GHO — a decentralized, over-collateralized stablecoin native to top DeFi lending protocol Aave — successfully deployed on Ethereum mainnet.
Gho Mainnet Launch
On July 15, Aave DAO has authorized and implemented the proposal for activating GHO, the native, decentralized, over-collateralized asset of the Aave Protocol. Users can create GHO on the Aave Protocol's Ethereum V3 market.
The first GHO facilitator is the Aave V3 market on Ethereum, enabling users to generate GHO using collateral stored in Aave V3, complete with substantial risk reduction features such as e-mode, isolation mode, and supply caps.
Upon launch, this facilitator has a minting capacity of $100M, which can be modified by the Aave DAO, subject to governance approval. The Aave DAO has also authorized a second facilitator, the Flashminting Facilitator, which allows for GHO minting up to a predetermined limit without tying up collateral, as long as the borrowing and repayment of GHO transpire within the same block on the Ethereum Mainnet.
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Introduction
Every healthy DeFi ecosystem is made up of a handful of key application types, namely: decentralized exchanges (DEXs), bridges, stablecoins and of course, money markets.
Money markets facilitate the movement of funds between lenders and borrowers using interest rates to regulate the behavior of market participants.
One of the earliest to ever do it, Aave, then-named ETHLend, launched in May 2017 as a Swiss-based peer-to-peer (P2P) lending platform on Ethereum. As one of the core protocols that kickstarted the DeFi summer of 2020, Aave has grown tremendously in both features and in Total Value Locked (TVL).
Currently, Aave holds almost $4.6 billion on its platform across seven chains, despite a 76.5% fall in TVL from the 2022 peak of $19.4 billion. This makes it the fourth largest decentralized application (DApp) by TVL, only behind fellow DeFi titans, Lido, MakerDAO and Curve Finance.
Source: DeFiLlama.com
The 2022 bear market was vicious, burning the runways of even the strongest of DeFi protocols. Amidst this stress test, the Aave community passed a governance proposal to launch and deploy an Aave-native stablecoin — GHO, to complement Aave’s existing features and generate increased revenue flows to the Aave Decentralized Autonomous Organization (DAO) Treasury. The vote passed with a whooping 99.99% voting in favor.
But first, to the uninitiated, what exactly does Aave do?
What Is Aave?
Aave was started by founder, Stani Kulechov, as a P2P borrowing and lending market, directly connecting users to facilitate movement of funds in the market. In late 2018, they announced the formation of a parent company, Aave, after the Finnish word for “ghost”. The move introduced a new suite of products as well, including Aave Gaming, Aave Lending and more. Aave Lending eventually became what is now synonymous with the Aave brand today.
Source: Aave
Instead of P2P lending, Aave utilized pool-based lending, in which lenders deposit into a pool of assets and borrowers borrow from that same pool. This was further developed in Aave V2 and V3, introducing new features such as isolated pools to better manage risks, high-efficiency mode to maximize capital efficiency when borrowing against identically-pegged assets, and cross-chain borrowing and lending with Aave’s Portal. These features, coupled with Aave’s head start, allowed them to grow into the 4th largest DeFi DApp today, and an integral player in the whole DeFi ecosystem.
Source: Lens Protocol
Beyond DeFi, Aave has also developed and launched Lens Protocol, a decentralized social media platform, which allows creators to mint their profile as interoperable NFTs and maintain ownership of their content.
Like most large DeFi DApps, Aave’s decisions are largely made via governance proposals and votes in the DAO. In July 2022, a governance vote passed to greenlight the GHO project, a stablecoin native to the Aave ecosystem. This was proposed to introduce a new revenue stream for the Aave DAO as well as to fortify their position as a leader in the DeFi lending space.
What Is GHO?
Derived from the word “Ghost”, GHO is an overcollateralized stablecoin by Aave. Like most stablecoins, GHO is minted as a loan against assets deposited by the user into the protocol, in this case, Aave V3. GHO is slated to launch on Ethereum Mainnet first as the Ethereum V3 pool currently has the most extensive risk-mitigation features. However, various Facilitators (protocols or entities) will be able to trustlessly mint and burn GHO, subject to approval from the Aave Governance.
Users can mint GHO using a diversified set of collateral available on Aave v3, whereby the amount they are allowed to mint is limited by the collateral deposited. As with traditional loans, if the collateral falls under the specified liquidation threshold, the collateral supplied is liquidated by Aave to repay the loan. If the user is not liquidated during the duration of their loan, the user then repays the GHO and the accrued interest to unlock their collateral, which can then be removed from the pool. The GHO repaid is then burned by Aave. Unlike other assets that are borrowed from Aave, where interest earned is paid out to asset suppliers, interest paid on loans of GHO are funneled to the Aave DAO Treasury.
With the current GHO design, GHO’s price is hard coded on Aave as $1. As such, this allows GHO to maintain its peg via arbitrage opportunities. When GHO trades above $1, users are incentivized to mint GHO as $1 of collateral yields 1 GHO, which is trading for more than $1. They can then sell off the GHO for profit. At the same time, this increases the supply of GHO, depressing its price back to peg. Conversely, when GHO trades under $1, borrowers of GHO are incentivized to buy GHO off the open market to repay their loans. This allows them to clear $1 of debt for less than $1. This move also reduces GHO supply, pushing the price of GHO higher.
Since GHO is minted and burned by Aave, it has no supply side, which means that interest rates cannot be determined by utilization as per the other assets on Aave. As such, GHO borrowing rates are set by the Aave DAO and can be adjusted via governance vote.
Beyond the mechanisms of GHO’s peg, stakers of the AAVE token on Aave’s Safety Module also receive a discount on the interest rate on GHO loans. Safety Module is a recently implemented feature of Aave in which AAVE tokens which are staked in the Safety Module, in the event of bad debt on the platform, can be sold to cover the deficit. In return, these stakers, which bear the risk, are paid incentives.
What Does This Mean For Aave?
GHO borrowing fees will introduce a new revenue stream for the Aave ecosystem. Borrowing fees are paid to the Aave DAO Treasury, which then allows the DAO to execute and fund new features for Aave. In a bear market, this is doubly important as developers are paid out from the Aave DAO Treasury. Hence, a larger DAO treasury means a longer runway for the protocol.
Source: Aave Balance Sheet Jan 2023
Conclusion
While Aave’s new stablecoin model is hardly a revolutionary design, the launch of GHO could be huge for Aave. Even at conservative estimates, GHO borrowing fees could potentially bring in millions in additional revenue for Aave.
With the recent launch of GHO on the Goerli Testnet, it won’t be long before we see GHO’s Mainnet launch and its impact on the Aave ecosystem. GHO could very well cement Aave’s position as the king of lending protocols in DeFi.
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