Journalist
Posted:
- At the time of publication, GHO was worth $0. 96.
- Aave took measures such as raising interest rates and launching GSM to correct the link.
Stablecoins are seen as the oasis of stability in the turbulent world of cryptocurrencies. However, their usefulness lasts as long as they maintain their peg to the underlying asset, be it a fiat currency such as the US dollar (USD) or a crypto asset.
Read Aave’s [AAVE] Price Forecast 2023-24
According to a recent post from the Digital Assets data provider Kaikoloan protocol Aave’s [AAVE] stablecoin, GHO, has failed to reach the $1 ideal peg since its launch in mid-July. At the time of publication, the stablecoin was worth $0.96.
Source: Kaiko
There is not enough demand for GHO
The algorithmic stablecoin was launched on the Ethereum [ETH] blockchain, giving Aave users the option to borrow it by depositing crypto collateral worth more than the GHO being borrowed.
The initial response was promising, and the stablecoin soared to a circulating supply of over 21 million within a month of its launch, according to data from DeFiLlama. The attractive interest rates of 1.5% played a major role in increasing GHO’s market capitalization.
Source: DeFiLlama
However, while supply has increased, insufficient demand has prevented GHO from reaching its niche.
Kaiko noticed this earlier report:
“Currently, there are few use cases for GHO, which means that many who minted GHO immediately sold it for another stablecoin.”
Will this solution work?
When they discovered the source of the problem, the Aave board floated a proposal to raise interest rates on loans from 1.5% to 2.5%. The rationale behind the increase was that borrowers would be tempted to buy back GHO and repay their loans.
While this may lower the token’s market supply, it may ultimately move the token closer to its dollar peg.
Aave DAO unanimously endorsed the proposal. As can be seen in the chart above, the efforts began to pay off as the circulating supply of GHO fell by more than 13% over the past two days.
How much are 1,10,100 AAVEs worth today?
Arbitration opportunities along the way
Much of the problem also arises from the lack of a robust refund mechanism and arbitrage opportunities. Unlike other stablecoins, arbitrageurs cannot profit from uncoupling events in GHO.
However, this may change with the upcoming launch of the GHO Stability Module (GSM). The module would allow users to mint GHO using other stablecoins as collateral. As a result, GHO issued via the GSM can be exchanged 1:1 for the underlying stablecoin collateral.