This is an archive of our post on Aave governance forum. Read the full thread here.

Summary

LlamaRisk supports this proposal and believes that continued funding would have a positive impact on the risk profile of the protocol. We are thankful to @karpatkey_TokenLogic and Aave’s Liquidity Committee for continued efforts in ensuring stability for Aave and GHO stablecoin.

Supply Venues for GHO

It is clear that increased adoption of GHO in different venues drives the supply of GHO. In addition, this also creates sustainable supply ‘sinks’ for the stablecoin. Consequently, each such adoption helps to alleviate pricing pressure and increases GHO’s competitiveness with other stablecoins.

The current largest supply sink for GHO remains the staking module, which currently hosts 71.5% of total GHO supply. The attractiveness of staking GHO is facilitated by Merit rewards program which is enabled by Aave’s DAO and managed by @ACI.

Source: TokenLogic GHO Analytics, 7th December, 2024

These incentives have greatly contributed to the stability of GHO, however incur costs to the DAO. This means that introducing new, attractive yield venues would help alleviate the need for Merit’s program spending.

Source: LlamaRisk - GHO Users: Interactions & Patterns, 25th September, 2024

LlamaRisk has also analyzed GHO user behavior and the journey of GHO back in September 2024, finding that the introduction of Merit has greatly contributed to GHO retention.

New GHO Market Deployments

As we prepare for GHO deployments in new chains, it is important to ensure the growth of liquidity as it would contribute to the retention of GHO in these chains and therefore enable new venues for GHO supply in the long term.

We support the liquidity and pricing targets introduced in this proposal while acknowledging that the secondary market pricing is also highly dependent on underlying market conditions. At times when leverage of volatile assets becomes increasingly attractive, most stablecoins experience selling pressure when they are borrowed and sold in the secondary market.

In addition, we believe that GHO Stability Modules (GSM) in each of these new GHO chains will help to create an initial stability buffer for GHO secondary market price and therefore assist in achieving the provided targets.

GHO Borrow Rate Adjustments

As outlined in this proposal, due to recent peg pressure multiple Borrow rate increases for GHO were needed. The GHO peg was restored on the 19-20th of November, when GHO’s borrow rate became more in line with the borrow rates of other stablecoins on Aave’s Core instance.

Source: TokenLogic GHO Analytics, 7th December, 2024

This leads to the conclusion that GHO peg is highly impacted by the GHO’s borrow rate discount in comparison to other borrowable stablecoins on Aave Core. While the borrow rate can remain at larger discount during less volatile market conditions, it is important to proactively increase GHO borrow rates when leverage of volatile assets becomes more broadly observed.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.