Jun 17, 2024
This liquidity primarily generates organic yield from LP fees, as users earn fees from trading activity within these pools. GHO is paired with other stablecoins in these liquidity pools, such as USDe, USDC, USDT, and crvUSD. The five biggest liquidity pools originate from Curve, Balancer, and Maverick protocols. Additional incentives also play a crucial role in maintaining and growing this liquidity. For example, on Curve, gauge incentives provide a significant portion of LP yield.
It is relevant to point out the differences between pairings with bluechip stablecoins like USDT and USDC versus newer ones like USDe. The GHO/USDe pool, which currently has more liquidity than the USDC and USDT pools combined, is heavily subsidized by the Ethena Shard program. While this subsidy has driven significant growth, it also raises questions about the long-term sustainability of the liquidity. If the incentives from the Ethena Shard program were to decrease, the liquidity might be less sustainable compared to pools paired with established stablecoins like USDT and USDC.
Source: GHO Analytics, June 11th, 2024
Peg history
After the launch, the GHO stablecoin faced difficulties maintaining its peg due to several factors. Initially, the absence of a Peg Stability Module (PSM) limited the mechanisms available to stabilize the peg during periods of market volatility. While it is not definitively proven that the GSM alone is impactful, its introduction aims to enhance stability. Additionally, the initial low demand for GHO necessitated the implementation of incentives to encourage users to mint and utilize the stablecoin. In response to these challenges, Aave's governance actively monitored GHO's market performance, adjusted GHO's market parameters, and introduced the Governance Stability Module (GSM). Following these actions, Aave's governance has adopted a prudent approach to increasing the borrowing cap, opting for incremental adjustments to ensure stability and measured growth.
GHO price chart and GHO's depeg that lasted until February 2024. Source: CoinMarketCap, June 11th, 2024
Holder distribution
More than half of all outstanding GHO tokens are currently staked in Aave's safety staking module. This significant staking level offers a good risk-adjusted yield for GHO holders and provides a crucial safety net for the protocol. In a severe shortfall or market disruption, these staked tokens can be slashed by up to 99%. This high slashing threshold was decided to offer higher risk-adjusted yields, as Aave and ABPT tokens had only a 30% slashing limit and thus provided lower yields. This slashing mechanism acts as an important buffer, protecting the broader Aave ecosystem by absorbing losses and helping maintain the stability of the GHO stablecoin in case it becomes under-collateralized.
Debt holder distribution
About 47.5% of total GHO debt is held by the top 10 borrowers (out of ~1400 total borrowers). Moreover, most of the sDAI collateral is provided by one borrower.
Source: GHO Analytics, June 5th, 2024
DeFi integrations
There exist different possibilities to earn yield with GHO outside of the Aave ecosystem, most notably:
Source: DefiLlama, June 5th, 2024
Gearbox: Users can supply GHO to the Gearbox lending GHO V3 Pool and earn interest paid by borrowers who utilize the pool by borrowing liquidity at higher leverage.
f(x) Protocol: Users can deposit liquidity into the Curve GHO+fxUSD pool, then stake their LP tokens in the f(x) protocol to earn additional rewards, such as governance tokens or other incentives provided by the platform.
Paladin: Users can auto-compound stkAave rewards while earning fees from GHO borrowers through Dullahan. Borrowers can leverage lower interest rates from stkAAVE's discount power, which Paladin manages.
Aura Finance: GHO can be deposited into Aura hybrid pools, allowing users to earn rewards from the pool's yield farming strategies, achieve a high boost through the protocol-owned veBAL, and accumulate additional AURA rewards.
Convex Finance: LP tokens of GHO pairs on Curve and f(x) can be deposited using the Convex Protocol to earn boosted LP rewards, trading fees, and claim boosted CRV without locking CRV themselves, with zero deposit and withdrawal fees.
Beefy Finance: GHO can be deposited in Beefy vaults to farm with higher yields. Users can benefit from compounded interest and additional reward tokens as Beefy optimizes yield farming using different strategies.
Notional Finance: GHO can be provided for leveraged liquidity on Notional V3. Users can provide liquidity, borrow against that liquidity, and then provide more liquidity, earning the spread between the liquidity yield and the chosen borrow rate, but with a higher liquidation risk.
GHO yield on DeFi protocols and liquidity pools. Source: DeFiLlama, June 5th, 2024
Conclusion
GHO, the decentralized stablecoin native to the Aave Protocol, has shown resilience and potential since its July 2023 launch despite initial challenges in maintaining its peg and slower growth. With over 80 million GHO in circulation as of June 2024, the stablecoin's design leverages Aave's V3 liquidity pool and introduces concepts like facilitators and the Safety Staking Module. GHO's stability is supported by over-collateralization, arbitrage incentives, dynamic interest rates, and the GHO Stability Module (GSM), allowing the minting of GHO with other stablecoins as backing.
The Aave DAO is crucial in steering GHO's development, with various entities monitoring and adjusting parameters to ensure stability and growth. The "Merit" Incentive program has boosted GHO's supply and utilization, making it attractive for users and liquidity providers. The high percentage of GHO staked in the Safety Module demonstrates strong user confidence in the stability of stablecoin.
Areas warranting ongoing monitoring and risk management include:
Collateral risk: Each new collateral asset or parameter change on Aave V3 can alter GHO's risk profile. The protocol must assess each asset's risks and manage the collateral pool to ensure GHO's stability.
Liquidation risk: The DAO should monitor the user's position health (e.g. Chaos Labs dashboard), liquidation volumes, and incentives to ensure the system can handle market stress.
Stablecoin exposure: The GSM introduces exposure to exogenous stablecoins, requiring careful monitoring and management of its debt ceiling and supporting assets. At this time, it represents a small proportion of the overall supply.
Governance and parameter risks: The Aave DAO must actively monitor and adjust GHO-specific parameters based on market conditions, price stability, and borrowing demand.
Safety Module participation: Incentivizing Aave staking in the Safety Module is crucial for its effectiveness as an insurance fund.
As GHO grows and expands through cross-chain launches and ongoing initiatives, ongoing risk monitoring, governance, and collaboration between the Aave DAO, Risk DAO contributors, and the DeFi community will be essential for its long-term success. Given GHO's resilient peg, more aggressive supply increases are expected. Currently ranking as the 21st largest stablecoin by market cap, GHO is well-positioned to become a profitable stablecoin for the Aave DAO, contributing to the ecosystem's sustainability and growth.