Sam Kazemian, founder of Frax Finance, issuer of the fractionally-collateralized stablecoin FRAX, showed immediate support for Aave’s planned stablecoin.
GHO will be backed by a range of cryptocurrency assets posted as collateral by borrowers on the platform, according to a proposal by Aave Companies, the firm behind Aave.
The proposal to Aave’s governance forum said users would be able to mint the stablecoin using assets they provided as collateral. The same assets would continue to earn interest while being used as collateral.
AAVE, the governance and utility token of the Aave protocol, surged on the news and rose 11% to $70. The token has slumped more than 65% year-to-date, and is 90% off its all-time high of $661 reached in May last year, as per CoinGecko data.
“While GHO would be secured by the assets on the Ethereum market, the main vision for GHO is to pursue organic adoption via L2s to solve real life payment opportunities across the internet and on-ground,” Aave founder, Stani Kulechov, wrote on Twitter.
The GHO stablecoin’s construction is complete, according to Kulechov, and the first audit will take place on July 11. He also said that the community of Aave would need to vote in an instant to approve the idea, which is now up for discussion.
GHO to boost Aave revenue, says CEO
Aave is a prominent decentralized finance (DeFi) lending and borrowing protocol boasting more than $5.59 billion in total value locked – the sum of assets managed by the protocol – according to data complied by DefiLlama.
That figure is down over 50% since early May, when the Terra blockchain debacle began to unravel.
According to the Aave Companies proposal, GHO will be a decentralized stablecoin on the Ethereum (ETH) mainnet. It will be overcollateralized by assets that continue to earn yield.
GHO is native to the Aave ecosystem, and users who intend to borrow the stablecoin must supply collateral at a specific ratio to mint it. When a user repays their debt or gets liquidated, the user’s GHO tokens will be burned by the protocol.
The plan said that instead of using the standard reserve factor that is taken into account when users borrow other assets, “all the interest payments accrued by minters of GHO would be directly sent to the AaveDAO treasury.”
Additionally, Aave proposed the idea of “facilitators,” which enables a protocol or any other entity to issue or burn GHO tokens in an anonymous manner. The AaveDAO will choose interest rates for GHO borrowing based on the state of the market.
The facilitator technique, according to Stani Kulechov, “allows for the addition of additional use-cases to mint GHO, such as minting against cross-chain assets.”
He anticipates that the protocol would “get a large amount of income in the form of fees” as people mint GHO through Aave and other facilitators.
How will GHO maintain dollar peg?
Stablecoins have come under increased scrutiny following the collapse of Terra’s UST stablecoin in May. It was little surprise when one user on the Aave governance forum asked: “What sort of arbitrage exists to maintain GHO peg? Who makes money on the arbitrage?”
Marc Zeller, integrations lead at Aave, responded and clarified:
“If GHO is above the peg for any reason, minting GHO with, for instance, another stablecoin and “shorting” it on stableswaps can be profitable and result in slippage. Paying down debt is beneficial if GHO is “under pegged.” Allowing the total supply of GHO to decline when debt is paid off will assist the peg be reestablished.
He continued, “This kind of mechanism has proven its durability over time with other ecosystem actors.”
The founder of Frax Finance, which issuing the fractionally-collateralized stablecoin FRAX, Sam Kazemian, immediately expressed support for the proposed stablecoin from Aave.
He said “would love to support” GHO with Frax’s liquidity pools on Curve to “incentivize deep liquidity for GHO on launch”.