Summary
LlamaRisk supports this ARFC and believes that this is a well-suited addition to the Avalanche instance where GHO will be deployed. Different GSM modules help reinforce GHO’s stability, and the opportunity to improve Aave’s capital efficiency with aUSDC makes it even more of a net positive for the DAO. This will not impact GHO’s risk profile but rather support the stability of GHO on a new chain.
GHO deployment on Avalanche will feature a 25M GHO bridge cap, therefore starting with a 5M exposure capacity for the proposed GSM will be enough to support potential inflows and outflows of GHO. We also support implementing low, non-zero GHO burn fees to ensure GHO capital retention within the system. This approach manages exposure, prevents large fee-free swaps, ensures balanced GSM operations, and mitigates unwanted potential depletion of the GSM, such as large GHO mints via CoW Protocol swap routing observed with the Ethereum USDT GSM.
GHO Stability
Currently, existing USDC and USDT GSMs remain empty due to the recent arbitrage opportunities that became available after the GHO secondary market discount reached more than 0.2%, making the GHO burn operations profitable for arbitrageurs. Both GSMs combined have provided a 16M stability buffer that helped to anchor GHO’s secondary market price.
Source: TokenLogic GHO Analytics, 26th November, 2024
In addition, GHO Stewards raised GHO borrow rates to align more closely with the borrow rates of other stablecoins on Aave’s Ethereum market. This has made GHO a less attractive asset for leverage looping on and restoring secondary market price stability. As the DAO continues to use balanced push-and-pull measures, the GHO pricing is expected to stay above the 0.2% arbitrage threshold.
Source: TokenLogic GHO Analytics, 26th November, 2024
GHO on Avalanche will be onboarded as a supply-and-borrow asset, therefore the borrow rate will continuously and more closely reflect broader market rates.
USDC Supply Impact
Suppose an additional 5M USDC is supplied to Aave’s lending pool on Avalanche. In that case, this portion will represent 4.9% of the total current USDC supply on Aave Avalanche, and therefore, at current borrow levels, the USDC borrow APY would be lowered by 5.1%. While the supposed one-time impact would be high at current high utilization levels, it can be expected that the effect of this reduction would not be sustained. Therefore, USDC borrow/supply utility would be impacted insignificantly.
Source: Aave, 26th November, 2024
Projection of Opportunities
Concerning the use of aUSDC instead of USDC for this deployment, we have presented the yield opportunity estimations in a aUSDC GSM Deployment on Ethereum proposal. These estimations are equally applicable to the Avalanche deployment.
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.