Aave’s GHO Stablecoin Consistently Trades Under Dollar Peg

Designing stablecoins which maintain their pegs isn’t a casual undertaking.

GHO, a highly anticipated stablecoin from Aave, the leading DeFi money market, launched on July 15 and is now trading at around $0.97. The token has trended downward from its intended $1 peg since launch.

At the same time, GHO’s supply has been on the rise — nearly 19M of the dollar-pegged tokens were in circulation as of Aug. 8 before redemptions brought the supply down below 18M.

Aave is the third-largest project in DeFi with nearly $5B in total value locked (TVL). To mint GHO, users must collateralize other digital assets like staked ETH or wrapped BTC, incurring what is currently a fixed 1.51% interest rate.

Rate Arbitrage

It’s notable that the interest rate to borrow GHO is fixed at 1.51% while lending rates for other stablecoins on Aave are much higher — for example, traders can currently earn 9.24% on USDC, crypto’s second largest stablecoin, on Aave V3.

Stani Kulechov, CEO at Aave Companies, which supports the protocol’s development, told The Defiant that governance participants chose the rate to optimize for growth during GHO’s early stages.

“GHO is very new and it is quite early,” he said. “At this time, the peg is not a concern to the DAO, which chose a lower rate to encourage growth and utility for borrowers to convert to the Aave-native asset at a lower cost and encourage liquidity, which is growing.”

GHO launched into a turbulent market — after an exploit and last week’s subsequent fears around CRV liquidations, stablecoin rates on Aave remain elevated.

This makes for a straightforward arbitrage opportunity – a trader could mint GHO, sell it for another stablecoin like USDC, and then deposit that USDC in Aave to capture the difference between the two rates.

Aave is an established DeFi platform, and GHO was a hotly anticipated project, making its departure from its peg a development worth watching. GHO was billed as a source of revenue for Aave when Aave Companies first proposed it in July 2022.

Forthcoming Stability Module

To be sure, GHO is less than a month old, and its slight drift below peg is no reason to write off the stablecoin’s chances for success — a “stability module,” for the stablecoin is being audited after passing a Snapshot vote with 100% approval.

The module will allow users to exchange other stablecoins at a one-to-one basis with GHO, according to a post on Aave’s forum. Kulechov asserted that the module would contribute significantly to GHO’s stability.

A similar module for MakerDAO, the collateralized lending platform, was instrumental in keeping its DAI stablecoin pegged at $1. It did, however, come with the much criticized side effect of increasing DAI’s reliance on USDC, a centralized stablecoin.

Once the code for the module is audited, the broader Aave community will be able to determine its specific parameters before it is deployed.

crvUSD Remains Solidly Anchored

Curve Finance, another DeFi heavyweight with $2.4B in TVL, launched an over- collateralized stablecoin called crvUSD in May — crvUSD has held its peg well and is currently trading within a tenth of a basis point from $1, according to CoinGecko.

It isn’t an absolute competition between crvUSD and GHO — during the chaos which ensued after the Vyper exploit, Marc Zeller, the founder of Aave Chan, a voting delegrate for Aave, proposed buying Curve’s CRV token to join the “Curve Wars,” and help GHO gain deeper liquidity.

There’s already a liquidity pool on Curve where users can trade between GHO and crvUSD — right now, it’s expressing what the difference in prices for the stablecoins also indicates — the market prefers crvUSD.

Evidence of this is the 78% dominance of GHO in the pool, which means users have been selling the stablecoin for crvUSD.

Both stablecoins are young, but so far, crvUSD appears to be the more robust of the two.

Kulechov, for one, isn’t too concerned. “GHO is behaving as would be expected as a new stablecoin that is still growing in liquidity daily. As GHO becomes accepted within different protocols across the crypto ecosystem and used for payments, this will also have a stabilizing effect,” he said.