Aave, the fourth largest DeFi platform, is a DeFi lending and borrowing protocol that allows users to earn yields on their deposited tokens. The Aave DAO manages the project through community proposals and voting.
It turns out that Aave has announced the launch of its native stablecoin, GHO: a decentralized stablecoin pegged to the US dollar and overcollateralized.
How Does GHO Work?
As a decentralized stablecoin on the Ethereum Mainnet, users will mint GHO. As with all loans on the Aave Protocol, a user must provide collateral (in a specific ratio) in order to mint GHO. When the user pays off a loan position (or gets liquidated), the GHO is returned to the Aave pool and burned.
All interest payments earned by GHO minters will go directly to the treasury of Aave DAO, in contrast to the standard reserve factor collected when users borrow other assets, and the principal is burned.
GHO introduces the concept of Facilitators. A facilitator can mint and burn GHO tokens through various strategies.
Facilitators must be approved by the Aave DAO and can apply different strategies for GHO generation. Aave DAO assigns each Facilitator a Cube with a specific capacity that represents the maximum limit of GHO that a specific Facilitator can mint. This limit is defined by Aave Governance.
Centrifuge, an off-chain ecosystem for structured credit, is looking to become the real–world asset facilitator for Aave’s new stablecoin, GHO — an opportunity for interaction between the world of physical assets and decentralized stablecoins.
RWAs can be considered off-chain digital assets and are most commonly used to serve as collateral in DeFi.
GHO is created (“minted”) by facilitators. By borrowing GHO, new GHO and GHO Debt Tokens are automatically generated and transferred to the user.
During a loan transaction, the Cube level for the Facilitator is updated to reflect the new amount of GHO minted.
The lending action fails if the requested amount exceeds the deposit capacity (Cube) assigned to the facilitator.
Given the nature of GHO and how it interacts with Aave, GHO cannot be supplied to the Aave V3 Ethereum Pool where it is minted.
No one provides GHO for a user to borrow. Instead, the protocol calls the GHO contract and mints that GHO on demand.
When a user provides collateral to the Aave Protocol, other users will borrow the provided assets. Interest will be earned on the provided collateral, which effectively reduces the interest a user pays for their borrowed positions.
Therefore, the collateral used to mint GHO will actively generate interest.
GHO Interest Rates
Loan interest rates for GHO will be determined by Aave DAO, with a stable rate that can be adapted based on market conditions. This design preserves the flexibility of the Aave Protocol’s loan interest rate model, and it will be possible in the future to implement any interest rate strategy that the Aave community deems appropriate.
Discount Rate Model
The nature of the asset allows for greater utility to governance and community participants. The initial implementation of GHO includes a discount strategy mechanism. This strategy initially allows Safety Module participants (stkAAVE holders) to access a discount on GHO borrowing rates. In the first implementation, the strategy will set a certain amount of GHO for discount per supplied stkAAVE and a discount on interest rates that can range from 0% (no discount) to 100% (full discount). These parameters are controlled by Aave governance.
Discounts are available to borrowers who stake AAVE in the Security Module, which is a tool used in the event of a shortfall event. By contributing to the Safety Module, users take on the risk that their participation may be reduced to cover the shortfall in the case of bad debt arising in the Aave protocol. To incentivize users to take on this risk, they may receive a discount on their interest rate.
Multiple collateral positions
Traditionally, in the DeFi ecosystem, users mint decentralized stablecoins through vaults backed by single assets. GHO has multiple collateral, which means that users can mint GHO based on their entire set of collateral assets supplied across the Aave Protocol. As a result, GHO will be backed by various types of assets.
The use of multiple different assets within the same loan position creates more flexibility for the user and allows for greater control over exposure to price fluctuations. This flexibility with multiple collateral means that the user would not have to balance multiple positions, health factors, and would not have to switch between assets to fund a position.
Flashloan vs FlashMinting
In the current Aave pool, if an asset is supplied, a user can perform a Flash Loan transaction with that asset. As GHO is not provided, it is not possible to perform a Flash Loan.
Therefore, FlashMinting has been introduced, which provides the same functionality and follows the current Flash Loan standard (ERC3156) as in the Aave Protocol. This allows users to access the liquidity of the FlashMinter Facilitator for a transaction, as long as the taken amount plus the fee is returned or (if allowed) a debt position is opened at the end of the transaction.
The FlashMinter facilitator is an entity that enables FlashMinting and has a limit of GHO to mint.
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Go or not GHO: Aave deploys native stablecoin GHO -EN 06 was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.