July 15, 2022 · 5 min read

Aave's New Stablecoin GHO - Has DAI Met Its Match?

On July 7th, Aave announced their intention to launch a new crypto-backed stablecoin GHO. The full announcement can be read here. It will run on Ethereum mainnet meaning this will have all the features of ETH but will also cost ‘gas’ which today (at a price of 15 Gwei) means a cost of $1.07 (using USDC as an example) to transfer $10 or $10M.  Two years ago today, gas was at an average price of 700 which made for very expensive transactions on the mainnet. As a result of the gas cost, this new token will probably not be suitable for ‘micro-finance’.

GHO is launching in a time of uncertainty for stable coins. With Tether’s newly launched Euro-tied stablecoin and its upcoming GBP-backed stablecoin, regulators are beginning to pay more attention to this type of asset. Many believe that tighter restrictions are not a possibility, but an inevitability. Additionally, with the collapse of Terra’s UST stablecoin, stablecoins now have a stigma to shake. Customers might now be more wary to ‘ape in’ to stablecoin projects (even non-algorithmic ones) - and with good reason.   

The Current Stablecoin Market 

To understand what GHO faces, let’s look at the Defi Stable Coin market today.  There are currently four types of stablecoin backed by; fiat currency, commodities, crypto or algorithmic crypto.  Looking at Market Value, ‘Fiat-backed’ still completely dominates the market with 91.5% covered by the three largest tokens, USDT, USDC & BUSD. 

In terms of market cap, the closest established stablecoin to GHO would be DAI which at $6.45B accounts for only 4% of the market.

Looking at chains other than Ethereum, it is interesting to note that although USDT is still dominant overall, there is now much more USDC on Ethereum than USDT. However, as can be seen below, USDT has an enormous $31B on TRON, which more than makes up the difference.

In traditional finance up to 60% of world currency reserves are held in USD and 40% of world trade is done in USD. This even applies to contracts between countries with their own national currencies such as Argentina and Kenya. In a similar way the vast majority of stable coins (99%) are pegged to the US Dollar. This means Euros, GBP and YEN stables are a long long way behind in adoption and proliferation despite recent publicity.

AAVE sets ‘liquidation thresholds’ for each asset which represents the value-threshold at which your assets locked on chain as collateral for your loan are ‘liquidated’ (quickly sold) to repay the loan.  For each vault, the ‘health rating’ is set referring to the level of ‘over’ collateralisation. 

What’s In Store For GHO? 

Members of the Aave community have (understandably) been quite vocal about how the liquidity protocol’s stablecoin should be set up. Aave will control the interest rates to be offered to those who collateralise the token and the responsibility of maintaining the token’s dollar peg will of course lie in the hands of arbitrageurs. Holders of Aave’s staked Aave token (stkAAVE) will also be able to mint GHO at a discounted price for helping to maintain the ecosystem.

Despite this however, community sentiment seems to remain mostly positive. Unlike UST, GHO will not be an algorithmic stablecoin. Instead it will use crypto backing to give value to the token. The most similar project on the market today is probably DAI (Maker’s crypto-backed stablecoin), which would probably come to be its main competitor.     

The White Paper (or details released so far at least) shows extensive interactions with the new concept of ‘facilitators’ some of which will be collateralized, some not, some treasury backed and some algorithmic (viz;)

This has great potential and is an interesting blend of factors protecting and governing the token. At this point, the interaction, governance and impact of these facilitators is not fully detailed.  This makes it difficult to come to any firm conclusion on whether this will be robust or able to  survive extreme and violent swings in the market. 

Crypto-backed coins can offer more security than purely algorithmic coins, but it’s worth remembering that this is not fiat-backing. Crypto assets are extremely volatile, meaning the value of this collateral has the potential to be drastically reduced over a very very short period of time. This is what causes a rush on the pools that can detach a token from its USD peg. In any case, Aave will need to prepare for a very different stablecoin market from that which we saw last year.

Novum Insights

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