The Aave community has unanimously approved the launch of an overcollateralized stablecoin for the ecosystem called GHO that will generate yield for its holders and that can be minted by borrowers by pledging collateral on this decentralized finance (DeFi) platform.
According to the project’s governance module, the proposal was approved by 99.99% of AAVE token holders. As a result, GHO will be whitelisted on the Ethereum V2 Market, which will serve as the first facilitator of all GHO-related transactions.
By launching GHO, Aave seeks to strengthen its DAO as 100% of the interest payments made on GHO loans will go toward the organization’s treasury.
Multiple crypto assets will be accepted as collateral for minting GHO on the platform although the proposal did not specify which those assets will be or how many GHO tokens users will be able to mint per asset.
In addition, AAVE token holders will be allowed to mint GHO by pledging their stkAAVE as collateral. However, they will be entitled to pay a lower interest rate compared to users who pledge other crypto assets.
Rather than focusing or shifting entirely to GHO, the protocol will maintain its optionality and will continue to support other stablecoins.
How Would the Aave Protocol Work Once GHO Goes Live?
Currently, users can earn money by lending their crypto assets to borrowers. The Aave protocol establishes a variable interest rate for both lenders and borrowers that fluctuates based on several parameters.
By introducing GHO, the AaveDAO is effectively becoming a lender within its own platform. It can be expected that interest rates on GHO will be very competitive to attract borrowers and increase the token’s liquidity. This could result in significant revenues for the AaveDAO as interest payments collected from this loan will go toward the organization’s treasury.
However, lenders will still be compensated by depositing their assets as those will be used to grant non-GHO loans. In those instances, the AaveDAO would receive the net figure resulting from deducting the interest payment made to the lender of the non-GHO asset from the total interest paid by the GHO borrower.
Can GHO Suffer the Same Faith as Terra’s Flagship Stablecoin UST?
Aave maintains that the overcollateralized nature of GHO should allow the token to maintain its intended peg as loans will be immediately liquidated if the collateral falls below the minimum and the GHO involved in such transaction will also be burned.
This feature has not prevented some crypto enthusiasts on Twitter and other platforms from arguing that Aave is exposing itself to the same weaknesses that led to the collapse of the Terra ecosystem.
However, it is important to note that Terra’s UST stablecoin was not overcollateralized. In fact, the Luna Foundation Guard (LFG) did not have enough reserve to cover the entire supply of UST that circulated prior to the token’s implosion.
In addition, even though GHO can be considered an algorithmic stablecoin as it relies on an automated system that will execute all the transactions required to maintain the token’s peg, its stabilization mechanism is reserve-dependent. In turn, Terra’s stabilization mechanism depends on the minting and burning of LUNA and UST.
In the past 30 days, AAVE has performed quite positively as the token produced gains of nearly 71%. Decentralized lending platforms appear to be regaining the public’s trust as they may now be considered more stable than their centralized peers following the collapse of some long-standing platforms such as the Celsius Network and Voyager Digital.
Data from Defi Llama indicates that Aave is the third largest DeFi protocol by total value locked (TVL) with $6.52 billion currently being held within its three networks. The largest of these three networks – the Aave v2 chain – has seen its TVL rise from $600 million to $5.3 billion in July.
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Author: Alejandro Arrieche
Alejandro is a financial analyst and freelance writer who’s been following the markets and writing informative news content for more than seven years, covering all the latest developments in the crypto and stocks spaces. Other publications Alejandro has written for include The Modest Wallet, Buyshares, Capital.com, and LearnBonds.
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