Coming soon to the DeFi Aave protocol is the new GHO stablecoin.
In fact, within the DAO came the board proposal to launch on the mainnet.
The idea was launched in July last year and the testnet arrived in February.
If the governance proposal is approved by the DAO, the new stablecoin will also be launched on the mainnet.
The launch of GHO on Aave V3
Initially, GHO will arrive on Aave V3 Ethereum Facilitator and FlashMinter Facilitator, but later it should also land on the Ethereum mainnet.
CoinMarketCap has already published the tab for the new stablecoin, although it’s pretty much empty for now.
They have been testing the performance on the Goerli testnet for months and now it’s time to release it publicly.
When it launches on the mainnet, users of Aave V3 on Ethereum will be able to earn GHO tokens by providing the necessary guarantees in return. According to the creators, this heralds a new era for the Aave ecosystem and related DAO.
The exact timing is not yet known at this time, partly because the governance proposal has not yet been definitively approved.
What is GHO and how does it work?
GHO is a decentralized multi-collateral algorithmic stablecoin native to the Aave protocol.
For its part, Aave is one of the main DeFi protocols on Ethereum, specializing in lending.
It currently ranks third for TVL, behind only Lido and Maker, but followed by Curve and Uniswap.
It has been around since 2020 and even reached over $19 billion in TVL at its peak. Now it’s about 5.
GHO is a token that will initially be minted only from assets delivered to the Aave protocol, and its market value will be programmatically aligned with that of the US dollar due to market efficiency.
As with all loans on Aave, users who strike GHO will be required to provide collateral at a specific ratio, and when they have borrowed GHO back in this way, it will be returned to the Aave pool and burned.
All interest earned on GHO goes directly to the Aave DAO treasury.
In fact, it will be the direct challenger to DAI, Maker’s algorithmic stablecoin.
Aave and the choice to launch GHO
Until now, Aave did not have its own stablecoin, so externally made stablecoins had to be used within the DeFi protocol.
At the moment, the most used stablecoins on Aave are USDT, USDC and exactly DAI.
With the launch of GHO, DAI may lose some users, and perhaps Aave could eventually overtake Maker in the ranking of DeFi protocols with a higher TVL.
However, the news of GHO’s launch does not seem to have had a significant impact on the price of the project’s native token, AAVE.
Although the price is higher than yesterday, it is still significantly below the 2023 highs.
By the end of 2022, it had fallen below $53, after hitting as high as $667 in May 2021.
In early 2023, it had risen to $92, but only went back to less than $59 just a few days ago.
Today it seems relatively stable around $61.
It is worth noting that the current price is lower than the launch price, as the initial price was around $70 in 2020.
The role of algorithmic stablecoins
Algorithmic stablecoins are collateral, but not what they are tied to.
That is, if they are pegged to the US dollar, they are not backed by US dollars. They are typically backed by other cryptocurrencies which are often quite volatile in value, so they carry a higher risk.
For example, the Terra ecosystem’s UST was pegged to the US dollar but was secured in LUNA, and as LUNA’s market value began to collapse, the stablecoin imploded.
GHO will be over-insured in different currencies, inspired by DAI. If the over-collateralization is sufficient, it should not lose its peg to the dollar, even in the face of large swings in the price of the collateral.
For example, DAI did not lose the peg when the price of Ethereum fell from $4,800 to $1,000.
Algorithmic stablecoins are the only ones that can be decentralized as they allow decentralized custody of the collateral.
In contrast, those backed in dollars cannot be decentralized because the custodian of the dollars can only be a centralized entity.