It’s been almost seven months since Aave officially launched its overcollateralized algorithmic stablecoin. Using the ticker GHO, the stablecoin operated all of this time under the $1 peg due to low demand and other technical difficulties. Now, GHO has finally reached its peg value.
Aave founder Stani Kulechov made the announcement via X (formerly known as Tweeter) on February 6th. In his tweet, Kulechov congratulated the community on enabling what he called a “fundamental building block for DeFi and payments”.
Stablecoins are hot, and people are using them all over the world. But, with their popularity, a lot of questions come to the surface. There are also loads of questions surrounding regulations, which is being talked about at the highest levels of government.
A Not-so-stable Stablecoin
A total of $2 million in GHO was minted on the Ethereum network when the stablecoin was launched back in July of 2023. While the launch was seen as a success by most of the Aave community, many crypto users considered GHO to be a failure.
Because of its algorithmic nature, GHO’s volatility was just too high for many to consider it a true stablecoin. GHO’s value was as low as $0.917 back on October 24, only three months after being launched, a price that was mostly sustained until November of that year.
While the price of the stablecoin has risen by 8.6% over its all-time low at the time of writing, this volatility has prevented it from going mainstream. Despite this, GHO has generated over $2.1 million in annualized revenue and has seen great improvement over the months, like the GHO Stability Module.
These improvements seem to be working so far, as GHO’s volatility has certainly decreased over the past weeks. In fact, the stablecoin’s value has managed to stay over the $0.995 mark until the time of writing, which would be a good performance if maintained for a longer period of time.
How Does GHO Work?
Unlike some of the most popular stablecoins, GHO doesn’t have a redemption mechanism that allows its holder to trade it for its equivalent in non-crypto assets. The lack of a redemption mechanism means that users can only trade their GHO at market value in secondary markets.
Popular stablecoins often back their value with a USD reserve, ensuring that the 1-on-1 peg is always maintained. GHO, on the other hand, tries to maintain this peg by using crypto-based over-collateralization.
As these underlying assets are also highly volatile, keeping GHO’s peg value relies heavily on demand. With Aave’s interest rates also being under the direct controls of the users thanks to Aave’s decentralized governance model, things can get even more complicated really quickly.
Another Big Win for DeFi
While GHO is not the first algorithmic decentralized stablecoin, as its open-source code, decentralized governance, and over-collateralization are similar to those of DAI and other coins. What sets GHO apart from its competitors is its multi-collateral banking, which allows users to use any Aave-supported cryptocurrency to mint it.
GHO also generates interest when users supply collateral to the Aave Protocol to mint it. This means Aave can use these assets to provide loans to other users, benefiting the whole ecosystem and allowing users to effectively reduce their interest rates when borrowing.
With the debate around stablecoin regulation continuing to grow by the day, the increased decentralization of stablecoins like GHO is paramount. Only by having efficient and flexible stablecoins can this type of asset become a true driver of crypto’s mission to open financial markets and remove regulators.
Some regulators see stablecoins as a systemic risk, although this is far from certain. In fact, the banking system is under strain, and stablecoins seems like a small asset class given the size of the Western financial markets.
