AAVE proposes stablecoin initiative: Why are stablecoins so important?
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AAVE proposes stablecoin initiative: Why are stablecoins so important?
In what aspects will GHO enhance Aave's "competitiveness"?
Navigating Web3 tides with focused insightsWritten by: Morty, TechFlow
On July 8, the Aave community released a new proposal to launch GHO, a decentralized overcollateralized stablecoin. The Aave DAO will adjust GHO's borrowing interest rate based on market supply and demand, while stkAAVE holders will be able to mint GHO at a discount. The goal is to enhance Aave’s competitiveness in the market through GHO.
Beyond Aave, we’ve also seen rapid growth in stablecoin market capitalization throughout this market cycle. Alongside centralized stablecoins, decentralized stablecoins are flourishing as well—public chains such as Terra-UST, Near-USN, and Tron-USDD have all launched LUNA-UST-like stablecoin models. Protocols on public chains including Cardano and Internet Computer are also planning to issue decentralized stablecoins for use within their respective ecosystems.
From a conventional perspective, stablecoins serve as a crucial component of public chain and protocol ecosystems, widely adopted by users as value carriers and settlement mediums. Yet under this logic, centralized stablecoins like USDT and USDC already perform exceptionally well. The primary purpose of decentralized stablecoins, therefore, is to eliminate the structural risks inherent in centralized stablecoins.
But is it really that simple?
Let’s consider this from Aave’s point of view and examine how GHO could boost Aave’s "competitiveness" across several dimensions, then extrapolate from there.
With the launch of GHO, Aave’s lending ecosystem will consist of three types of assets:
First, collateral/lending assets—high-quality assets such as ETH, wETH, USDC, etc.
Second, platform tokens, such as AAVE and stkAAVE;
Third, the stablecoin, namely GHO.
Here’s a brief overview of stkAAVE: stkAAVE is short for staked AAVE. Token holders can stake AAVE into the protocol’s Safety Module—a smart contract-based security component—and receive stkAAVE tokens at a 1:1 ratio. By holding stkAAVE, users earn rewards in newly issued AAVE tokens and trading fees. However, staked AAVE requires a "cool-down period" before it can be withdrawn (currently set at 10 days).
The Safety Module is designed to mitigate Aave’s insolvency risk and protect liquidity providers from potential losses due to liquidations or smart contract vulnerabilities. The rewards received after staking AAVE are essentially incentives provided by Aave to users who contribute to the protocol’s security.
After launching stkAAVE, Aave needs to provide sufficient incentives to encourage more token holders to deposit AAVE into the Safety Module. First, the larger the funds held in the Safety Module, the stronger the protocol’s ability to withstand risks. Second, the more AAVE locked in the Safety Module, the greater the market demand for AAVE, leading to a firmer AAVE price.
Now let’s return to GHO. As mentioned earlier, stkAAVE holders can mint GHO at a discount. The introduction of GHO effectively enhances the utility of stkAAVE. GHO will become a stable and reliable settlement medium within the Aave ecosystem, while Aave can fine-tune market demand for GHO through adjustments to its borrowing interest rate.
GHO is highly programmable and grants Aave a form of "monetary issuance power," enabling applications across various domains. The broader GHO’s adoption, the higher the market recognition of stkAAVE—since the GHO minting discount creates a consistent arbitrage opportunity. This dynamic explains how GHO strengthens Aave’s competitive edge in the lending sector.
Let’s zoom out further: what role do stablecoins play for public chains?
Primarily, they act as stable and reliable settlement mediums and low-volatility value stores.
Secondly, thanks to their high flexibility, public chains can link stablecoins with native chain tokens via discounted minting mechanisms—effectively subsidizing users. As long as profit opportunities exist, stablecoins can catalyze increases in both the native token price and the chain’s total value locked (TVL). Beyond investment appeal, additional utilities for native tokens—such as liquidity mining incentives—can drive greater participation in the ecosystem, creating a flywheel effect.
However, it's important to note that while LUNA/UST followed a similar model, its trajectory was ultimately unsustainable. Anchor Protocol’s 20% annual yield—essentially the “discount” offered on UST—was not viable long-term. While stablecoins are powerful tools for incentivization, their long-term sustainability depends on ensuring that the costs driven by such discounts remain below the real profits captured by the protocol. This is likely why Aave plans to adjust GHO’s interest rates via DAO governance based on evolving market conditions.
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