Last week the CurveDAO signaled that a new stablecoin is in the making. At that point, it was clear that Aave would also develop its own stablecoin since an initial proposal was already passed. Now the results are in on the second proposal and we have a little bit more details on GHO and most certainly more details than on Curve’s stablecoin project which seems to be also in an early stage.
What is GHO, how is it different from other stablecoins and can we trust this technology?
GHO is backed by borrowers’ collateral
Aave is a decentralized lending system and one of the biggest DeFi protocols by TVL and other metrics. Users can lend or borrow crypto assets and stablecoins on Aave. By providing liquidity to the smart contract they can also earn interest.
The users who like to mint GHO will have to deposit one of the tokens or cryptocurrencies accepted by Aave. In this way, they are borrowing GHO against their crypto assets while at the same time earning interest on them. Aave will also allow to take out loans denominated in GHO. In return, the protocol will charge interest and use these fees to give them back to the Aave DAO.
One of the key differences here is that the value of GHO is pegged to US-Dollar by the value of the collateral borrowers are depositing. In order to ensure that the value of all deposits cannot drop below a sufficient threshold, GHO deposits have to be overcollateralized, meaning that users will deposit more in value than they receive in stablecoins. Should a user pay back his GHO to the protocol or should his deposit decrease in value, the GHO tokens are simply burned as the position gets liquidated.
Can we trust GHO?
There are always risks involved when using decentralized financial services that cannot be excluded. What most investors fear is a downfall similar to what we have witnessed with Terra. This is not possible with GHO since the stablecoins are backed by a basket of assets.
A death spiral like we have seen with TerraUSD that was only backed by LUNA is not possible. It is worth mentioning that there are still liquidation risks involved that would otherwise not occur when using a stablecoin backed by a company like Tether or Circle.
Judging from where decentralized stablecoins have started and how some of them have failed this year, the development of GHO is a positive thing for the DeFi economy. DAI from MakerDAO is doing well but it doesn’t scale easily. There is clearly a demand for decentralized stablecoins solutions and it is good to see that the industry is attempting to learn from Terra’s failure and mature.