Introducing: GHO

Summary

Aave Companies is proposing to the DAO the introduction of a native decentralized, collateral-backed stablecoin, GHO, pegged to USD.

With community support, GHO can be launched on the Aave Protocol, allowing users to mint GHO against their supplied collaterals. GHO would be backed by a diversified set of crypto-assets chosen at the users’ discretion, while borrowers continue earning interest on their underlying collateral. As described below, all decisions relating to GHO will be in the hands of Aave Governance.

If approved, the introduction of GHO would make stablecoin borrowing on the Aave Protocol more competitive, provide more optionality for stablecoin users and generate additional revenue for the Aave DAO by sending 100% of interest payments on GHO borrows to the DAO.

Introduction

In the last couple of years, stablecoins have reached a central position in the space, now standing at an approximate $150B market capitalization. Stablecoins provide a fast, efficient, borderless and stable way to transfer value on the blockchain. Decentralized stablecoins add transparency and censorship resistance to this list of benefits – an integral part of web3.

The usage of stablecoins will only continue to grow as cryptoassets become further integrated with a user base that is less crypto-native. Decentralized stablecoins provide censorship-resistant fiat-denominated currency on the blockchain.

Introducing, GHO, a decentralized multi-collateral stablecoin that is fully backed and native to the Aave Protocol.

How would GHO work?

As a decentralized stablecoin on the Ethereum Mainnet, GHO will be created by users (or borrowers). As with all borrowing on the Aave Protocol, a user must supply collateral (at a specific collateral ratio) to be able to mint GHO. Correspondingly, when a user repays a borrow position (or is liquidated), the GHO protocol burns that user’s GHO. All the interest payments accrued by minters of GHO would be directly transferred to the AaveDAO treasury; rather than the standard reserve factor collected when users borrow other assets.

GHO introduces the concept of Facilitators. A facilitator (e.g., a protocol, an entity, etc.) has the ability to trustlessly generate (and burn) GHO tokens. If this proposal is approved, then any facilitator would have to be approved by Aave Governance. Various facilitators will be able to apply different strategies to their generation of GHO.

For each Facilitator, Governance will also have to approve something that we call a bucket. A bucket represents the upward limit of GHO a specific facilitator can generate.

If enacted, this proposal will activate the first facilitator: the Aave Protocol - specifically the AAVE market on Ethereum. Governance will be able to determine and assign this facilitator a specific bucket capacity to bootstrap the GHO liquidity and the GHO market.

The Aave <> GHO integration

The Aave – GHO integration employs the same mechanisms as any other asset listed on the Aave Protocol – a specific GHO aToken and GHO Debt Token will be deployed. These tokens can be registered, upon approval of the proposal, for the GHO token on the Aave Ethereum market.

GHO Interest rates

Borrow interest rates for GHO will be determined by the AaveDAO, with a stable rate that may be adapted depending on market conditions. This design retains the Aave Protocol’s borrow interest rate model flexibility, and it will be possible in the future to implement any interest rate strategy the Aave community sees fit.

A Discount Model for GHO

Given the nature of the asset, this integration allows for innovative features that provide greater utility for governance and community participants. The initial implementation of GHO includes a Discount Strategy mechanism. The initial discount strategy allows for Safety Module participants (stkAAVE holders) to access a discount on the GHO borrow rate. In the first implementation, the strategy will set a certain amount of GHO at discount per stkAAVE supplied, and a discount on the interest rates that can vary from 0% (no discount) to 100% (full discount). These parameters are controlled by Aave governance.

We have put together a sheets page here where you can play around with different interest and discount rate models to give you a better idea of the mechanisms behind them.

Aave V3 and GHO, a Match Made in Heaven

Using isolation mode, users can generate GHO with a broad range of assets that are currently supported on the Aave Protocol whilst keeping it collateralized and reducing risk. Supply and borrow caps also help reduce risk.

E-Mode acts as a stabilizing factor in market volatility due to its higher LTV. For example, in the event of a market downturn, GHO demand increases as the price of collateral contracts and users borrow more GHO using other non-volatile collateral assets to repay their positions. This would increase the amount of GHO that enters the market and reduce demand. Stablecoin holders can also access GHO with a rate close to 1:1 with zero slippage thanks to E-Mode.

Portal will provide the ideal path forward to scale GHO in the heterogeneous multichain world. Using portals, GHO can be distributed trustlessly across networks whilst being minted on Ethereum, which has higher security, by simple message passing, without the need to use bridges, reducing the overall risk. Whilst the implementation of GHO proposed here does not include this burn/mint and messaging implementation, the next facilitator implemented and activated by the Aave community may allow the redistribution of GHO tokens on various networks, and automatically supply them into the markets where the feature is activated.

Although the Ethereum market is still running the V2 version, an upgrade to the V3 codebase is expected in the upcoming months.

Further Utility for Governance

Holders of stkAAVE can mint GHO at a discounted rate, meaning they will pay a lower interest rate on the GHO that they borrow. Therefore, there is an incentive to help secure the Aave Protocol as AAVE is staked (stkAAVE) into the protocol’s Safety Module.

As people mint GHO through the Aave Protocol and any other facilitators, we expect the Aave DAO to receive a substantial amount of revenue in the form of fees. Instead of LPs receiving most of GHO’s borrow interest paid, this interest is fully collected by the DAO. This increase in revenue can be used to innovate, support contributors in the ecosystem, bolster the treasury during market downturns or anything else the DAO decides.

Following the introduction of GHO, the DAO will also be able to decide GHO’s native interest rate and change it over time through a governance process, which will be outlined in an upcoming proposal. This means that GHO’s monetary policy will be controlled in a decentralized way by AAVE governance.

Importantly, the Aave Protocol should remain as inclusive as possible with a variety of stablecoins available for supply and borrowing. Expanding the protocol’s stablecoin pools to include GHO will add optionality and diversification for Aave users and help contribute to the sovereignty of the protocol. GHO will also have a stable interest rate, adding certainty for borrowers.

GHO to market

We envision GHO adoption both inside and outside of the crypto-native community.

Given the low transaction fees on L2s and their growing adoption, we believe there is an opportunity for GHO to have widespread usage on L2s.

Moreover, grants and hackathons can be directed towards developing and integrating payment methods for GHO which have use cases both for crypto-native as well as more mainstream users.

GHO will provide a level of security and decentralization that is inclusive for crypto-native users while also using a growth strategy that emphasizes its use cases for a growing mainstream audience. This strategy should be focused on use cases such as payments whilst taking advantage of the growth and potential of L2s. Grants and hackathons – decided by the Aave Grants DAO - will be a key part of the strategy to build out these mainstream use cases.

Community Snapshot Votes

A Snapshot will follow this ARC to determine whether the community wants to move forward with GHO.

If the community votes positively for the deployment of the protocol creating the ability for users to mint GHO, a recommended starting interest rate and discount rate will be proposed (please comment below with any recommendations), both of which can be changed through governance over time with contributors such as Gauntlet and others potentially playing a key role.

Deployments of GHO on the Aave Protocol across other chains will require further governance approval.

In the future, the community will also be able to decide whether to provide retroactive funding to those who contributed to the creation of GHO and how much funding to provide.

If approved by the community, various audits – by OpenZeppelin and PeckShield – will occur in the coming weeks.

Conclusion

This ARC is focused on introducing and getting community feedback on Aave’s native decentralized USD pegged stablecoin, GHO.

GHO will be:
:earth_africa: Decentralized
:muscle: Over-collateralized by assets that continue to earn yield
:sparkles: Backed by multiple types of collateral available on the Aave Protocol
:balance_scale: Governed by the Aave community

We look forward to hearing community feedback on GHO and all aspects of this proposal.

Ready, Set, GHO :running_man: :running_woman:

50 Likes

How do you see Facilitator #3 delta neutral position work from a high level point of view?

1 Like

What sort of arbitrage exists to maintain GHO peg? Who makes money on the arbitrage?

1 Like

facilitators presented are suggestions to help the community consider the GHO proposal.

a simple “delta-neutral” facilitator role could be to mint GHO to provide liquidity in stableswap pools such as Curve and offset fees by LP yield while staying in a low risk environment.

It’ll be up to the community to propose to governance facilitator roles.

4 Likes

if GHO is above peg for any reason, it’s profitable to mint GHO with for example another stablecoin and “short it” on stableswaps and earn slippage.

With emode very efficient leverage can be enabled to do this both ways.

If GHO is “under peg” it’s profitable to pay back debt. Allowing GHO total supply to go down as debt repaid is GHO burnt as helping peg to be restored.

This kind of mechanism proved its resilience with other actors of the ecosystem since years.

“Let ppl make money by protecting the system”

7 Likes

Great initiative.

Can someone please outline the key differences between DAI (by MakerDAO) and GHO and why would someone uses GHO over DAI for example?

Thanks, love to learn more.

4 Likes

So all of those options for facilitators aren’t going to happen unless they are voted on? Also, do you mind explaining how the algorithmic facilitator is different than other algorithmic backed stable coins such as Luna?

Aave is decentralized, no option is by default without governance approval.

That being said, zero facilitators approved would mean that no GHO can be minted and will not be very efficient.

A predictable path is that governance allows “core” roles (such as Aave) on a first batch and then gradually and as candidates present themself to governance, new role and associated buckets of GHO minting are attributed.

2 Likes

among other stuff, GHO allows position-based minting instead of collateral vault specific minting allowing a smoother and more balanced position management with very heavy gas optimization.

Aave specific features such as emode and portals allows for more use-case and makes GHO easier to integrate outside of L1 or to maintain peg than alternatives.

But i personally be crystal clear on this, the idea is to grow the decentralized stablecoin market not to compete.
The power of DeFi is that GHO allows more liquidity for decentralized stablecoin in the market, more fees for Aave, more volume and fees for Curve, more stability for other stablecoins more attractiveness of DeFi in general compared to CeFi.

With GHO Aave wins, but also curve, balancer, convex, makerdao, qidao, frax and so on…
Synergies define our ecosystem.

6 Likes

Sam here from Frax :) We would love to support GHO with our FRAXBP pools on Curve to incentivize deep liquidity for GHO on launch and have GHO-FRAXBP be the trading hub for GHO. If you’re not familiar with FRAXBP: Deploy a "FRAXBP" Pool & whitelist Frax for veCRV Staking - Proposals - Curve.fi Governance

The idea is basically to pair stablecoins with a FRAX-USDC base pool and FRAX will incentivize the metapool proportional to its size/demand so it does not even need matching contributions by the project. It simply needs organic demand+size :slight_smile:

Additionally, we’d love to help out any way we can and participating by being a “facilitator” when more information is released on the structure. This is one of the most exciting Aave proposals in a long time, congratulations! Looking forward to seeing GHO in the wild. :sunglasses:

20 Likes

This is a great proposal for Aave and increasing decentralized stablecoins adoption.

I do want to call out that borrowing interest rates cannot be controlled by the DAO. They need to be variable or fixed but be completely market-driven. There is ample literature and historical examples in TradFi and DeFi that pegged currencies (or stablecoins in this case) cannot have all three at the same time:

  1. Free flow of capital (in and out)
  2. Independent monetary policy (money supply or interest rates)
  3. Peg stability

Setting arbitrary interest rates controlled by the DAO will lead to markets out of equilibrium at the expense of capital controls (controlling minting/redeeming mechanism) OR the peg stability OR even both. UST wanted to achieve all three which led to significant capital imbalances. I am aware this is not an algorithmic stablecoin but please look further than this analogy to analyze if borrowing interest rates have to be really controlled by the DAO rather than be market-driven. In events where GHO depegs, an algorithmic interest rate model can increase borrow rates to induce demand for GHO and restore peg. Vice-versa to when GHO exceeds $1. This will of course impact the DAO revenue and make it less predictable but that seems worthwhile to having an artificial temporary balance of freely trading stablecoin with arbitrary interest rates and fixed peg.

If you want GHO to succeed, consider borrowing interest income as secondary consideration otherwise you are falling into the fallacy every country with a pegged currency has made and ultimately failed.

6 Likes

Hey, Truco from Yeti Finance on Avalanche here :grinning:

Interested in how the facilitator role would work, for instance a system like Yeti Finance could be used to mint GHO against ERC-4626 or other vault standards for something like delta neutral strategies, which we have been developing on our own anyway. This would remove the need to produce fragmented liquidity for individual stablecoins across ecosystems when deploying on another chain like Ethereum mainnet since GHO liquidity would already exist. The Yeti model takes inspiration on stability mechanisms from Liquity, and could be a way to introduce GHO minting against high yielding assets.

We already take aToken v3 on Avalanche as collateral to mint YUSD, excited to explore potential collaborations with GHO.

3 Likes

Hey, Benjamin from QiDao Protocol (MAI)

Congrats on GHO! I love me some CDPs <3

Excited to work with yall on making the stablecoin mcap more decentralized. Maybe this paves the way for a CDP 3pool on Curve (MAI-DAI-GHO)? :eyes:

13 Likes

Hello team, Figue from Paladin.

Wow, congratulations on the massive annoucement, this is going to blow wide open the design space around Aave. We’d love more technical details on the actual implementation of the discount for stkAave holders. Would they need to deposit them on Aave, or would this be done by looking on their balances ? As a protocol controlling 50,000 + stkAave, we want our community to benefit as much as possible from these new opportunities !

We have opened a parallel governance post to discuss opportunities here, if any of you want to pitch in!

7 Likes

Thats what i was waiting for. A battle tested defi protocol creating a decentralized stablecoin.
Has there been any simulation done like what is going to happen to GHO if immediately 50% of the Liquidity on Aave will be withdrawn? Will there be just huge liquidations and thus burning of the token or what could possibly happen to GHO?
Also what would happen if the protocol of Aave gets exploited in the staking module. The GHO being backed by these stkaave would loose their backing and probably their peg to these token?

Just some ideas that came around my mind.

What i really like is, that finally the token of Aave gets more use-case or at least revenue by staking in the safety module and thus getting GHO cheaper. This could incentives not only normal user but also big holder and other protocols to safe the Aave protocol and also earn fees by minting GHO and lending them to other participants.
I am already seeing the Aave wars ;)

Curious how you’re thinking about GHO oracles. Eg. would it be internally fixed to $1 (as is the case with most other CDP stablecoins such as MakerDAO’s DAI) or using a market price? I think $1 fixed (despite maybe some edge cases and risks) is probably more suitable, as otherwise people shorting GHO against other stablecoins to arb the peg could be blown up in a deleveraging spiral.

3 Likes

The initial implementation would fix the price at $1 in a similar fashion as DAI, the GHO behavior can be customized though in the future as it’s an oracle configuration that is very similar to other assets on Aave

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Hi, Teddy from Notional here. Really exciting proposal! Like some of the other commenters on this post, I am looking forward to seeing more details on the facilitator role. Notional could help build out fixed rate borrow/lend markets for GHO - would love to explore!

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We need more decentralized stablecoins in Defi, there’s too much reliance on centralized stables such as USDC, and USDT. I think Aave creating a stablecoin will increase the confidence, trust, and adoption of decentralized stablecoins.
And shoutout to the already existing ones FRAX, DAI, LUSD, BAI, AUSD and so many more!
And I will like to ask, how can one contribute to the development.