Aave: Getting GHO back to Peg

Aave’s GHO stablecoin has remained depegged since its launch in July 2023. As of Sep. 7, 2023, the stablecoin is trading at ~$0.974. GHO is an overcollateralized USD stablecoin pegged to $1 and controlled by Aave Governance. GHO can currently be minted by taking out loans against crypto assets supplied to Aave V3 liquidity pools on Ethereum.

The cause of GHO’s depegging is a result of it being on the ‘short’ side of a carry trade. Traders can borrow GHO “cheap” (1.51% borrowing rate), sell GHO for another stablecoin, typically DAI, and deposit that stablecoin into a yield-bearing opportunity (e.g., DAI can be deposited into DSR and earn 5% APY). The sell pressure created by this trade has caused the price of GHO to deviate from its soft peg of $1.

To address these peg issues, Aave Governance has created a pair of governance proposals:

1. “GHO update on Aave V3 Ethereum Pool” was executed on Sep. 1, 2023, and reduced the GHO borrowing cap on the Aave V3 Ethereum Pool from 100 million to 35 million.
2. “Increase GHO Borrow Rate” has not been passed yet but aims to increase the borrowing rate for GHO from 1.5% to 2.5% (stkAAVE discount rate: 1.06% → 1.75%).

Both proposals aim to reduce the supply of GHO. Whereas the first proposal explicitly reduces the supply of GHO through the borrowing cap, the second proposal implicitly reduces the supply of GHO by making borrowing more costly.