AAVE Joins the Stablecoin Craze

After the rapid de-peg of the Terra USD project, it seems like stablecoins have fallen from grace. But if we look closer, we’ll find that the craze for stablecoins is just heating up.

Unlike traditional stablecoins such as USDT, the Terra USD (UST) was not backed by real dollars held in reserve, instead it held it’s peg to the dollar algorithmically, a smart contract used the Luna cryptocurrency as a “volatility offset” for UST. If the price of UST rose above a dollar, traders were incentivised to burn Luna for UST increasing the supply, and if the price of UST fell, traders could burn UST to create Luna. This arbitrage meant UST was supposed to stay pegged to the dollar.

Do Kwon - Terra Luna founder

During March and April, an unknown attacker analyzed the weaknesses in this arrangement and set up a coordinated speculative attack on the UST currency by shorting both the stablecoin itself and the Bitcoin held in reserve by the parent company of UST. The ensuing chaos surrounding the de-pegging of UST and the collapse of the Luna currency caused a large crash in the price of all cryptocurrencies.

Proliferation

Last year during the proliferation of DeFi, countless platform specific stablecoins were established, some of them designed to be yield bearing amalgamations of existing stablecoins like Curve.fi’s YCURVE. 

Daniele Sesta founder of Abracadabra money

Some of them were stablecoins generated as rewards for staking such as Abracadabra Money’s MIM coin, and some were traditional asset-backed stablecoins such as Tethers gold backed token Tether Gold. Or even Olympus DAOs OHM token which was marketed as a “non-pegged” stablecoin.

However they are produced, stablecoins are marketed as offering a safe haven amid the wild swings in price of cryptocurrency and are increasingly forming a large proportion of crypto users holdings. The issuance of a stablecoin can complement and legitimize the blockchain protocols that offer them.

These days it seems like there are new stablecoins popping up every day. Some of the weird and wonderful new stablecoins are Jarvis Synthetic British Pound, The Coffin Dollar and the Synthetic Australian Dollar. A brief survey shows that there are almost 100 listed stablecoins of different types with a large proportion of them created since the beginning of this year.

New Contenders

Some of the biggest names in crypto are shaking things up with new stablecoin releases. Tether, the granddaddy of stablecoin companies, announced the release of a Sterling backed stablecoin. Tether blog claims that “Tether GBP will reinforce the British Pound Sterling as one of the most dominant currencies across the globe and introduce an FX opportunity for USD₮ and EUR₮. It will also act as an on-ramp to the decentralized finance ecosystem”

The decentralized alternative to Tether, Maker, the issuer of the collateralised stablecoin DAI announced the first ever integration for a DAO with a traditional bank, the Philadelphia based Huntingdon Valley Bank, will soon be able to mint DAI backed by collateral in the form of real estate and other loans on its balance sheet.

Huntingdon Valley Bank- myhvb.com

This could mark the start of further collaborations between Maker and traditional banks to bring even more collateral backing to their stablecoin, DAI.

In the past couple of days, another challenger appeared that could shake up the stablecoin market in a big way.  

AAVE Joins the Race
AAVE Governance saw a proposal vote for a new stablecoin: the GHO token. The GHO stablecoin will be a cryptocurrency with stability to the U.S. Dollar, which will be owned and managed via the Aave community, who will vote on the proposal in the coming months. 

AAVE governance forum

At a time when the blockchain industry is in the midst of a depression leading from the collapse of Terra's UST, it’s important to understand how GHO is different and why it matters.

“GHO will be created by users (or borrowers). As with all borrowing on the Aave Protocol, a user must supply collateral (at a specific collateral ratio) to be able to mint GHO. Correspondingly, when a user repays a borrow position (or is liquidated), the GHO protocol burns that user’s GHO.”

governance.aave.com

“GHO introduces the concept of Facilitators. A facilitator (e.g., a protocol, an entity, etc.) has the ability to trustlessly generate (and burn) GHO tokens. If this proposal is approved, then any facilitator would have to be approved by Aave Governance. Various facilitators will be able to apply different strategies to their generation of GHO.”

Aave is a Decentralized Finance (DeFi) protocol that facilitates peer-to-peer lending and borrowing of cryptocurrency and dollar-valued stablecoins. Aave quickly rose to stardom as the second-largest DeFi lending platform due to its ability to provide interest on a wide range of crypto deposits while issuing crypto-collateralized stablecoin loans without the need for any credit checks. Aave is governed by the Aave DAO, a collective of token holders who vote on proposals that determine the governance of the protocol and thus operates like a decentralized company run by tokenholder voting.

According to Aave Governance, the proposal will soon be voted on to determine if the Aave community wants to move forward with GHO's development. If successful, then GHO will be backed by users' cryptocurrency deposits in the Aave protocol the same way DAI is backed by user deposits in the Maker Protocol.

Whether you think this new development adds risk to the AAVE protocol or a potential increase in value in the ecosystem, there’s always a profit to be made on the trade. Both MKR, the governance token of Maker and AAVE governance token, have been listed on FAMEEX since December 2021 and paired with USDT. Traders are watching the progress of proposals on both AAVE and Maker waiting for the opportunity to profit from the news.  

Even Shiba is getting in on the stablecoin action, announcing the future release of an algorithmic stablecoin called SHI. The developers have yet to release details of how it works, but the suggestion is that it would be used in their upcoming metaverse expansion.

And it won’t be the last either! 

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