Background

$GHO is AAVE’s upcoming stablecoin. AAVE’s proposal to create it’s own stablecoin was passed in August and there is an audit already done by Openzepplin. Progress update is being done in the AAVE forum. The code continues being tested and audited and $GHO is still under active development.

What is $GHO

$GHO is a decentralised stablecoin that is governed by AAVE. Initially, AAVE lending pool would be the only “facilitator”(explained below) that can mint and burn $GHO by depositing USDC. AAVE governance aims to gradually bring in other facilitators who can have their own logics in accepting different collaterals for minting $GHO. AAVE governance would maintain the whitelist of facilitators and quota of $GHO minting of each of them.

How $GHO would work:

• Facilitator There would be a number of facilitators that can mint and burn $GHO permissionlessly. Each facilitator would have a bucket, which defines the upper limit of $GHO this facilitator can mint. facilitator is meant to be a smart contract that defines how it would allow $GHO minting.

• AAVE Governance AAVE Governance has the power to whitelist facilitators, make change(s) to its bucket, but not affecting any $GHO that is already minted. Governance would also be able to affect the interest rate of $GHO being minted out of each facilitator.

• AAVE lending protocol Based on the whitepaper, AAVE lending protocol is going to be the first $GHO facilitator in the beginning, meaning that $GHO can only be sourced through AAVE lending pool in the beginning.

• $GHO interest rate model AAVE governance will statically adjust interest rates depending on the need for the $GHO supply to contract/expand. AAVE governance has the ability to adjust this rate for EACH FACILITATOR.

• Discount model to safety module participants Holders of stkAAVE would enjoy 20% of interest rate discount based on the disclosure in the audit report. Amount of $GHO eligible for this 20% discount per stkAAVE is yet to be disclosed.

Comparison with existing stablecoins

• Comparison with $DAI Similarity: Both require collateral whitelisting (facilitator in $GHO); $DAI charges a stability fee and $GHO has a static interest. Difference: $GHO would put a bucket on each type of collateral while $DAI has no such constraint.

• Comparison with $FRAX Similarity: Nothing I can think of. Difference: $GHO is meant to be overcollateralized while $FRAX is under-collateralized. $FRAX has only stablecoins or stablecoin liquidity position in the treasury while $GHO can have risky assets. $GHO does not associate with $AAVE directly, while $FXS, the governance token of Frax protocol, is also involved during the minting & burning of $FRAX.

• Comparison with $MIM Similarity: Both $MIM and $GHO are designed to be over-collateralized. Both have a different mint quota for each type of collateral. Both have different interest rates parameters for each type of collateral. The mint quota is controlled by multisig for $MIM and controlled by governance for $GHO respectively. Difference: $MIM has no interest rate discount for SPELL holders or SPELL locking holders; while $GHO would provide interest rate discount to stkAAVE holders.

• Comparison with $LUSD Similarity: Both $LUSD and $GHO are designed to be over-collateralized. Difference: $LUSD is entirely permissionless and accept only $ETH as the collateral, while $GHO would accept multiple collaterals and it is permissioned to add further collaterals. $GHO would have a static interest, while $LUSD is interest-free. $LUSD incurs a 1-time 0.5% mint fee while $GHO does not specify any mint/borrow fee.

What would be the opportunity?

AAVE is the first lending protocol that taps into the stablecoin war. No doubt this is a new experiment that carries some risk. But based on the above understanding there are a few potential impacts that may change the stablecoin landscape:

AAVE governance carry a lot of power: AAVE governance have the ability to:

1. make change to interest rate

2. up or down the bucket of $GHO that a facilitator is entitled to

3. whitelist (so delist as well) a facilitator The power that AAVE governance can exert on $GHO is much bigger than the governance of other stablecoins protocols do to their counterparts. If $GHO indeed has a market, then the utility of $AAVE would increase for sure. Interested protocols may fight for AAVE’s voter for whitelisting for facilitator, increase in $GHO bucket etc.

Facilitator model adds in contract risks but can be a synergy play

With existing model, stablecoin protocols consider collateral as a pure ERC20 tokens, and the acceptance of the collateral is enacted by whitelisting the token address for collateral. This narrows the types of collateral accepted for one particular stablecoin. On the other hands, $GHO attempts to modularize the collaterals to a “Facilitator” entity, such that each facilitator can adjust the minting and burning of $GHO with regard to their own collaterals while AAVE governance focus on managing the aggregate risk by adjusting the bucket(upper limit) of $GHO each facilitator can mint. If this model works properly, we can imagine $GHO to be an inclusive stablecoin protocol that has both algorithmic, centralised and uncentralized stablecoins, RWA or off-chain assets, all to be accepted as collaterals. This would bring synergy and additional scale of economy to the stablecoin market.

Bootstrapping $GHO would be difficult, but if AAVE is determined there would be lots of incentives in the beginning. Based on the whitepaper, Aave lending protocol is going to be the first $GHO facilitator in the beginning, meaning that GHO can only be sourced through AAVE lending pool in the beginning. When there is no utility in the beginning, borrowing $GHO, and paying $GHO interest seems not profitable. I imagine AAVE protocol would introduce some incentive(s) to bootstrap the total supply of $GHO in the beginning. It can be a bribe to its curve pool , provide $AAVE incentives to the borrowers, or something brand new.

Over the long run, AAVE also have the ability to entitle part of its revenue to a staked pool of $GHO similar to the $LUSD model.

Disclaimer: Not financial advice. Do your own research.

Reference:

• Forum post: https://governance.aave.com/t/gho-development-update/10267

• Technical White Paper: https://governance.aave.com/uploads/short-url/6B2t8gC8Sf4WOafAcgOrdCg0Nka.pdf

• Audit: https://github.com/aave/gho-public/blob/main/audits/Aave GHO Audit Report Updated - August 2022.pdf