The recently launched Aave stablecoin is struggling to remain stable, and one researcher predicts that current efforts to fix the problem will fail.
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 rating agency Bluechip, believes both are doomed to fail.
“In its current form [GHO] can’t hold its bond,” Pallasena said in an interview with Blockworks.
Stablecoins are one of the most popular use cases in crypto, and GHO should provide Aave with additional lending income. But since the token’s launch in July, GHO has still not reached its $1 mark and sits at around $0.98 at the time of writing.
Pallasena believes that the only way to solve the pegging problem is to allow users to exchange GHO for their underlying collateral – thus driving the price to $1 through arbitrage.
Decoupled stablecoins are typically a tough sell for investors, but Pallasena said users are borrowing GHO despite its pricing issues because a popular leverage trade creates exposure to the 5 percent yield on Maker’s popular sDAI token.
The Aave government has proposed a number of reforms to bring GHO into line with its bond. In early September, Aave increased GHO’s lending rate from 1.5% to 2.5%. Aave passed a snapshot on Thursday to fund a “liquidity committee” that would increase GHO’s liquidity on Balancer, Maverick and Uniswap. A proposal to increase the yield of GHO liquidity pools to incentivize deposits was passed on Friday.
Pallasena said while interest rate adjustments and liquidity issuances could drive pegging, they are ultimately not sustainable as it can still be profitable to mint undervalued GHO and trade elsewhere. Instead, Aave should allow users to redeem their collateral for their GHO by receiving a dollar in exchange for $0.98 – and move the peg to $1.
“Facilitating arbitrage. This is the best way to do it,” Pallasena said.
Aave passed a proposal over the summer to implement a MakerDAO-like “GHO stability module,” which would allow users to swap between stablecoins based on arbitrage incentives. The GSM is currently under review and there is no official release date yet.
Several Aave representatives could not be reached by press time.
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