Aave plans to launch a decentralized stablecoin GHO

The Aave community is considering launching a native decentralized US dollar stablecoin called GHO. This proposal aims to gather feedback and support from the community.

GHO will have the following key features:

1. Complete Decentralization
2. Over-collateralized by assets that continuously generate income
3. Support for multiple Aave protocol collateral
4. Governed by the Aave community

If approved, GHO will be launched first on the Aave protocol. Users can mint GHO based on the collateral they provide. GHO will be backed by various crypto assets chosen by the users, while borrowers can still earn interest on the original collateral. All decisions related to GHO will be managed by Aave governance.

The introduction of GHO is expected to enhance the competitiveness of stablecoin lending within the Aave protocol, providing users with more options. The interest generated from borrowing GHO will be entirely owned by the DAO, creating an additional source of income for Aave DAO.

The current market value of stablecoins is approximately $150 billion, making them an important component in the cryptocurrency space. Stablecoins provide a fast, efficient, borderless, and stable method for blockchain value transfer. Decentralized stablecoins also have higher transparency and censorship resistance, which are core features of Web3. As crypto assets further integrate with traditional users, the adoption of stablecoins is expected to continue to grow.

GHO will be issued on the Ethereum mainnet, created by the user ( borrower ). Like other lending on the Aave protocol, users need to provide a certain ratio of collateral to mint GHO. When users repay their loans or are liquidated, the protocol will burn the corresponding amount of GHO. All interest generated by GHO borrowers will be directly transferred to the AaveDAO treasury, instead of requiring a standard reserve ratio like other assets.

GHO introduces the concept of "facilitators," which are protocols or entities that can generate and destroy GHO tokens without trust. If the proposal is approved, any facilitator will need to obtain approval from Aave governance. Different facilitators may adopt different strategies to generate or destroy GHO.

For each facilitator, Aave governance also needs to approve what is called a "bucket." Buckets represent the GHO cap that a specific facilitator can generate. Once in effect, this proposal will activate the first facilitator - the Aave protocol, specifically the AAVE market on Ethereum. The governance department can assign a specific bucket capacity to this facilitator to guide GHO liquidity and the market.

The Aave-GHO integration uses the same mechanism as other assets in the protocol, which is to deploy specific GHO aTokens and GHO debt tokens. Once the proposal is approved, these tokens can be registered as GHO tokens in the Aave Ethereum market.

The borrowing rate of GHO will be determined by AaveDAO, remaining stable but adjustable based on market conditions. This design retains the flexibility of the borrowing rate model of the Aave protocol, allowing for the implementation of any rate strategy deemed appropriate by the community in the future.

Considering the nature of the assets, the initial deployment of GHO includes a discount strategy mechanism. The initial discount strategy allows the participants of the security module, (stkAAVE holders, ) to receive a discount on the GHO borrowing interest rate. The first deployment will set a certain amount of GHO discount for each provided stkAAVE, with discount rates ranging from 0% to 100%. These parameters are controlled by Aave governance.

Through isolation mode, users can generate GHO using various assets currently supported by the Aave protocol, while reducing risk through collateral backing. Supply and borrowing limits also help in risk control. E-Mode serves a stabilizing role in market fluctuations due to its higher LTV. For example, during market downturns, as the price of collateral contracts rises and GHO demand increases, users will borrow more GHO using other non-volatile collateral assets to repay their positions. This will increase the market supply of GHO and reduce demand. At the same time, E-Mode also allows stablecoin holders to exchange GHO at nearly a 1:1 rate, with no slippage.

Portal will provide an ideal path for expanding GHO in a multi-chain world. Through Portal, GHO can be distributed across networks without trust, while being created on the more secure Ethereum. The entire process requires only simple messaging, without the need for bridges, thereby reducing overall risk. Although the current GHO deployment does not include this burn/mint and messaging feature, future facilitators deployed and activated by the Aave community may allow for the redistribution of GHO tokens across various networks and automatically supply them to markets where the functionality is activated.

Although the Ethereum market is currently still running the V2 version, it is expected to upgrade to the V3 codebase in the coming months.

stkAAVE holders can mint GHO at a discounted price, which means borrowing GHO at a lower interest rate. This incentivizes them to stake (stkAAVE) into the protocol's security module to protect the Aave protocol.

When users create GHO through the Aave protocol and other facilitators, the Aave DAO will earn substantial revenue in the form of fees. Most of the borrowing interest paid on GHO is not given to LPs, but is entirely received by the DAO. The increased revenue can be used for innovation, supporting ecosystem contributors, providing funding during market downturns, or other DAO decision-making purposes.

With the introduction of GHO, the DAO will also be able to determine the native interest rate of GHO and adjust it through the governance process. This means that the monetary policy of GHO will be controlled in a decentralized manner by AAVE governance.

It is important that the Aave protocol maintains inclusivity as much as possible, supporting the provision and borrowing of various stablecoins. Expanding the protocol's stablecoin pool, including GHO, will increase user choice and diversity, promoting the protocol's sovereignty. GHO will also introduce stable interest rates, providing borrowers with certainty.

GHO is expected to not only be applicable to the native crypto community but also to expand into more scenarios. Given the low transaction fees and growth trends of Layer2, GHO is expected to see widespread use on Layer2. Furthermore, cash rewards and hackathons can encourage the development and integration of GHO payment methods, targeting both crypto-native users and mainstream users.

GHO will provide a certain level of security and Decentralization for native crypto users, while adopting a growth strategy to develop use cases for the growing mainstream user base. This strategy should focus on use cases such as payments, leveraging the growth and potential of L2. Cash rewards and hackathons determined by Aave Grants DAO will be key drivers in building these mainstream use cases.

Community snapshot voting will determine whether to continue advancing GHO. If the community supports the deployment of the protocol, it will allow users to mint GHO, propose initial interest rates and discount rates, both of which can be adjusted through governance. Cross-chain deployment of GHO on the Aave protocol requires further governance approval. In the future, the community will also decide whether to provide retroactive bonuses to GHO contributors and the amount of the bonuses.

If the community approves, OpenZeppelin and PeckShield will conduct various audits in the coming weeks.