The stablecoin market received a happy update when the Finnish cryptocurrency lender Aave shared the news of their own stablecoin, GHO. Currently, GHO is only published to Ethereum’s Goerli test network.
If GHO were implemented in the Ethereum mainnet, it would make stablecoin lending based on the Aave protocol more competitive, provide more choices for stablecoin users, and bring additional income to Aave DAO by sending 100% of the interest from GHO loans to it.
In this article, we get to know the stablecoin in more detail and review the background to its release.
In short: What is Aave?
Aave is a cryptocurrency and DeFi loan service founded by Finnish Stani Kulechov in 2017. With the DeFi platform built by Aave, users can borrow cryptocurrency and accrue interest on the cryptocurrencies they store on the platform.
Aave specializes in so-called overcollateralized loans, where the user deposits an amount of cryptocurrency greater than the loan amount as collateral for the loan.
Aave also has its own token, AAVE, which can be traded on most exchanges and can be staked on the Aave platform to earn interest.
Aave crypto guide:
What is GHO?
GHO is a stablecoin published by Aave, which has its value pegged to the US dollar (USD). GHO is fully decentralized and secured by an over-collateralization mechanism, just like Aave’s crypto loans.
Aave mints GHO tokens when users of its loan service deposit cryptocurrency as collateral to borrow GHO tokens. When the loan is repaid, Aave burns the GHO tokens issued in connection with the loan in question. In this way, the number of tokens in the protocol is reduced.
Only assets in the Aave protocol can be used as collateral against GHO tokens.
All income earned from GHO stablecoins goes directly to Aave Treasury, which transfers them to Aave DAO.
According to the press release published by Aave, the GHO stablecoin would have already been audited by Open Zeppelin, SigmaPrime, and ABDK. While writing this news article, Certora is also conducting its own audit regarding GHO.
Stani Kulechov, the founder of Aave, believes that the decentralized stablecoin will act as its own payment layer in the future, transferring value safely, easily, and efficiently between the DeFi and TradFi ecosystems.
The source code for GHO stablecoins is publicly available on GitHub for developers to explore and test before releasing it to the Ethereum mainnet.
In addition, Aave also has its Bug Bounty program, which encourages users to find and report security holes in exchange for monetary rewards.
Aave DAO, a decentralized independent organization, is responsible for decisions and updates related to GHO stablecoin.
GHO discount mechanism
GHO includes a discount mechanism coded into it. With this mechanism, users who have staked their funds in Aave Safety Module (stkAave) are entitled to discounts on GHO’s loan interest.
The size of the discount is affected by the number of locked funds. Currently, it is possible to get a discount between 0% (no discount) and 100% (full discount). Aave DAO controls these parameters.
On Aave’s website, you can find a Google Sheets file that can be used to calculate how the amount staked in the Safety Module affects the interest on the loan.
As the name suggests, DAO, or Decentralized Autonomous Organization, is a distributed independent organization. In this organizational form, all changes have to be voted on. Approval of the changes requires the support of the majority.
Everyone who holds Aave cryptocurrency can participate in Aave DAO voting.
The transition of the GHO stablecoin from Ethereum’s testnet to the mainnet depends entirely on the decision of Aave DAO, which manages it. In principle, Aave DAO could block the release of GHO to the Ethereum mainnet completely, but it would not advance the interests of that DAO in any way.
The latest votes of Aave DAO have influenced the determination of GHO’s supply, interest rates, and risk parameters.
Aave DAO is also responsible for selecting facilitators who can mint and burn GHO tokens. Due to its extensive risk management features, the first facilitator will be the Ethereum V3 market.
Stablecoin market in 2023
The popularity of stablecoins has grown steadily with the unstable crypto market. More and more investors are looking for ways to invest in digital assets without cryptocurrency volatility. Stablecoins are one option for this.
Stablecoins also offer their users a convenient and safe way to protect themselves from weak macroeconomics and unstable national currencies.
The significance of stablecoins in the crypto market cannot be ignored. Currently, the market value of Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) alone is more than 124 billion dollars. In this market situation, it is about 12 percent of the market value of the entire crypto market.
Given the benefits of regulation to stablecoins, several jurisdictions can be expected to finalize their regulatory framework for stablecoins by the end of this year.
Flexible models and clear rules would give the crypto market a much-needed push forward, which could help alleviate the losses incurred during the crypto winter. In the best case, transparent and fair stablecoin regulation could lead to a bull market.
The regulation would also provide opportunities for traditional financial and technology companies to efficiently launch their stablecoin projects, promoting the development of the entire crypto market.
Aave Stablecoin — FAQ
What is GHO?
Gho is a stablecoin published by the Finnish company Aave. Its value is tied to one dollar, and its borrowing works with the so-called mint-and-burn logic. Changes regarding stablecoin are made in a decentralized independent organization, Aave DAO.
How to acquire GHO?
The only way to acquire GHO stablecoin is to borrow it from Aave’s loan service against digital assets. When the loan is repaid, Aave destroys the GHO tokens issued in connection with the loan in question so that there are not too many tokens in circulation.
Can you get a discount on GHO?
GHO includes a discount mechanism that allows users to get a discount on GHO’s loan rates. Those users who have locked their funds in the Aave Safety Module are entitled to the discount. The size of the discount depends entirely on the size of the amount locked in the module.
How does GHO differ from other stablecoins listed on Aave’s marketplaces?
Unlike many other stablecoins, GHO’s oracle price is fixed. GHO is entirely decentralized and transparent, and its operating principle cannot be changed.
GHO’s interest rates are determined by Aave DAO and are directed to Aave DAO instead of the asset suppliers.
Is GHO a Finnish stablecoin?
Although GHO was developed by Aave, founded in Finland, it cannot be considered directly as a Finnish stablecoin. Numerous boundary-breaking teams within Aaven have participated in the development of GHO.
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