Decentralised finance (DeFi) and liquidity giant Aave plans to launch a new kind of over-collateralised stablecoin called GHO despite confidence in stablecoins being at a lull.
With GHO, users could borrow the stablecoin whilst still earning yields on any assets they have locked with Aave. However, the proposal remains in a feedback stage and will ultimately be subject to the community DAO’s approval.
Aave tweeted the news on 7 July, stating: “We have created an ARC for a new decentralised, collateral-backed stablecoin, native to the Aave ecosystem, known as GHO.”
The company went on to tweet that GHO would be an Ethereum-based, decentralised stablecoin pegged to the US dollar that could be collateralised through multiple assets of the user’s choosing.
Obtaining GHO would be done by minting the coin against a user’s deposited collateral, although a list of which assets will be supported and any ratios involved has yet to be released.
Considering users would be borrowing the stablecoin against their own holdings, any positions would have to be over-collateralised as with normal Aave loans.
Aave said in a statement: “With community support, GHO can be launched on the Aave Protocol, allowing users to mint GHO against their supplied collaterals. GHO would be backed by a diversified set of crypto-assets chosen at the users’ discretion, while borrowers continue earning interest on their underlying collateral.”
The Aave team added that: “If the community votes positively for the deployment of the protocol creating the ability for users to mint GHO, a recommended starting interest rate and discount rate will be proposed,” adding that an audit would occur over the next few weeks if accepted.
The proposal coincides with Aave’s native token (AAVE) having gained 15% over the past 24 hours to currently sit at £60 at the time of publication.
According to DefiLlama data, Aave is the second-largest DeFi platform in terms of total value locked at £5.65 billion. The ecosystem is based on Ethereum but also supports multiple Layer 2s such as Polygon, Optimism and Arbitrum.
Stani Kulechov, Aave’s founder, took to Twitter to share his broader vision for GHO as a USD-pegged asset:
“While GHO would be secured by the assets on the Ethereum market, the main vision for GHO is to pursue organic adoption via L2s to solve real life payment opportunities across the internet and on-ground.”
Despite the promising rhetoric, Aave’s announcement comes at a trying time for stablecoins after the collapse of Terra’s UST and LUNA in May this year.
US regulators have called for a cryptocurrency regulation bill that would require all stablecoins to be fully backed by USD reserves. Meanwhile, the landmark MiCA regulatory framework which is making its way through the EU courts would also require stablecoins to be sufficiently backed by liquid reserves.
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