Aave DAO endorsing overcollateralized stablecoin divides the crypto community

by · August 1, 2022

Aave DAO, the governing body behind the decentralized finance (DeFi) giant Aave (AAVE) protocol, has unanimously voted to create an overcollateralized stablecoin called GHO.

The Aave company put forward the GHO creation proposal on July 28, which received an overwhelming 99.9% of the votes in the community within three days. The proposal was closed on 31 July at 10:00 GMT with 501,000 AAVE tokens pledged in favor of creating the crypto-security backed stablecoin.

Aave DAO GHO Voice picture

GHO would be an Ethereum-based and decentralized stablecoin pegged to the US dollar that could be secured by multiple crypto-assets. The next step in the process will be the creation of GHO using a new Aave Improvement Protocol (AIP), and any user who wants to create GHO can do so by depositing any other crypto-asset accepted by the Aave protocol.

Aave is a non-custodial decentralized crypto lending and borrowing platform that hopes to leverage its overcollateralized stablecoin to offer better liquidity and passive income opportunity.

Being an over-security stablecoin, users must always deposit a higher amount of crypto than the mintage of GHO. This will ensure an over-collateralized loan on these stable coins. Once the user has repaid the loan, their position will be liquidated and their borrowed GHO will be burned.

The lending protocol will also charge interest on loans taken out in GHO, with payments going back into the Aave DAO coffers, instead of the standard reserve factor collected when users borrow other assets.

Related: Aave launches overcollateralized stablecoin called GHO

Aave’s announcement of a crypto-backed stablecoin brought back memories of the recently depegged TerraUSD (UST), the stablecoin collapse that wiped out nearly $40 billion in investors’ money. Many users were quick to dismiss it as another stablecoin intended for depegging.

Many Aave supporters were quick to point out the flawed behavior of UST that made it unsecured, which eventually led to the depegging, but the upcoming GHO would be over-secured in the same way as DAI, meaning that the assets backing the stablecoin will always have a higher value. One user wrote:

“UST was without security and run by a thug who attacked people shouting that he was a thug. Aave is building an overcollateralized algorithmic stablecoin similar to DAI. Aave is the largest DeFi lending protocol in the world and has been nothing but transparent.”

The native token of the popular DeFi protocol surged over 15% in the past week in the wake of the GHO proposal and has seen a 4% increase in the past 24 hours following its approval.