Aave plans to launch a native decentralized stablecoin GHO

The Aave community is considering the launch of a new decentralized stablecoin, GHO. This proposal aims to introduce a stablecoin pegged to the US dollar and backed by collateral, fully managed by the Aave protocol.

The main features of GHO include:

• Decentralization
• Over-collateralized by income-generating assets
• Supports multiple Aave protocol collateral
• Governed by the Aave community

If approved, GHO will make its debut on the Aave protocol. Users can mint GHO based on the collateral they provide, which can be various crypto assets. Borrowers can still earn interest on their collateral, and all GHO-related decisions will be governed by the Aave community.

The introduction of GHO is expected to enhance the competitiveness of stablecoin lending on the Aave protocol, providing users with more options. The interest generated from GHO lending will be fully attributed to the Aave DAO, bringing additional income to it.

The current market value of stablecoins is approximately $150 billion, making them an important component of the cryptocurrency space. Stablecoins provide a fast, efficient, and borderless way to transfer value. Decentralized stablecoins can also enhance transparency and resistance to censorship, aligning with the principles of Web3. As crypto assets further integrate into mainstream user groups, the application of stablecoins is expected to continue to grow.

The Operating Mechanism of GHO

GHO will operate as a decentralized stablecoin on the Ethereum mainnet. Users need to provide collateral to mint GHO, and the collateral ratio will be strictly controlled. When users repay their loans or are liquidated, the corresponding GHO will be burned. All interest generated from GHO loans will go directly to the Aave DAO treasury, rather than having to pay standard reserve fees like other assets.

GHO introduces the concept of "facilitators", entities that can generate and destroy GHO tokens in a trustless manner. All facilitators need to obtain approval from Aave governance and can adopt different strategies to manage GHO.

For each facilitator, Aave governance also needs to approve the "bucket", which is the upper limit of GHO that the facilitator can generate. Once the proposal takes effect, the Aave protocol will become the first facilitator, especially in the AAVE market on Ethereum.

Aave and GHO Integration

The Aave-GHO integration will employ the same mechanism as other assets in the Aave protocol, including the deployment of specific GHO aTokens and GHO debt tokens. These tokens will be registered as GHO tokens in the Aave Ethereum market.

The borrowing interest rate for GHO will be determined by the Aave DAO. The rate will remain stable but can be adjusted according to market conditions. This design preserves the flexibility of the Aave borrowing rate model, allowing for the implementation of any interest rate strategy that the community deems appropriate in the future.

GHO Discount Model

The initial deployment of GHO includes a discount strategy mechanism. Participants in the security module (stkAAVE holders ) can receive discounts on GHO borrowing rates. The discount ranges from 0% to 100%, with specific parameters controlled by Aave governance.

The Synergy Between Aave V3 and GHO

Aave V3's isolation mode allows users to generate GHO using multiple assets while reducing risk through collateral backing. Supply and borrowing limits also assist in risk control.

E-Mode can play a stabilizing role during market fluctuations. For example, during market downturns, as the prices of collateral contracts rise and GHO demand increases, users can borrow more GHO using other non-volatile collateral assets to repay their positions. This will increase the supply of GHO in the market and reduce demand. At the same time, E-Mode also allows stablecoin holders to exchange GHO at a nearly 1:1 ratio with zero slippage.

The Portal function provides an ideal path for the expansion of GHO in a multi-chain environment. Through Portal, GHO can be distributed across networks without trust, while also being created on Ethereum, enhancing security. This process requires only simple messaging without the need for bridging, thereby reducing overall risk.

Although the Ethereum market is still running on the V2 version, it is expected to upgrade to the V3 codebase in the coming months.

Further Applications of Governance

stkAAVE holders can mint GHO at a discounted price, incentivizing them to protect the Aave protocol. When users create GHO through the Aave protocol, the Aave DAO will earn substantial revenue through fees. This revenue can be used for innovation, supporting ecosystem contributors, providing funds during market downturns, or other DAO decision-making purposes.

With the introduction of GHO, the DAO will be able to determine the native interest rates of GHO and make adjustments through the governance process. This means that the monetary policy of GHO will be controlled in a decentralized manner by AAVE governance.

The Aave protocol will continue to support the provision and borrowing of multiple stablecoins. Expanding the protocol's stablecoin pool, including the introduction of GHO, will increase user choices and promote the sovereignty of the protocol. GHO will also introduce stable interest rates, providing borrowers with more certainty.

Market Applications of GHO

GHO is not only suitable for the crypto native community but can also be extended to a broader range of scenarios. Considering the low transaction fees and growth trends of Layer2, GHO is expected to have wide applications on Layer2. In addition, cash rewards and hackathon events can encourage the development and integration of GHO payment methods, targeting both crypto native users and mainstream users.

GHO will provide security and Decentralization for crypto users while adopting a growth strategy to develop use cases for the increasingly growing mainstream users. This strategy will focus on applications such as payments while leveraging the growth potential of L2. The cash rewards and hackathon events determined by Aave Grants DAO will be key drivers in building these mainstream use cases.

Community Voting

The community will decide whether to continue promoting the GHO project through snapshot voting. If the community supports the deployment of the protocol, allowing users to mint GHO, initial interest rate and discount rate proposals will be put forward, and these parameters can be adjusted over time through governance.

Cross-chain deployment of GHO on the Aave protocol requires further governance approval. In the future, the community will also decide whether to provide retroactive rewards to contributors who created GHO, as well as the amount of the rewards.

If approved by the community, OpenZeppelin and PeckShield will conduct various security audits in the coming weeks.