Aave Companies, one of the contributors developing the Aave protocol, has released a technical paper on Aave’s upcoming GHO stablecoin, along with the results of its first security audit.
GHO is an overcollateralized dollar-backed stablecoin that was proposed in July. The project was greenlit by the community on July 31 with near-unanimous support.
Aave is DeFi’s fourth-largest protocol with over $5B in total value locked (TVL).
The audit was conducted by leading security firm Open Zeppelin, which has found no critical or high-severity bugs in the codebase. However, the firm did find two medium-severity bugs in the codebase.
Facilitators are entities responsible for minting and burning GHO tokens and are chosen by Aave governance. Each facilitator will have their own unique strategy to utilize GHO tokens, which are backed by excess collateral. Of course, a sharp drop in collateral values could result in a liquidation event.
The Aave V2 market on Ethereum was initially selected to be the first facilitator. However, with the recent launch of Aave V3 on Ethereum as a fresh deployment, the team has opted to use it as GHO’s inaugural facilitator. The team believes that the latest iteration of the protocol is better suited for GHO, as it introduced key risk-reducing features such as e-mode, isolation mode and supply caps.
Each facilitator can mint GHO tokens based on the maximum capacity of their bucket, which is the maximum number of tokens that a facilitator can mint and is determined by Aave governance. The total supply of GHO can be determined by summing up all the buckets across all facilitators.
When a user repays his GHO loan or is liquidated, interest accrues to the Aave DAO treasury. The repaid GHO is burned and the circulating supply is reduced.
Discount For Stakers
Users who have staked AAVE tokens on the platform will be able to mint GHO at a discounted interest rate.
GHO does not rely on any price oracles to determine its price, and the protocol relies instead on arbitrage, where users are expected to redeem their GHO tokens in case the price falls below the $1 threshold.
Conversely, it will be profitable for arbitrageurs to mint GHO when it trades above $1 as they would be able to sell the tokens on the open market and pocket the difference.
Aave Companies intends to deploy its first testnet in the coming weeks.
GHO faces challenges that include diminishing investor confidence, regulatory risks, and threats from its competitors.
In the aftermath of Terra’s collapse, investors’ confidence in decentralized stablecoins has been on the wane. MakerDAO’s DAI, the largest decentralized stablecoin, has seen its market cap drop by 15% from $7.1B on Aug.11 to roughly $6B today.
In addition, regulators worldwide are putting the screws to stablecoins. The U.S. Congress is reportedly working on legislation that would ban certain types of algorithmic stablecoins for a period of two years.
GHO faces stiff competition from well-established protocols like MakerDAO, the issuer of the DAI stablecoin. In July, leading DEX Curve Finance also announced that it plans to launch its own overcollateralized stablecoin.
AAVE is up nearly 9% in the past week.
Corrected on Oct. 19 to report that Aave Companies is one of the contributors developing the Aave protocol.