GHO "Stablecoin" Continues To Trade At $0.97

Aave's native stablecoin, GHO, is experiencing ongoing issues. Billed as a transparent and decentralized stablecoin, it has consistently traded beneath its $1 target. The culprit appears to be a lack of the arbitrage mechanisms that successful stablecoins rely on to entice traders to buy or sell when the token moves off its peg.

How Does GHO Work?

GHO is a decentralized, collateralized stablecoin, similar in many respects to MakerDAO's DAI: The original decentralized backed stablecoin. Assets used within the Aave protocol can be used to back and mint GHO.

However, GHO isn't a straight clone of DAI. Unlike the Maker Protocol, where users lock assets in Vaults and mint DAI individually, GHO can only be generated by Facilitators, who can mint a limited amount of stablecoins decided by the Aave DAO. (There are currently only two Facilitators.) There are other paths to minting and burning GHO beyond users locking collateral in Vaults, with the DAO having the ability to decide new use cases.

In the broad strokes, however, GHO is similar to DAI. As a decentralized stablecoin, it is backed by crypto collateral (not dollars in a bank account, like USDT, USDC, and other fiat-backed stablecoins). And, unlike algorithmic stablecoins, it's over-collateralized, not under-collateralized.

Unfortunately, though, one thing GHO hasn't proved to be is stable.

Trading Off The Peg

Ever since its launch, GHO has traded at less than $1, gradually losing value over the last month.

The problem appears to be the lack of arbitrage mechanisms that would incentivize traders financially to return GHO to the $1 mark.

Other stablecoins, whether centralized or decentralized, have such mechanisms. If USDC ever trades significantly below $1, for example, traders can buy it at the discounted price and redeem it for actual dollars 1:1, essentially profiting by buying cheap USD. Similarly, if USDC is above $1, users can mint new USDC and sell it on the crypto market for an immediate gain. With DAI, a Vault owner can buy discounted DAI and pay down their debt cheaply, or sell DAI they have generated at $1 for a profit on the open market.

Since the GHO ecosystem is in its infancy, it lacks the network effect and infrastructure to make such arbitrage trades possible, safe, and profitable. There is, at present, no formal redemption system that allows traders to buy discounted GHO and trade it for $1 in crypto assets. While a so-called Stability Module is on the way, without this, buying GHO and waiting for a time when it might be possible to sell it for $1 is an optimistic trade. Locking up funds for an unknown duration is a risky business, especially in a sector where there are so many other opportunities to profit.

It's worth noting that trading a little off the peg is not a dealbreaker for stablecoins. DAI has spent extended periods above and below $1, and even fiat-backed stablecoins like USDT have seen short-term volatility. GHO's immediate threat is low demand. That's not something that will help its peg problems, meaning the issue may get worse—a vicious cycle that pushes traders to better-established and more stable alternatives.

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