Decentralized lending protocol Aave announced on Thursday that it will launch its own stablecoin, GHO. The stablecoin is collateral-backed and pegged to the value of the US dollar, although the collateral is mostly other crypto assets.
“GHO would be backed by a diverse set of crypto-assets chosen at the discretion of users, while borrowers would continue to earn interest on their underlying collateral,” the governance proposal states. A DAO, consisting of all Aave token holders, will vote on the proposal after a feedback period.
The announcement comes as stablecoins come under increased scrutiny following the collapse of UST and Terra luna in May. CFPB director Rohit Chopra suggested that stablecoins were generally not ready for consumer payments soon after the collapse, while the proposed cryptocurrency regulation bill made sense. Cynthia Lummis and Kirsten Gillibrand would require all stablecoins to be backed by USD reserves. The EU’s landmark MiCA regulatory framework, for which a tentative agreement was released last week, would also require stablecoins to be backed by sufficient liquidity reserves.
The GHO proposal in its current form does not require liquid reserves, but rather collateralizes the currency with diversified crypto reserves. Its initial collateral would come from the deposits of individual coiners, and interest rates would be determined by the DAO.
This is different from algorithm-backed stablecoins, like UST, which depended on the real-time burning and minting of the luna coin to maintain its peg to the dollar. The mechanism that GHO plans to use has come under more scrutiny than those that have liquid reserves, such as USDC. For example, DAI, which uses a stabilization mechanism very similar to the GHO proposal, momentarily faltered due to strong demand after the collapse of UST.
GHO is not an exact replica of DAI for the Aave protocol. There are many pre-approved paths for entities – what the proposal calls “enablers” – to burn and automatically generate GHO. Additional use cases that would trigger burning or GHO generation can be DAO approved as well.
But despite GHO’s quirks, reactions to the online announcement have been particularly suspicious. Thousands of retail investors lost significant savings on the collapse of UST-luna, which continues to generate fallout across the industry, including a liquidity crunch at crypto lender Celsius.
That said, Maker, the creator of DAI, and Aave are among the few lenders Celsius has repaid so far – so perhaps the two have reason to be bold while the rest of the industry freezes.