Aave Proposes Decentralized, Yield-Generating Stablecoin GHO

The U.S. dollar-pegged algorithmic stablecoin will be minted by users and generate interest yields.

AccessTimeIconJul 8, 2022 at 12:20 p.m. UTC
Updated May 11, 2023 at 4:43 p.m. UTC

Aave has proposed the creation of a decentralized algorithmic stablecoin, GHO, as it looks to improve on the features of its lending platform.

The fully collateralized stablecoin will be native to the Aave ecosystem and available on the Ethereum network initially. It is expected to be offered on other Aave-supported blockchains based on future community votes.

Still a proposal, the plan is for Aave to allow users to mint GHO tokens against their supplied collaterals. GHO would be backed by a basket of cryptocurrencies chosen at the users’ discretion, while borrowers would continue earning interest on their underlying collateral.

This would work similarly to existing algorithmic stablecoins, which mint exactly $1 worth of tokens when users provide $1 worth of cryptocurrency. In GHO’s case, a user must supply collateral (at a specific collateral ratio) to be able to mint GHO.

Correspondingly, when a user repays a borrow position (or is liquidated), the GHO protocol burns that user’s GHO, the proposal explained.

All decisions relating to GHO will be in the hands of Aave governance. GHO is expected to generate additional revenue for the Aave DAO by sending 100% of interest payments on GHO borrows to the DAO, the proposal said.

Aave said the GHO stablecoin will rely on “facilitators” for the smooth functioning of GHO. A facilitator, such as another protocol, will have be able to trustlessly generate and burn GHO tokens. The facilitators would have to be approved by Aave governance.

Facilitators, however, will have limits in place to ensure they don’t abuse their powers. “For each facilitator, governance will also have to approve something that we call a bucket. A bucket represents the upward limit of GHO a specific facilitator can generate,” the Aave proposal said.

Borrow interest rates for GHO will be deterehd by the AaveDAO, with a stable rate that may be adapted depending on market conditions. This design retains the Aave protocol’s borrow interest rate model flexibility, and it will be possible in the future to implement any interest rate strategy the Aave community sees fit.

Community voting for the creation of GHO is expected to begin soon. Sentiment among Aave users remained mostly positive as of Friday. However, there were concerns around Aave controlling the interest rates offered to users and the intent of arbitrageurs who would work to maintain GHO’s $1 peg.


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Shaurya Malwa

Shaurya is the Deputy Managing Editor for the Data & Tokens team, focusing on decentralized finance, markets, on-chain data, and governance across all major and minor blockchains.

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