AAVE: GHO development update

In May, during the fall of the market, the general market capitalization of stablecoins fell sharply and did not change relatively, slightly reduced over the past few months. The collapse of Stabelcoin Terra, UST, pushed the production of stabilcoins to protect market participants. USDC and BUSD received a market share immediately after collapse, since investors switched to stablecoins with transparent and sufficient provision to reduce risk. However, the fall of UST did not prevent the teams and developers from continuing to work on innovations, and since then several stabilcoins were announced, including AAVE GHO from AAVE.

What is AAVE?

AAVE is a decentralized lending protocol that allows you to provide loans and occupy assets. At the time of writing, the AAVE is the largest Defi lending protocol with more than $ 5 billion in TVL (Source: Source: Defillama).

Initially, AAVE was launched on Ethereum, but since then it has expanded to six other networks: Arbitrum, Avalanche, Fantom, Harmony, Optim and Polygon. AAVE has also recently been launched AAVE ARC, a CEDEFI product focused on lending to institutions. It complies with the rules https://gagarin.news/news/klaytn-cooperates-with-open-sea-to-develop-the-asian-nft-market/ for combating money laundering (aml), since institutions are required to undergo a KYC audit.

What is GHO?

GHO is a decentralized stablecoin that can be released by users. To do this, it is necessary to provide security with a given coefficient. Thanks to this, the GHO will become fully secured by stablecoin and will be able to be produced with many assets supported by the protocol.

Despite the fact that it is available on Ethereum, AAVE plans that GHO will be in various networks that will be used by Defi and retail users for various purposes.

How GHO works

Although All stablecoins are aimed at achieving similar goals, there are various types of stablecoins by type of support:

• Secured by fiat money (centralized)
• Secured by goods (centralized)
• Secured by cryptocurrency (decentralized)
• Algorithmic (decentralized)
• Hybrid – a mixture of the above

GHO is a decentralized stablecoin with various security, supported by different cryptoactures. AAVE plans to stabilize GHO by all means available to them, depending on intermediaries producing GHO. These include protocols or organizations introduced to the AAVE CHITSIAL, which can freely produce and burn GHO tokens.

As shown in the diagram, intermediaries can use various strategies to generate and stabilize GHO. Each such participant will have a certain limit on the amount of GHO, which they can release. It is represented by the level of "Bucket". In this article, we will consider the GHO Ministry of Mint with the first intermediary – the AAVE protocol.

GHO loan for AAVE protocol

AAVE protocol is a liquidity protocol that allows you to provide and occupy funds under a wide range of assets, while receiving profitability. To generate GHO according to the AAVE protocol, users must provide security before they can take GHO due to the provision coefficient. Each time the user occupies GHO, the BUCKET level increases. The loan will not be approved if the requested amount exceeds this level appointed to the protocol.

To repay his loan, the user returns the borrowed GHO to the burning protocol, reducing the BUCKET level. Any interest paid is then transferred to the AAVE DAO treasury. As in the case of any type of secured loan, the user is eliminated when the dollar value of its provision leads to the fact that the provision coefficient falls below the required threshold. Upon liquidation, the GHO acquired by the liquidator is returned to the protocol for burning.

Interest rates

Since GHO is released through borrowing in the protocol, GHO http://coin-graph.site/?p=205 cannot be used as an asset on the proposal (lending) side. Thus, the interest rate on loans is not dynamically regulated using conventional demand and demand mechanics. Instead, the GHO interest rate on AAVE is determined using AAVE control, which should adjust the interest rates depending on the demand of GHO.

To support the initial GHO mining, the discount mechanism will allow GHO at a discount (from 0% to 100%), depending on the number of STKAAVE provided. Stkaave – the amount of AAVE, which the user put in the security module. AAVE in the security module are used to support the protocol in case of failure.

The mechanism of price stability

Since AAVE uses excessive support strategy, it relies on arbitration and monetary policy for GHO stabilization:

• When GHO sinks below $ 1, borrowers receive an incentive to buy GHO at a reduced price and repay/eliminate the position, making a profit from the difference. Conversely, when GHO exceeds $ 1, users receive an incentive to occupy GHO and sell it on the market, returning their loan as soon as GHO stabilizes.
• AAVE management can control the interest rate on loans, price threshold and discount rate in order to expand or reduce GHO proposal.

AAVE on Bybit Web3

Bybit now offers a way to access your favorite web3 dapp through the casteic wallet Web3. This means that Bybit controls your keys without the need for KYC and with 24/7 support. You can pay and withdraw funds, as well as freely gain access to DAPP, for example, to AAVE. Check everything for yourself by link!

Conclusion

The competition in the stablecoin industry is quite high. Currently, the market is dominated by Tether (USDT) and Circle (USDC), but no project is completely decentralized due to the nature of their ensuring. Busd Binance also gains a market share, but lags behind USDT and USDC in Ethereum and other EVM networks. DAI remains the largest stablecoin in the decentralized market, but the coin has recently been criticized due to excessive dependence on USDC.

GHO has to go a long way to win the market share. Nevertheless, his position as the largest Defi protocol can help accelerate the growth of demand for GHO. His first intermediary, AAVE, will allow GHO to release the entered assets in the lending market. This will limit the amount of GHO, which can be released due to the requirements for excessive support. However, as soon as GHO demonstrates stability and sufficient demand, the Ministry of Mint can potentially be carried out using delta-neutral positions, real assets (RWA) or automated market operations (AMO) by the AAVE protocol itself or other intermediary. This would increase the capital efficiency of GHO and allow him to increase his offer as demand increases.

In connection with the deployment of the GHO test network and its launch, it will be interesting to see how GHO works and whether it can cause demand in the market. We are looking forward to new developments after this launch.

Warning: Bybit employees can be involved in some or all tokens and projects mentioned in the article. This statement prevents any conflict of interests and is not a recommendation to purchase any token or participate in any of the mentioned ecosystems. This content is intended exclusively for introductory purposes and should not be accepted as an investment council. Please study this issue well and be careful if you plan to participate in any of these projects. The opinion expressed in this article belongs to the author (am) and does not reflect the views of Bybit.