Aave GHO stablecoin launched on Ethereum mainnet

Aave, the largest lending protocol and one of the leading decentralized finance (DeFi) protocols, has launched its own stablecoin, GHO, on the Ethereum mainnet. GHO is a multi-collateralized stablecoin that is pegged to the U.S. dollar and backed by various assets supplied to the Aave protocol. So in this article we are gonna know what is GHO, what are its benefit and why it could make or break the Aave protocol.

What is GHO and how does it work?

GHO stands for Ghost, a reference to the spooky theme of Aave. GHO is an overcollateralized stablecoin, meaning that users need to deposit more value in assets than they can mint in GHO. For example, if a user deposits 100 DAI (a stablecoin pegged to the U.S. dollar) into the Aave protocol, they can mint up to 80 GHO, depending on the collateral factor of DAI.

GHO can be minted using any asset that is supported by the Aave protocol, such as ETH, AAVE, WBTC and more. Users can also borrow GHO from the protocol using their supplied assets as collateral. The interest rate for borrowing GHO is determined by the supply and demand of the market, as well as the governance parameters set by the Aave DAO.

The Aave DAO is composed of AAVE and stkAAVE token holders, who can vote on various aspects of the protocol, such as adding new assets, adjusting risk parameters and managing the treasury. The treasury receives a portion of the interest paid by GHO borrowers, creating a revenue stream for the protocol and its stakeholders.

GHO is designed to maintain a 1:1 peg to the U.S. dollar by using an oracle price feed that is fixed at $1. This means that GHO does not rely on external market forces or arbitrageurs to keep its price stable. However, users can still trade GHO on secondary markets, such as decentralized exchanges, where its price may fluctuate slightly due to supply and demand.

What are the benefits of GHO?

GHO offers several benefits to both users and the Aave ecosystem. Some of these benefits are:

  • Transparency and security: GHO is fully backed by verifiable assets that are locked in smart contracts on the Ethereum blockchain. Users can audit the collateralization ratio and the health factor of GHO at any time. Moreover, GHO inherits the security and decentralization of Ethereum, making it resistant to censorship and manipulation.
  • Flexibility and interoperability: GHO can be minted using a variety of assets that have different risk profiles and yield opportunities. Users can also use GHO in other DeFi applications, such as lending, borrowing, trading and investing. Additionally, users can benefit from Aave’s innovative features, such as flash loans, flash minting and liquidity mining.
  • Governance and sustainability: GHO is governed by the Aave community, who can decide on its future development and direction. The community can also benefit from the revenue generated by GHO, which can be used to fund grants, incentives and other initiatives that support the growth and innovation of the protocol.

Why do we need a Decentralized stablecoin?

To understand the need of a truly Decentralized stablecoin, lets first know the difference between a Centralized and Algorithmic stablecoin.

Centralized stablecoins like USDT, USDC are backed by fiat currencies typically in the form of government debt, which can provide a certain level of stability and trust for investors. Centralized stablecoins are issued by a centralized entity, such as a company or a bank, that holds the fiat reserves in a custodial account. Users can redeem their stablecoins for the corresponding fiat currency at any time, “as long as the issuer has enough reserves”.

Algorithmic stablecoins, on the other hand, are not backed by any physical asset, which can make them more volatile and risky. Algorithmic stablecoins are issued by a smart contract or a protocol that uses mathematical algorithms to adjust the supply and demand of the stablecoin in order to keep its price stable. Users cannot redeem their stablecoins for fiat currency, but they can trade them on secondary markets or use them in other DeFi applications. Some examples of algorithmic stablecoins are DAI, GHO, FRAX and ESD.

So, centralized stablecoins are subject to the laws and regulations of the jurisdictions where they operate, which can impose compliance requirements, audits, taxes and restrictions on their use. They are issued by a central authority hence can be censored by the government in the name of regulations. Whereas algorithmic stablecoins are more decentralized and autonomous, which can make them more resistant to censorship and manipulation, as their is no single entity to point to and hence to replace the current financial system with Defi we need a truly decentralized stable coin that cannot be manipulated by government or a company.

Why GHO could make or break the Aave protocol

TerraUSD(UST) an algorithmic stablecoin that was supposed to be pegged to the U.S. dollar and was backed by its sister token LUNA lost its peg in May 2022. The collapse was triggered by a combination of factors, such as a sudden spike in demand for UST, a lack of sufficient collateral in LUNA, a faulty oracle price feed, a malicious attack and a governance failure. The collapse of UST and LUNA wiped out billions of dollars of value and sparked a panic sell-off across the crypto market. This not only shakes the trust of crypto investors but also destroyed the LUNA ecosystem.

If anything similar happened to Aave’s GHO stablecoin then it could be very bad not just for Aave but for the hole crypto industry as Aave is one of the largest Defi protocol. On the other hand if Aave’s GHO succeeded in becoming a truly decentralized stablecoin then it could be a big step towards decentralization and financial independence.

How to get started with GHO?

To get started with GHO, users need to have an Ethereum wallet that supports DeFi applications, such as MetaMask or WalletConnect. Users can then visit the Aave website and connect their wallet to access the protocol.

Users can then choose to supply or borrow GHO from the Ethereum V3 market, which is currently the only market that supports GHO. Users need to approve their assets for spending by the protocol and then enter the amount of GHO they want to mint or borrow.

Users can also stake their AAVE tokens in the Safety Module (SM) to receive stkAAVE tokens, which entitle them to a discount on the borrowing rate of GHO. The discount rate is proportional to the amount of stkAAVE held by the user.

Users can monitor their positions and manage their risks using the dashboard provided by Aave. Users can also repay their loans or withdraw their deposits at any time.

Conclusion

GHO is a new stablecoin launched by Aave that aims to a truly decentralized stablecoins. GHO is backed by multiple assets supplied to the Aave protocol and governed by its community. GHO offers various benefits to users and the ecosystem, such as transparency, security, flexibility, interoperability, governance and sustainability.

GHO is currently available on the Ethereum mainnet and can be accessed through the Aave website. Users can mint or borrow GHO using their supplied assets as collateral and enjoy a discount if they stake their AAVE tokens in the SM. Users can also use GHO in other DeFi applications or trade it on secondary markets.

GHO is an exciting addition to the DeFi space and a testament to the innovation and vision of Aave. GHO may pave the way for more decentralized and community-driven stablecoins in the future. Would recommend checking the FAQ section of GHO stablecoin on Aave’s website for more info.

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