By
Temitope Olatunji
April 16th, 2024
Defi protocol Aave has announced its intent to create a GHO stablecoin line that would be overcollateralized with yield-generating assets.
Open-source non-custodial protocol Aave has proposed a new stablecoin called GHO. According to Aave, its stablecoin will be overcollateralized and similar to Ethereum-based stablecoin DAI. In addition, the GHO stablecoin will also be a decentralized stablecoin and have yield-generating assets.
Part of the governance proposal reads:
“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.”
Aave users would also be able to mint the stablecoin by using assets already supplied as collateral. Aave founder Stani Kulechov commented on securing the stablecoin in the market, expanding this to the platform’s broader goal. In a Twitter post, Kulechov offered:
“While GHO would be secured by the assets on the Ethereum market, the main vision for GHO is to pursue organic adoption via L2s to solve real life payment opportunities across the internet and on-ground.”
Kulechov’s statement was also part of an extensive Twitter thread that touched on other aspects of the proposed Aave stablecoin.
The proposal for the Aave GHO stablecoin is still up for discussion and would need to scale through an Aave DAO governance vote before implementation.
Proposed GHO Applicability
According to the proposal, users (borrowers) will create GHO as a decentralized stablecoin on the Ethereum Mainnet. Furthermore, all interest payments accrued by GHO miners would directly transfer to the AaveDAO treasury. This method does away with the standard reserve factor collected when users borrow assets.
GHO would also feature the concept of facilitators, entities that trustlessly generate and burn stablecoin tokens. However, the proposal specifies that Aave Governance should vet all prospective facilitators upon approval. Successful facilitators will be able to apply different strategies as they generate GHO.
Aave GHO Announcement Comes amid Broader Stablecoin Turmoil
Reactions to the GHO announcement online were mostly skeptical considering the current optics. This is because Aave’s decision to launch its new GHO line comes amid increased scrutiny in stablecoins.
The general stablecoin scrutiny began after TerraUSD (UST) and Luna collapsed back in May. Shortly after the dramatic collapse, which saw billions of funds wiped out, CFPB Director Rohit Chopra raised further doubts about stablecoins. According to him, the ‘stable’ reserve asset-pegging digital currencies were generally not ready for consumer payments.
Furthermore, in the aftermath of the UST crash, pro-crypto US Senators Cynthia Lummis and Kirsten Gillibrand also responded to the plunge. In their proposed crypto regulation bill, the senatorial duo called for the backing of all stablecoins by US reserves. While most stablecoins specify actual backing with US reserves, TerraUSD used an algorithm instead. At the time, Lummis also explained in a press release announcing the bill:
“As this industry continues to grow, it is critical that Congress carefully crafts legislation that promotes innovation while protecting the consumer against bad actors.”
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