Investors will receive GHO by minting it through various supported crypto assets, but the stablecoin must maintain its parity to the US dollar. Although the AAVE collateral can allow issuing USD 1 worth of GHO, the protocol will automatically burn their balance if they face liquidation.
Investors maintain their interest in algorithmic stablecoins despite the recent setbacks that affected TerraUSD (UST) and other protocols. In that regard, DeFi platform Aave will introduce a new collateralized pegged crypto asset on the Ethereum blockchain.
That new asset would be the stablecoin GHO, which aims to improve some relevant features of lending platforms. Holders of AAVE tokens have responded to that proposal by offering feedback, support, concerns, and criticism. Surprisingly, 99% of them seem to have supported the idea of its introduction.
The rising popularity of the stablecoins Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) in the cryptocurrency industry is undeniable. Investors can trade these three pegged crypto assets with almost all other cryptocurrencies on any exchange. Unlike their algorithmic counterparts, which have faced quite a few problems, hard assets back them.
The Disadvantages of Using Algorithmic Stablecoins
Neither cash reserves nor precious metals back algorithmic stablecoins, buy these maintain parity to the US dollar by holding cryptocurrency reserves. Due to the volatile nature that characterizes crypto assets, that balancing act is very precarious.
USDD briefly lost its peg to the US dollar and dropped to USD 0.93, while Solana’s NIRV declined by over 85%. Those two examples confirm that the algorithmic approach is risky, which causes the demand for safer stablecoins to grow. Although a basket of other digital assets backs the GHO proposal, GHO involves a primarily algorithmic currency.
Users of the AAVE token will receive GHO by minting it against the collateral provided. Although users can do it through various supported crypto assets, the stablecoin must always maintain its peg to the US dollar.
The Possibilities of Success for the Stablecoin GHO
Many people question the viability of GHO due to its algorithmic nature, which leads Aave to focus on allowing loans against collateral. However, its native stablecoin only makes sense if it can maintain its peg to the US dollar without missing a beat. The experience with other algorithmic stablecoins has shown that it is easier to say than do.
The AAVE collateral of Investors can allow them to mint USD 1 worth of GHO, having a collateralization ratio to buy it. However, these details are still unclear, as the protocol will automatically burn their balance if they pay off their loan position or face liquidation.
The payment of interests on GHO balances will go to Aave DAO to yield more revenue and strengthen its treasury. The DAO will determine the loan interest rates for GHO, although market conditions may affect its stability.
Despite its potential, it is necessary to identify many aspects of the proposal along the way. Since GHO borrows elements from other algorithmic stablecoins, it poses a risk to Aave and its position in the DeFi industry.
By Alexander Salazar
