Aave’s recently introduced stablecoin is having trouble being stable, and one researcher thinks current attempts to modify it will fail.
Last week, the Aave DAO approved two Snapshot proposals that were partially designed to assist GHO in achieving its desired currency peg. Both, in the opinion of Vaidya Pallasena, director of ratings at stablecoin rating firm Bluechip, are destined for failure.
“In its current form, [GHO] cannot maintain its peg,” Pallasena stated in an interview.
One of the most well-liked applications for cryptocurrencies is stablecoins, and GHO was created to increase Aave’s borrowing income. However, since the token’s introduction in July, GHO hasn’t yet reached its $1 peg; it’s now trading at roughly $0.98.
According to Pallasena, the only way to resolve the peg issue is to permit users to swap GHO for their underlying collateral, enabling arbitrage to drive the price down to $1.
De-pegged stablecoins are often difficult to sell to investors, but according to Pallasena, despite GHO’s price problems, users are borrowing it due to a popular leveraged trade that gives them exposure to the 5% yield on Maker’s well-liked sDAI token.
Aave governance has put out many adjustments that are intended to align GHO with its peg. Beginning in September, Aave raised the borrowing rate for GHO from 1.5% to 2.5%. The “liquidity committee” would improve GHO’s liquidity on Balancer, Maverick, and Uniswap. On Thursday, Aave approved a Snapshot to finance it. A proposal to increase the rate on GHO liquidity pools to encourage deposits was approved on Friday.
While rate adjustments and liquidity expenditures can move the peg, according to Pallasena, they are ultimately unsustainable since it is still possible to profitably manufacture undervalued GHO and trade it elsewhere. As an alternative, Aave should allow users to use their collateral against their GHO to get a dollar in place of $0.98, raising the peg to $1.
“Facilitating arbitrage. That’s the best way to do it,” Pallasena stated.
Over the summer, Aave approved a plan to build a “GHO stability module” modelled after MakerDAO, enabling users to choose between stablecoins depending on arbitrage incentives. The GSM has not yet been given a formal release date and is still undergoing audits.
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