Jack Kubinec

Aave’s recently-launched stablecoin is struggling to stay stable, and one researcher believes current efforts to fix it will fall short.&nbsp;



The Aave DAO passed two Snapshot proposals last week aimed in part at helping GHO achieve its intended dollar peg. However, Vaidya Pallasena, the ratings director at stablecoin ratings agency Bluechip, thinks both are doomed to fail.



“In its current form, [GHO] cannot maintain its peg,” Pallasena said in an interview with Blockworks.



Stablecoins are one of the most popular use cases in crypto, and GHO was <a href="https://app.aave.com/governance/proposal/268/">meant</a> to bring additional borrowing revenue to Aave. But <a href="https://blockworks.co/news/aave-stablecoin-gho-mainnet-launch">since the token’s July launch</a>, GHO still has yet to reach its $1 peg, with <a href="https://aave.tokenlogic.com.au/">trading</a> at around $0.98 at the time of writing.&nbsp;



Pallasena thinks the peg problem can only be solved by allowing users to exchange GHO for their underlying collateral — thereby letting arbitrage bring the price to $1.&nbsp;



De-pegged stablecoins are ordinarily a tough sell for investors, but Pallasena said users are borrowing GHO despite its price woes because of a popular levered trade that creates exposure to the 5% yield on Maker’s popular sDAI token.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The new frontier of DeFi🧐 Earn 11%+ APY on <a href="https://twitter.com/search?q=%24DAI&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$DAI</a> with RWA yield👇 Dai savings rate (DSR) on Maker is paying out 5% APY. Yield is revenue generated from the DAI collateral that&#39;s in real world assets such as US t-bills. There is further a proposal live on <a href="https://twitter.com/AaveAave?ref_src=twsrc%5Etfw">@AaveAave</a> to enable… <a href="https://t.co/Xv1z752wE1">pic.twitter.com/Xv1z752wE1</a>&mdash; Thor⚡️Hartvigsen (@ThorHartvigsen) <a href="https://twitter.com/ThorHartvigsen/status/1694255201010516070?ref_src=twsrc%5Etfw">August 23, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Aave governance has proposed a slew of reforms meant to bring GHO in line with its peg. At the start of September, Aave <a href="https://snapshot.org/#/aave.eth/proposal/0x4b6c0daa24e0268c86ad1aa1a0d3ee32456e6c1ee64aaaab3df4a58a1a0adc04">increased</a> GHO’s borrow rate from 1.5% to 2.5%. Aave passed a Snapshot on Thursday to fund a “liquidity committee” that would <a href="https://snapshot.org/#/aave.eth/proposal/0x556aa2b8439dba5929e613fb5515279d8396621e71fba058912434a60751fbd4">increase</a> GHO’s liquidity on Balancer, Maverick and Uniswap. On Friday, a proposal passed <a href="https://snapshot.org/#/aave.eth/proposal/0x225c33775892d959715f85e0c3edb61966fe7e67b1dd474d0ee28fea533dc2c9">boosting</a> yield on GHO liquidity pools to incentivize deposits.&nbsp;



Pallasena said while rate tweaks and liquidity spending can nudge the peg, they aren’t ultimately sustainable because it can still be profitable to mint underpriced GHO and trade it elsewhere. Instead, Aave should make it possible for users to redeem their collateral against their GHO, receiving a dollar in exchange for $0.98 — and moving the peg to $1.



“Facilitating arbitrage. That’s the best way to do it,” Pallasena said.



Aave passed a proposal <a href="https://governance.aave.com/t/temp-check-gho-stability-module/13927/1">implementing</a> a MakerDAO-esque “GHO stability module” over the summer, which would allow users to convert between stablecoins based on arbitrage incentives. The GSM is currently undergoing <a href="https://governance.aave.com/t/gho-stability-module-update/14442">audits</a> and does not yet have an official release date.



Multiple Aave representatives could not be reached by press time.



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GHO ‘cannot maintain its peg’ without changes, says researcher

Ben Strack

<div id="highlights-block_627e8f5ba3026" class="highlights">
 <ul>
 <li>Users with leverage “might be at risk of liquidation,” Lido said</li>
 <li>Lido revealed yesterday it would offer incentives for users to provide liquidity to its new Curve pool</li>
 </ul>
 
</div>



Liquid staking protocol Lido warned that the swap rate between ether (ETH) and stETH — a token representing ether staked on Lido — has deviated from its one-to-one peg amid crypto market turbulence.



The protocol allows its depositors to use their Lido staked assets to gain a yield on top of their original staking yield.



But Lido said <a href="https://twitter.com/LidoFinance/status/1525129266689622016" target="_blank" rel="noreferrer noopener">in a tweet</a> Friday morning that stETH was trading at a discount of 4.2% to ETH on the main Curve pool.



The protocol noted that while long-term stETH holders and liquidity providers are not at risk, leveraged positions on stETH are.



“If you have a leveraged position, for example through Aave, you might be at risk of liquidation,” the protocol tweeted.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“You should urgently de-risk any leveraged positions that have a challenging health factor, for example, by adding extra collateral.”</blockquote>



ETH traded around $2,080 at 12:45 pm ET, according to Blockworks data. Meanwhile, stETH was at roughly $2,000.



Lido <a href="https://twitter.com/LidoFinance/status/1524826418571534336" target="_blank" rel="noreferrer noopener">revealed yesterday</a> it was deploying an additional Curve pool to improve the liquidity around the peg between stETH and ETH. The pool offers additional incentives amounting to one million Lido DAO tokens (LDO).



LDO was trading at $1.68 at 12:45 pm ET — up nearly 10% in 24 hours.



“We all know that there is no reward without risk; at the same time Lido works to maintain healthy integrations,” Lido wrote in <a href="https://blog.lido.fi/lido-stassets-collateral-risk-monitoring/" target="_blank" rel="noreferrer noopener">a May 10 blog post</a>. “In the event of a liquidation, collateral will be sold to cover the debt. To ensure that there is always enough liquidity on the market we perform liquidity sufficiency analysis using aggregated indicators.”



On Friday, following <a href="https://cms.blockworks.co/terra-halted-again-exchanges-delist-spot-trading/" target="_blank" rel="noreferrer noopener">the resumption of the Terra blockchain</a> for the second time, Lido <a href="https://twitter.com/LidoOnTerra/status/1525115693342990336" target="_blank" rel="noreferrer noopener">announced</a> that users could bridge bETH — a representation of stETH on Terra’s Anchor protocol — back to Ethereum.&nbsp;



As holders flee Anchor and retrieve stETH, if they want to cash out to fiat currency, they must first sell stETH for ether, as major exchanges only list the native asset — not its staked derivative.&nbsp;



Much of the bETH being swapped in Curve stems from liquidations of loans on Anchor that became undercollateralized, and was therefore acquired at a discount.



Macauley Peterson contributed reporting.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



The Lightspeed newsletter is all things Solana, in your inbox, every day. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to daily Solana news</a> from Jack Kubinec and Jeff Albus.