Aave Deploys Native Stablecoin GHO on Ethereum Testnet

GHO joins an increasingly competitive space as rival DeFi protocols also issue or are moving to release their own protocol-native stablecoins.

AccessTimeIconFeb 9, 2023 at 2:00 p.m. UTC
Updated Feb 9, 2023 at 5:44 p.m. UTC

Aave, one of crypto’s largest decentralized finance (DeFi) protocols, has deployed its native stablecoin GHO on Ethereum’s Goerli testnet, Aave Companies, one of the firms that develops the lending protocol, said Thursday.

Developers and potential adopters of GHO, pronounced as “go,” can access the stablecoin’s codebase and test how it works before being released to the wider public on the Ethereum blockchain, a press release said.

GHO’s mainnet start is subject to community discussion and approval.

Aave is a lending and borrowing platform that allows users to take out crypto loans or earn yields on their tokens using smart contracts, without third-party oversight. It is managed by a decentralized autonomous organization, Aave DAO, through proposals and community votes.

The protocol's native stablecoin has been highly anticipated among DeFi users since the community overwhelmingly supported its development in August in a governance vote.

Stablecoins are a novel group of cryptocurrencies whose value is backed by an outside asset and aims to keep its price linked to a currency such as the U.S. dollar. The asset class has become the backbone of the crypto ecosystem by facilitating trading and transfers between the traditional currencies and digital assets. It has grown to a total market capitalization of $136 billion.

Aave’s GHO will face fierce competition as a slew of rival decentralized finance (DeFi) protocols issue or are in the process of crafting their own native stablecoin as a means to attract users at a time when crypto lending is flagging. Currently, DeFi lender Maker’s DAI is the largest decentralized stablecoin, with a $5 billion circulation, while Curve, another top protocol, is inching toward launching its native crvUSD stablecoin.

Still, Aave's top position within DeFi with some $7 billion worth of digital assets pledged on the platform may give its stablecoin a jump-start.

“I suspect GHO will soon be a top decentralized stablecoin behind DAI,” Dustin Teander, analyst at crypto intelligence firm Messari, told CoinDesk. “However, given that the demand for debt is currently fairly low in DeFi, it could take some time to see significant expansion.”

How Aave’s GHO works

GHO will be an overcollateralized stablecoin backed by crypto assets, according to a technical paper authored by Emilio Frangella and Steven Valeri from Aave Companies. Its price will be fixed with an oracle to $1.

The supply of GHO is controlled via a mint-and-burn mechanism. Aave creates (mints) GHO tokens when users deposit digital assets as collateral to borrow GHO, while they keep earning a yield on their underlying assets.

When users repay the principal loan, Aave destroys (burns) the previously issued GHO reducing its circulation and returns the underlying collateral.

Those who stake the protocol’s AAVE governance token, may borrow GHO at a discounted rate.

"This adds an incentive to staking AAVE and could result in short-term increase in staked AAVE depending on the interest and discount rates," Teander added. "In the long run, if the discount is valuable enough it could be a viable incentive to move away from dilutive token emissions for attracting capital."

Aave DAO will be responsible for determining the token’s supply, interest rate and risk parameters. The DAO will receive all interest fees during the GHO loan period, a clear distinction from lending and borrowing all other digital assets on Aave.

GHO will rely on so-called facilitators such as other DeFi protocols that will be able to trustlessly mint and burn GHO tokens. They must be approved by Aave’s governance and respect an upper limit for borrowing called a bucket.

Prior to the testnet release, the GHO deployment was audited by blockchain code auditing firms Open Zeppelin, SigmaPrime and ABDK, and it is currently under audit by Certora, the press release said. The protocol also started a Bug Bounty program which encourages community members to discover and report security vulnerabilities for up to $250,000 reward.

UPDATE (Feb. 9, 16:04 UTC): Adds analyst comment about AAVE staking.


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Krisztian  Sandor

Krisztian Sandor is a reporter on the U.S. markets team focusing on stablecoins and institutional investment. He holds BTC and ETH.