Introducing: GHO

It is amazing to see @AaveCompanies on the governance forum presenting revolutionary ideas and engaging with the community. GHO is a fantastic idea and launching it on the an established lending market which at its peak, held over $35b of liquidity and is governed by the 125,000 unique AAVE or stAAVE holders, makes a lot of sense to me.

The introduction of GHO on Aave v3 with E-Mode is going to enable some recursive yield arbitrage strategies which will become more profitable for users who hold stkAAVE. The net affect of this strategy will be to reduce borrowing rates across the platform and will lead to a higher TVL. Lower borrowing costs on stable coins in general is good for attracting borrowers.

If these yield arbitrage positions are not managed properly, like stETH and ETH recursive borrowing, there will be risk and opportunities for liquidators to maintain the health of the market. The supply cap (bucket) on GHO will be key to managing this at a system level. The Aave v3 functionality is perfect for managing the risks with bringing GHO to market. I’d be keen to build out a platform that shows the risks and help enable the community make informed decisions around the governance of GHO - I think this is a key aspect for facilitators to understand.

With 100% of the interest from borrowing GHO going to Aave DAO’s Treasury, this is going to be, not just a new source of revenue, but a very material revenue source. I am expecting this to be very lucrative for the Aave community. The introduction of GHO across all the different markets and ability to move funds seamlessly between the various networks will be a unique advantage to Aave who has been very proactive in deploying on other networks. The competitive edge of GHO will become increasingly apparent in time to come.

The facilitator role is interesting, the Aave DAO elects a facilitator via governance and then sets the supply limit on GHO that facilitator could deploy into the chosen market. This is an interesting concept of placing trust in an entity to manage supply of GHO. If this is like the Gauntlet and Bored Ghost Developing relationships, then it is an opportunity to welcome another key player into the Aave ecosystem. I am keen to see who emerges in this space.

I like how stkAAVE holders receive a discount when minting GHO and I think that is an elegant way of incentivising the use of GHO relative to other stable coins. I would expect the minting GHO incentives to be less or equal to revenue generated by GHO over any extended time horizon, perhaps not at launch though. These incentives will bring more GHO into supply and that will lead to downward pressure on GHO spot price as any whale will mint GHO and swap it to another stable coin.

I wonder how the minting incentives will interact with various other stable coins and their mechanisms. I would assume other over collateralised stable coins must now be considering offering similar incentives to borrowing/minting their stable coin. Lower net interest rates via incentives for borrowing or airdrop upon borrowing…

Creating deep liquidity for GHO will be a priority and the idea of incentivising liquidity on a DEX using GHO rather than stkAAVE or AAVE is an interesting thought - kind of like how Curve uses the 3crv token within the veTokenomics model. The GHO/stable coin pairs on Uni v3 and multi asset pools on Balancer v2 which tap into Aave’s lending market yield seem like ideas worth exploring. Balancer as an asset manager is compelling for helping drive TVL/revenue back to Aave markets.

This is very interesting, I am fan of the free markets when it comes to pricing debt. I am hoping this is not a fixed borrowing cost but rather a mechanism for variable interest rate loans.

Fixed Interest Loans is worth exploring, especially if there can be bond auctions with various loan durations. I wonder if we will see a facilitator emerge who acts like a auction house that sells bonds whereby bidders either post some collateral or have received delegation from other investors on Aave’s platform. By being able to mint a stable coin like GHO which is integrated into a lending market will provide a unique positioning in the market.

I am a big fan of GHO and I think it will do quite well within defi. I am excited to see what gets built on top of Aave markets at Hackathons as I think there are some unique advantages which can be tapped into relative to other stable coins in the market. The continuous innovation from Aave Companies and broader community is incredible.

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Really novel idea for improving the dynamics of collateral based stable stores of value. Positively, I see the benefit to the user and the experience. It provides a relatively versatile hedge against incentivized risks! Is there a supply cap yet determined? It should be able to be well controlled by said validator. Having a small supply cap prevents potential momentum shifts of reserves. A bucket distribution system is designed to overflow but residual factors need to be accounted for. I would start it start it small scale between chains and limit as many variables as possible in order to ensure the reserves are utilized redundantly in a healthy way for the protocol before assuming broader variables like rates and increased exposures.

We are excited about the vision for GHO and see the stablecoin as an incredibly strategic product for the Aave ecosystem. Some additional ideas:

  • Liquidity and Network Effects: Stablecoins need multiple liquidity venues to ensure market participants can enter/exit seamlessly. While Curve has dominated the stablecoin landscape, Uniswap v3 may be another compelling liquidity venue to build GHO liquidity. The Aave community could explore stkAAVE liquidity mining incentives for GHO pools on Curve and Uniswap. Newly issued tokens could also explore building DEX pairs using GHO as a liquidity pair, improving the stablecoin’s network effects. This is in addition to Aave’s E-Mode. Given stablecoins’ inherent payment focus, there may be value in working with wallets and consumer facing front ends closely i.e Argent, Donut, Metamask etc. Wallets could serve as an onramp into GHO and could receive some referral fee for driving activity.

  • Staggered Launch: Given the role GHO will play in DeFi, there may be value in structuring a staggered launch with moving supply caps. For example, at launch, the supply of GHO could be capped at 50MM. As the system and stablecoin are battle tested, this cap can be raised quickly. This limits the exposure in the event of an issue while setting a strong foundation to grow on. A staggered launch would especially help battle test the arbitrage mechanics.

  • Facilitator Guidelines: Before onboarding specific protocols as facilitators, there’s likely value in identifying how much exposure in general Aave wants to specific verticals i.e RWA, over-collateralized, algorithmic etc. Onboarding protocols such as Credix and Goldfinch may help increase GHO’s visibility and usability to a relatively new set of borrowers - emerging market credit participants. Protocols including Notional and Maple could also drive significant crypto-native activity. On the credit score side, Spectral Finance and ArcX may be worth exploring as facilitators as well.

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Huge points, Liquidity is like… well… water. the less of it there is the easier it is for a single splash to stretch the whole surface. its like filling a pond with liquid concrete.

I’m looking forward to more conversations on individual aspects of GHO, I think there’s a ton of interesting points in this. I love the fact that using aTokens as collateral gives you this automatic “interest rate” arbitrage: if deposit rates on the market are higher than the stability fee for GHO the yield on your collateral will make you more money than what you pay for minting GHO. Effectively this means you are never missing out on high Aave market rates when you use your assets as collateral for the stablecoin.

I wanted to share what I think are the three most critical things to do for a successful launch:

  • Peg Stability: Ensure buying/selling it at the peg is extremely easy. The protocol already addresses this by allowing minting of GHO with other stablecoins as collateral. This is a great start, we should make sure that DEX aggregators like 1inch & Paraswap integrate these to allow their users slippage free trading even when liquidity is low. We should also allow people to leverage their LP positions to create a massive amount of liquidity similar to how MakerDAO allows 50x leverage on G-UNI DAI USDC LP tokens. This would require onboarding a G-UNI (now arakis) LP token to the market and allow minting of GHO against it.
  • Create trust in the stablecoin by managing risk very conservatively and having diverse uncorrelated collateral. Every GHO holder needs to know that they will always be able to sell their GHO for $1. Diversity in collateral is critical here to avoid any cluster risk (if it’s 80% backed by USDC there’s no benefit over just holding USDC). The work that Gauntlet has been doing on the Aave market is a good start but I believe the Aave community must go beyond that and ensure that risk is managed well and becomes a bigger part of governance discussions on Aave. @Anjan-ParaFi also made good points on this.
  • Give people reasons to hold GHO: people will be looking for yield opportunities when holding GHO. Current lending rates on the Aave market for stables are quite low. I believe onboarding higher yielding uncorrelated yield opportunities through things like fixed term lending and of course lending out to real world borrowers.

As GHO is coming closer to launch, how will the @RiskDAO start discussing some of the parameters? I’d love to get involved.

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GHO is a great proposition, and I look forward to seeing it in the wild!

I also look forward to the whitepaper. In the meantime, I would like to propose two ideas that, in my view, need to be addressed in more depth: how to achieve broad adoption of GHO and risk management.

The discounted interest rate on GHO is a great idea – however, a discounted interest rate for stkAave holders only seems somewhat narrow. I believe that to boost broad adoption of GHO, a wide range of Aave users should be incentivized to borrow GHO. This could be done by offering a discounted GHO borrow rates to users who previously borrowed other stablecoins. In addition, other incentives are needed to hold and/or transact in GHO. In this respect, I feel that the token’s utility could be enhanced further.

@RiskDAO Assuming a diversified collateral pool, borrowed GHO still creates more risk exposure. To counter this, I propose to distribute a portion of the GHO interest earnings to the stkAave safety pool. They should be distributed as additional rewards proportionate to stkAave staked over a given period. Offering additional rewards to stkAave stakers incentivizes them to keep staking and attract more stakers, thus increasing the overall stability of the safety pool. GHO would remain a lucrative revenue source for Aave.

I strongly recommend simulating the tokenomics of this new token, perhaps with cadCad or radCad (https://cadcad.org/) to see how the system behaves under different assumptions. Simulating GHO’s tokenomics would also permit to stress-test the system and possibly identify any unintended consequences there may be.

Let me know if you would like to explore any of my thoughts further, I would love to get involved!

Hello,
I’m a simple user of Aave and DEFI.
A new stablecoin pegged to dollar ?
Why not !
But I’d prefer a more international vision.
I propose this : a stablecoin pegged to IMF special drawing rights or a similar asset.

To prevent GHO from rising above peg, Aave users can utilize e-mode to deposit alternative stablecoins (USDC, DAI, etc) and then short GHO to push price back down. But, the incentives only will work correctly if the interest earned on collateral is higher than interest paid to borrow GHO. If the position has negative carry, there is significant risk of short squeezes where many people try to unwind the trade due to lack of profitability / not enough new users are incentivized to open a short. See Maker’s experience with 101% collateral ratio stablecoin vaults (mid to late 2020) for example of this - my takeaway is that they did not really work as intended, even while Maker disabled liquidations and gradually reduced interest rates to 0%.

The result is that, while GHO is above peg, borrow rates will probably need to be maintained at an extremely low level by the DAO to ensure that other stablecoin deposit rates are still higher than GHO borrow rates. As more alternative stablecoin collateral is deposited by GHO shorters, this will also tend to push down borrow rates on these other assets. There’s a risk that this e-mode driven peg stability mechanism could actually drive down Aave’s overall protocol revenue.

A less popular but IMO more effective mechanism for maintaining peg is peg stability modules (PSMs), where GHO could be minted on 1:1 basis (potentially with a small fee) against trusted stablecoins to avoid upside depegs.

The GHO borrowing discount for stkAAVE is an interesting idea, but I believe that it will provide relatively little benefit for the majority of stkAAVE holders - many ppl are either not interested to borrow, or would be concerned about transaction fees making borrow positions uneconomical for small size. I think a more appealing approach to link GHO utility back to stkAAVE risk backstop would be directing a part of the interest earned to either distribute to stkAAVE holders directly, or buy back AAVE from the market and then distribute this to stkAAVE holders.

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I agree. USDA perhaps.

The latest US stablecoin bill iteration seems to only require Insured Depository Institution status (FDIC insured) for stablecoin issuers that engage in lending (as understand would be the case for GHO).

How would you deal with that scenario?

Hey @TokenBrice ty for the feedback! I have a small question though:

I don’t quite understand this, Aave DAO is controlling other interest rates. In fact, governance changes interest rates relatively frequently. Even then, how would you have the interest rate set algorithmically? Maybe via an IR curve, but then the DAO just controls optimal utilisation (just like other assets) except the “utilisation” is virtual, since GHO is minted.

That said, if you have other ideas about algorithmically setting interest rates autonomously, I think that’s awesome!

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Thank you to everyone for sharing your thoughts on the proposal. It is now time to go vote, you can find the Snapshot here: Snapshot

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We fully support the launch of stablecoin GHO. The use of GHO in isolation mode will allow users to borrow while keeping thee GHO collateralized and reducing risk. It will also increase the utility of stkAAVE, which is an incentive to help secure the Aave Protocol by increasing the protocol’s Safety Module.

We are looking forward see the adoption of decentralised GHO increase while maintaining the security of the Ethereum Network. This will especially benefit the Aave DAO both the security and the protocol revenue. It will be the base stablecoin used in the Aave ecosystem.

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tl;dr: make GHO stronger by adding a ‘PSM 2.0’

GHO will need some structure like Maker’s PSM, which has proven itself crucial to maintaining stability and liquidity in Dai. As a reminder, Maker’s PSM hardcodes an exchange rate of 1 DAI to 1 USDC. Arguably, this is a bit too simple.

An improved PSM could increase resilience in a few ways:

  • Better diversify PSM reserves: multiple PSMs with different asset risks could be used.

  • Programmatic risk control: Maker-style PSMs are static and don’t adapt if risks of PSM assets materialize. For instance, if a PSM asset broke peg or got frozen, the entire protocol including other PSMs would be affected negatively. For static PSMs, the only way to adapt is through (slow) governance, whereas risk control could be encoded programmatically.

  • Coordinated PSM strategies: different static PSMs don’t ‘talk to each other’. This is a problem because a good risk control strategy should know the global health of all PSMs to be able to adjust policy accordingly. A dynamic PSM policy could overlay many facilitators that each perform PSM roles.

  • Contingency pricing: why hardcode the PSM exchange rate at 1:1? If severe shocks to PSM reserves lead to a shortfall, the remaining reserve assets could be managed instead of depleted. A dynamic PSM that prices for this contingency would keep the protocol’s balance sheet alive and give the stablecoin a better chance to survive and stabilize into the future.

Launching a new stablecoin is a chance to build in a better PSM, which could autonomously support stability and liquidity to the best abilities of the protocol, given its state of health.

We have developed such an improved PSM design (or an automated “primary market” for minting and redeeming stablecoins) from first principles as part of Gyroscope. Reach out to us with any questions. We would be excited to work with Aave to develop stronger stablecoins.

You can find details about our design in a recent talk, a full paper and implementation will also be released soon.

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Something that came up in my mind.
If we really want a decentralized stablecoin, then this stabelcoin shouldn’t be backed (or at least not that much) by another stablecoin like USDC or USDT. We all know what happend to tornado.cash and what USDC and USDT (had to do) did to those addresses that have been using tornado. This isn’t decentralized at all when one institution can decide if the stables i am holding are legal so i can use/transfer them or freeze them because they think something illegal happend. Its either everything or nothing.
I would prefer to see GHO being overcollaterized but not too much backed by the other. Also doesn’t make sense. I also don’t want my Euros which may be shitty being backed by another shitty USD currency.
DAI already went that way which is bad if you ask me.
The only ones doing it right are RAI and LUSD, but they don’t have enough liquidity. Lets be like Aave, permissionless and not centralized and controllable by another instance.

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I don’t like to see the phrase “Credit Score” anywhere near the subject of minting debt. I would like to see some clarity on the potential minting power of a facilitator. If it is at all possible for an entity to mint uncollateralized GHO, I can’t cast my vote in favor of this proposal.

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Wen airdrop ??? I’m kidding.
We really need some stablecoin independant from centralised token, as we are in danger with DAI and the USDC collateral we need to be decentralized as much as we can to avoid any bankster/ centralised government dictatorship . I dream a day when all stablecoin will be peg to BTC/ ETH is place of the USD volatile shitcoin. actually BTC is stable, ETH will become more stable with the merge and POS and the fiat currency should be peg to them as the old gold system.
when the GHO will take birth ?

You have to keep in mind that GHO will mostly (at least its looking like that for now) be backed by USDC and USDT. But if the community agrees that we are having a cap here we could lead the way to decentralisation. Its all up to us all.

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Thanks for the precision, so I will not invest more than 1% on it. On the long term, centralised stablecoins will be the poison that will destroy the cryptos revolution. With this dollar peg, banksters found their way to manipulate and control the crypto space. Greediness of crypto actors will supplant the cypherpunk vision like the gafam destroyed the Internet vision of liberty into a centralised infrastructure where our datas are used against us. As the dollar is manipulated and the crypto space continue to value according this shitcoin, we just definitively burried satoshi and the emancipation of the financial power. we need a bitcoin standard or whatever peg on a crypto standard of value or we’ll still financial slaves for life.

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Really good analysis, thanks for this.

The interest rate should be derived from parameters like risk of the collateral used to mint GHO, essentially the same risk scale the protocol uses today that is constantly updated as market conditions change. The ‘virtual utilisation’ in this case is the max amount of collateral for that asset that can be used to mint GHO across Aave.

Interest rates set by the DAO aren’t as responsive to market conditions as algorithmically controlled ones are. It’s safer for the protocol and users to use an algo IR curve.

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