Why is Aave’s native USD stablecoin GHO always below $1?
Original author: @TokenBrice
Original compilation: Peisen, BlockBeats
Editors note: GHO, the native stablecoin in the Aave protocol, has been below $1 since its inception and is currently around $0.96, Liquidity Engineer@TokenBricePost a post on social media platforms to explain this phenomenon and point out the deficiencies in its liquidity management. But he also said that apart from providing liquidity, holding GHO now has no practical value.
BlockBeats on October 16report, the Aave community has passed the ARFC proposal to further increase the stablecoin GHO lending rate to 3% with the purpose of enhancing GHO anchoring and increasing income.17th, the circulation of Aaves native stablecoin GHO has exceeded 25 million, reaching 25, 152, 308 as of now.
Based on,@TokenBriceHe will propose and implement a series of response measures to govern the DAO as a member of the Liquidity Committee, and commit to making the GHO price reach at least $0.985 within a month during this period. BlockBeats compiles the original text as follows:
Since its inception, GHO has been trading below the base price (currently around 0.96). You may be wondering why, and whether this will change. The simple answer is: GHO’s price volatility stems from an imbalance in demand and supply, and this problem is about to be resolved. Want a detailed answer? Read on, a fascinating journey of discovery is about to begin.
First, we need to understand GHO: it is a native stablecoin in the Aave ecosystem that can be minted using any token backed as collateral on Aave. Borrowers pay an interest rate determined by governance, and stkAAVE holders receive a discount on that rate. The current interest rate range is 2.13% to 3.05% and is expected to rise soon.
GHO interest rate issues
The current situation of GHO is similar to the early days of Maker/DAI: its interest rate is determined by governance (no PSM/GSM), which means that GHO cannot adjust naturally under changing market conditions. However, market conditions have changed dramatically since the birth of GHO. I have shared my opinion on this design many times and there is no need to repeat it again, read my blog for details.
If youre wondering why the current interest rate and interest rate model is problematic, the answer is simple: its still far lower than other alternatives, such as the interest rate for borrowing DAI on Maker, or even the interest rate for borrowing other stablecoins on Aave (like $ >5% of DAI or $USDC). This results in an arbitrage cycle where stkAAVE holders can borrow GHO at an annualized yield of approximately 2.13%, exchange it for DAI, and enjoy the DAI savings interest rate (currently 5%).
As I mentioned above, governance bodies are well aware of this issue and are actively addressing it. So, from that perspective, the outlook is positive, its just a matter of time. Now lets discuss another major topic explaining GHOs current situation, which is closely related to interest.
Practicality of GHO
An effective way to ensure the long-term stability of stablecoins is to give them practical application value. Indeed, this is crucial for those who borrow or buy stablecoins in large quantities and keep them as holders of such assets. For example, @LiquityProtocols $LUSD stability pool enables LUSD holders to earn ETH from the liquidation process and LQTY from the emission process. The Stability Pool is a special case as it also serves as the main reserve for liquidation on the protocol.
Other CDP protocols have implemented different solutions but achieve the same purpose in providing utility for stablecoins, such as: Dai Savings Rate in MakerDAO: users can stake DAI to earn more DAI.
Although these solutions each have their own characteristics, from a macro perspective they achieve the same purpose: ensuring that there is a group of stablecoin holders who are happy to keep them as such assets, i.e. not exchange them for another stablecoin or something else assets.
This is exactly what GHO currently lacks: other than providing liquidity, holding GHO now has no practical application value. Therefore, most borrowers who enjoy below-market borrowing costs are happy to sell their GHO to another stablecoin in order to earn yield on those currencies, such as DAI.
Now, in this regard, governance is aware and considering its options, the main ones include:
1. Add wGHO as collateral on Aave
2. Provide GHO holders with betting options: GHO savings interest rate.
Now that the stage is set, we can talk about my favorite topic: liquidity strategies!
The shortcomings of GHO liquidity management so far
Liquidity management is a tough game: maintaining a steady balance between spending, efficiency, political and market goals. In the case of unpegged stablecoins such as GHO, it becomes more challenging to figure out what is necessary and what is harmful.
In fact, while you may see me complaining about liquidity efficiency on a daily basis, it is the least of your concerns when developing a strategy for re-pegging stablecoins. This is because re-anchoring requires some less efficient measures, such as paying out-of-range liquidity as price support.
Although the GHO Liquidity Committee is composed of experienced professionals, they have fallen into a trap in the pursuit of efficiency, which is detrimental to anchoring. To give you a better understanding, lets give some examples.
Stableswap pool supporting GHO
Stableswap is generally considered a very good liquidity concentration option for stablecoins: it concentrates liquidity around a 1:1 price, providing when all involved stablecoins are actually pegged. Huge depth of liquidity.
However, if an asset were to decouple, the situation would get worse, as Stableswap could actually exacerbate the problem. Why is this happening? We can observe the liquidity distribution of the $GHO main Stableswap pool.
Due to the low anchor price of GHO, the concentration of GHO in the pool is much higher than the target 50%. Assuming that the TVL is 10 million to facilitate calculation, if all stablecoins are perfectly anchored, there will be about 5 million GHO in the pool and the other three coins each accounting for 1.33 million.
However, we actually have about 7.5 million GHO and 2.5 million other coins. From a buying and selling pressure perspective, this means that there is a surplus of 2.5 million GHO that will be rebalanced to GHO when the price of GHO rises. Essentially a wall of 2.5 million GHO sell orders distributed between GHO prices 0.95 and 1.00.
Stableswap is harmful for assets that are pegged too low or too high: When stablecoins are pegged too high, we observe a similar but opposite effect to what was happening with the LUSD Curve pool a few months ago: paired assets in the pool become heavier. As the price of LUSD falls, it serves as a buying reserve that has the power to prevent its effective decline.
Uniswap V3 pool supporting 0.95-1.003 GHO
Now, the issue has become more subtle, but the concept is still similar. When the price of GHO was around 0.96, Bunni launched a GHO/USDC pool on Uniswap v3 with the price range set at 0.95-1.003. As always, to calculate buying and selling pressure, you have to calculate the balance of the respective coins. Since the liquidity distribution of Uniswap v3 is linear, you need to find out where we are currently in the range (in terms of price) in order to calculate the balance on that basis. This is actually very simple!
Here is the breakdown of the price range: USDC -0.95 - 0.96 for everything below 0.95 (we are currently in the 0.95-0.96 range) -0.97-0.980.99 -1.00 , and finally GHO for everything above the 1.00 range.
As you can see, at the time of pool launch, the price was on the left side of its range, meaning over 80% of the liquidity was concentrated on GHO. This suggests that if the pool was fully supplied, there would be a sizable wall of sell orders in the price range from 0.96 to 1.00. Fortunately, the price of the pool fell outside the preset range and Bunnis liquidity provision program was quickly shut down, thus ending all LP incentives and avoiding a large amount of token deposits.
It’s time to change the way liquidity committees operate
The Liquidity Committee (LC), established two weeks ago, has already launched a number of measures and is currently using a collaborative structure. In an effort to make LCs operations more streamlined, efficient and error-free, we decided yesterday to change our decision-making process.
To ensure that the committee operates under clear leadership, with a clear vision and key actions to achieve that vision, we voted to put this author in charge of streamlining leadership.
In these difficult times, we need to take decisive measures. Now that the GHO price has dropped to $0.96, it is our responsibility to ensure that LC is used to its maximum potential. Therefore, I propose that the LC operate under my leadership for one month and submit the proposal to a vote.
With 4 votes in favor and 2 votes unexpressed (the LC has 7 members, but I abstained from voting), the Liquidity Committee passed the proposal.
Therefore, I will temporarily serve as the leader of the Liquidity Committee for the month ending November 30th, with the aim of getting the GHO price to at least 0.985 during this period. If we fail to achieve this goal, I will take full responsibility and submit my resignation to the committee.
Why choose me?
Now, you may be wondering: why me? The reason is actually very simple: the Liquidity Committee requires a unique kind of expertise, and there may be only a handful of people in the entire DeFi ecosystem who possess this knowledge. This knowledge requires the capabilities of both a stablecoin and liquidity expert. More specifically, it requires experience managing directional liquidity on non-pegged stablecoins, which I like to call “non-pegged assets.” As you might expect, there arent many of them. Fortunately, I have managed the liquidity of a stablecoin that has decoupled upward (LUSD, from inception to approximately June) and slightly decoupled downward (LUSD, June to date).
Im excited to apply these experiences to lead the Liquidity Committee in re-anchoring GHO. To achieve this, we will make full use of all relevant tools, focusing on the ones best suited for the task @mavprotocol.
Maverick: A plug-in engine?
Indeed, Maverick’s static pool allows you to achieve a uniform liquidity distribution within a specific range, which is one of its most interesting applications. Unfortunately, Uniswap cannot achieve this because its distribution is linear. This means that you can create static pools and place trade orders within a given price range, which is exactly what we will use GHO to achieve! This has begun to unfold between GHO/USDC BP #57 0.956 and 0.966, and is known as GHO Anchor Support Pool I.
Note the I letter in the name: this means there will be more similar pools in the future. As the price moves to the left (i.e., the GHO price increases), incentives will gradually shift toward a higher price floor. Under the guidance of governance, GHO will advance towards the anchor price at a steady but firm pace through other measures such as improving GHOs utility and stimulating repayment.
DeFi is amazing: join in, Anonymous!
What’s unique about DeFi is that everyone can watch, verify, and participate in its live events. Regardless of your views on GHO, you are strongly advised to pay close attention to developments here in the coming weeks, as the ongoing experiments are of unprecedented scale.
Even more exciting is that you can not only be an observer, but actively contribute to these efforts. Here are some possible ways:
1. If you have idle USDC, you can pay attention to the upcoming Maverick mining pool similar to BP#57 and provide funds for it. Youll also reap some pretty impressive rewards in the process.
2. If you are already providing liquidity in the Balancer GHO pool or backing with your veBAL/vlAURA tickets, please temporarily stop these operations. Although Aave/GHO like Balancer, as mentioned before, stableswap is currently disadvantageous for GHO. Minimizing the size of this pool will help reduce the pressure needed to restore the peg price. We also focus on the /$crvUSD pool, although that pool is relatively small ($300,000), so the issue is less pressing.
3. If you believe that the Liquidity Committee has the ability to restore GHOs anchor price under new unified leadership, then you may consider going long GHO. GHO is currently priced at 0.96%, and if we do get back to the peg before the end of the year, youll be making a profit of 4 cents per $1 in 2 months, which equates to an annualized return of 24%. That’s a pretty good return for just buying and holding a stablecoin.
I appreciate the support of the other members of the Liquidity Committee and will do everything I can to make this happen. The payment I am asking for is not for these efforts, but simply compensation for my gas fees (probably a few ETH).
Within a month of reaching my goal, if the Aave DAO and community appreciates my efforts, my only request is that any retroactive recognition be directed to rather than me personally: Ant is eager to receive funding as it will help them Expand your own operations and implement bolder initiatives like this small coup I conducted on their behalf yesterday.
