Aave is launching a new stablecoin just as trust in stablecoins hits a low
The GHO coin is not backed by liquid fiat assets, but it isn't an algorithmic stablecoin like Terra's UST either.
Decentralized lending protocol Aave announced Thursday that it would be launching its own stablecoin, GHO. The stablecoin is collateral-backed and pegged to the value of the U.S. dollar, though the collateral is mainly other crypto assets.
“GHO would be backed by a diversified set of crypto-assets chosen at the users’ discretion, while borrowers continue earning interest on their underlying collateral,” the governance proposal reads. A DAO, made up of all Aave token holders, will vote on the proposal after a feedback period.
The announcement comes as stablecoins are under increased scrutiny after the collapse of Terra's UST and luna in May. CFPB Director Rohit Chopra suggested stablecoins were generally not ready for consumer payments shortly after the collapse, while Sens. Cynthia Lummis and Kirsten Gillibrand’s cryptocurrency regulation bill would require all stablecoins to be backed by USD reserves. The EU’s landmark MiCA regulatory framework, for which a provisional agreement was published last week, also would require stablecoins to be backed by sufficient liquid reserves.
The GHO proposal in its current form does not require liquid reserves, instead collateralizing the currency with diversified crypto reserves. Its initial collateral would come from individual minters’ deposits, and interest rates will be determined by the DAO.
This is different than algorithmically backed stablecoins, like UST, which depended on the real-time burning and minting of companion coin luna to maintain its dollar peg. The mechanism GHO plans to employ has come under more scrutiny than those with liquid reserves, like USDC. For example, DAI, which employs a very similar stabilization mechanism to the GHO proposal, momentarily wobbled in price because of high demand after UST's collapse.
GHO is not an exact replica of DAI for the Aave protocol. There are several pre-approved paths for entities — what the proposal names “facilitators” — to automatically burn and generate GHO. Additional use cases that would trigger burning or GHO generation can be approved by the DAO as well.
But despite the quirks of GHO, reactions to the announcement online were notably suspicious. Thousands of retail investors lost significant savings on the UST-luna collapse, which is still generating fallout across the industry, including a liquidity crisis at crypto lender Celsius.
Protocol link: https://www.protocol.com/bulletins/aave-gho-stablecoin