volatility is ~10%

GSM Parameters

Conditioned on the above holding, we recommend the following updated parameters for the GSM.

• Freeze / unfreeze
  • freeze at (0.99, 1.01)
  • unfreeze at (0.995, 1.005)
• Buy/sell fee
  • 0.2%
• GSM caps
  • 3.5m for USDC, USDT

Freeze / unfreeze parameters
These bounds on the freeze/unfreeze parameters should apply to both USDC and USDT market price, as well as GHO/USDC, GHO/USDT ratios, as demonstrated by the USDC depeg during March 2023 and how it affected the DAI PSM. During the USDC depeg, the USDC reserve supply ballooned in the DAI-USDC PSM. This caused DAI to lose its peg since a growing amount of DAI was becoming backed by USDC.

DAI-USDC PSM behavior during USDC depeg

As such, having freeze/unfreeze bounds on the USDC/USDT side may mitigate GHO depegs when USDC or USDT depeg. Having freeze/unfreeze bounds on the GHO side may prevent excess drainage of the USDC/USDT in the GSM.

Buy/sell fees
We recommend initializing with buy/sell fee at 0.2%. We are exploring more sophisticated fee strategies. As of now, it is unclear how targeted fee strategies (for instance, fees dependent on difference to $1 peg) can benefit GHO peg more than constant fee strategies.

The recommendations provided above are based on the current market conditions and are intended for reference purposes. Prior to the launch of the GSM, we will revise all recommendations, with a particular focus on GSM caps and Buy/Sell fees, once the conditions mentioned above are met. This update is necessary to accommodate any changes in the market and GHO conditions that may significantly impact the recommendations. These conditions include stablecoin borrow rates, GHO market cap, liquidity, and more.

[AaveLabs]

Aave Labs is progressing well with the development of the GHO Stability Module (GSM) and GHO GSM 4626. Multiple successful audits have been completed by external firms, including OpenZeppelin, ABDK, SigmaPrime, and an independent security researcher. Enhancing our security measures further, the final stages of the codebase verification are being conducted with Certora.

With these developments nearing culmination, the next step is the deployment of the GSM and GSM 4626. The GSM will be enabled once the criteria from the risk providers has been accepted. The 4626 version will be deployed and can be utilized at a later date once the GSM has reached maturity and is working as expected. An AIP will be developed collaboratively with the DAO risk providers, focusing on the configuration parameters. This ensures that our latest developments are seamlessly integrated, maintaining the highest standards of security and efficiency in the Aave ecosystem.

[EzR3aL]

@AaveLabs Whats the difference between the GSM and GSM 4626?

[Gauntlet]

GSM Launch Parameter Recommendations

Given community interest in launching the GSM now as opposed to waiting for the recommended GHO conditions, Gauntlet and @ChaosLabs recommend the following launch parameters.

GSM Parameters

We recommend the following updated parameters for the GSM under current conditions (GHO at ~$0.983).

Freeze / unfreeze

• freeze at [0.99, 1.01]
• unfreeze at [0.995, 1.005]

Buy/sell fees

• 0.2%

Since the GSM is planning to be launched without seed liquidity, we continue to recommend buy/sell fees of 0.2%.

GSM caps

• 500k for USDC, USDT

The lowered GSM caps can help to bring temporary blips > 1 back to peg (assuming liquidity remains similar in structure to current conditions, given the temporary nature).

Capping GSM to lower caps may help reduce risk of unexpected GHO minting via GSM and potential associated market selling that could negatively impact the peg.

Should GHO going over peg be consistent, that may indicate our other GSM launch conditions have been met (such as the price > $0.995 condition), and as such we could recommend to increase caps at that time.

[AaveLabs]

The GSM 4646 is a separate smart contract that is aimed to be used with ERC4626 vault shares as the underlying asset. It provides buy/sell functionality to/from an ERC4626 vault share to/from GHO. Yield generated is directed to the GHO treasury in form of GHO.