DeFi Platform Aave Unveils Another Decentralized Stablecoin

Key Insights:

• Aave’s dollar-pegged GHO will be backed by user collateral.
• It offers a similar decentralized stablecoin to Maker’s DAI.
• Stablecoins represent more than 15% of the total crypto market.

On July 7, the Aave DeFi network unveiled its latest offering, another stablecoin entering an already crowded market.

Aave (AAVE) founder, Stani Kulechov, tweeted that the team has submitted a request for comments on the launch of a new over-collateralized stablecoin which will be backed by assets on the platform.

The proposal is now in the hands of Aave’s decentralized autonomous organization (DAO), which will vote on it.

BREAKING: The @AaveAave team submitted ARC to launch a self-sovereign overcollateralized stablecoin GHO backed by the Aave Protocol collaterals 👻 👇🏼 https://t.co/YHpLmipLjl

— stani.lens (🌿,👻) (@StaniKulechov) July 7, 2022

A Crowded Stablecoin Market

On the surface, it sounds similar to the failed Terra ecosystem in which the LUNA token was used to mint UST stablecoins. However, GHO will not be an algorithmic stablecoin making it more akin to that offered by the Maker platform, which allows users to supply crypto assets as collateral to mint the DAI stablecoin.

Aave users will be able to use their collateral on the platform to mint GHO dollar-pegged stablecoins. The stablecoin would be backed by these diversified crypto assets, which are selected at the user’s discretion, the proposal explained.

The introduction of GHO would make stablecoin borrowing on the Aave Protocol more competitive. It would also “provide more optionality for stablecoin users and generate additional revenue for the Aave DAO by sending 100% of interest payments on GHO borrows to the DAO,” it explained.

Aave added that “significant risk mitigation features” will be included to prevent too much of the stablecoin from being minted and avoid a potential collapse.

Aave automates digital asset lending and borrowing by eliminating the centralized intermediary. The platform is the DeFi industry’s second-largest, with a total value locked of $6.8 billion, according to DefiLlama.

Tron (TRX) is another crypto network having recently launched a stablecoin. Its USDD coin was spawned after the collapse of Terra, essentially doing the same thing. The asset has never gained traction and is still trading below its peg at $0.991 at the time of writing.

Stablecoins, or those pegged to a fiat currency, currently comprise more than 15% of the total crypto asset market, with a market capitalization of $154 billion. Tether (USDT) and Circle (USDC) make up the lion’s share of this, with a combined market share of almost 80%. The difference is that these two are centralized and issued by corporations, whereas Aave’s offering will be decentralized and similar to Dai.

AAVE Price Outlook

The native token for the network, which has the same name, has surged 16.4% on the day to reach $73.11 at the time of writing, according to CoinGecko.

AAVE prices are up 29% over the past week, but they have dumped a painful 89% since their May 2021 all-time high of $662.