Aave’s Innovations and Challenges From Aave V3’s High Growth to GHO’s Liquidity Strategy

From Aave V3's Rapid Growth to GHO's Liquidity Strategy Exploring Aave's Evolution and Hurdles in Innovation

Author: Jiang Haibo, LianGuaiNews

Aave has always been one of the main lending protocols in the entire DeFi ecosystem, with Aave V2 playing an indelible role during the previous bull market. However, recent data shows that Aave V3 is surpassing V2, and perhaps in the near future, Aave V2 will also exit the stage of history like V1. The stablecoin GHO is another important product launched by Aave this year, but GHO’s performance is not ideal, lacking applications and its price has been consistently below $1. Aave has prepared multiple measures to address this issue.

Aave V3 Surpasses V2, V3 Maintains High Growth

Aave started as ETHLend in 2017, renamed to Aave in 2018, deployed the initial version of smart contracts on Ethereum in 2019 and launched Aave V1, and released Aave V2 at the end of 2020, then Aave V3 in March 2022. Since the last bull market, Aave V2 has been the main product of Aave and one of the main lending protocols in the entire DeFi ecosystem.

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However, Aave V2 still has some drawbacks, such as the inability to limit the borrowing amount for each liquidity pool, where the risk of one asset may affect the entire protocol. Previously, Michael Egorov, the founder of Curve, collateralized too much CRV to borrow stablecoins, and whether it was Michael Egorov or his counterpart, once the positions were liquidated, there was not enough liquidity in the market, causing Aave to actually have bad debts.

Although since the launch of Aave V3, the TVL version of V2 has gradually declined while V3 has increased, V2 has always remained dominant. In September this year, after a year and a half since the launch of Aave V3, this situation finally changed, with the TVL of Aave V3 surpassing the V2 version.

Aave V3 supports cross-chain lending, improves capital utilization with an efficient mode, supports lending of isolated assets, allows setting borrowing and deposit limits, updates the liquidation mechanism, and can provide various reward tokens. Aave V3 has also helped Aave establish its position in the multi-chain ecosystem, and its status as the V3 version becomes increasingly solid.

As shown in the following figure, Aave V3 has maintained a stable growth rate since the beginning of this year, with TVL increasing from $440 million to the current ($25 October 2023) $2.98 billion.

Insufficient Demand for GHO, Slight Deviation from the Peg

In addition to being a solid lending protocol, Aave also launched its native stablecoin in July this year, supporting borrowing GHO using various deposits as collateral, which may bring new revenue and growth points to the protocol. Similar to MakerDAO’s DAI, borrowing GHO from Aave requires interest payment, but users who stake AAVE tokens in the Aave Safety Module can enjoy interest discounts. Aave founder Stani stated at the end of September that about 30% of GHO was minted with discounted interest rates.

As of October 25th, the maximum circulation of GHO is 35 million, and currently 26.54 million have been issued. Due to the need to set various risk parameters, it was not until after Aave V3 matured that the opportunity for GHO appeared, and the circulation limit can be adjusted according to the usage of the GHO stablecoin through governance.

Compared to stablecoins like crvUSD from Curve, GHO does not have enough use cases. Aave is not a DEX and has limited ability to attract liquidity for GHO. Among all the decentralized stablecoins issued by top DeFi projects, GHO seems to perform relatively poorly.

Although GHO is overcollateralized, there is no mechanism to anchor its price to $1. From a price perspective, since its issuance, the price of GHO has been consistently lower than $1 and has a downward trend. According to CoinGecko data, the current GHO price is around $0.967, with a negative premium of over 3%.

According to on-chain data from Etherscan, the top destinations for GHO are Balancer and Uniswap, accounting for 33.4% and 12.4% of the current GHO circulation respectively.

According to Balancer’s liquidity pool, GHO’s liquidity is in the GHO/USDC/USDT pool, but the proportions have deviated significantly. GHO accounts for 74.19%, while USDC and USDT only have 12.82% and 12.99% respectively. This indicates that there is insufficient demand for GHO, and many users are selling GHO in the market after minting.

Multiple Measures to Enhance GHO Liquidity and Anchor to the U.S. Dollar

In the face of insufficient demand and price detachment of GHO, Aave has prepared multiple solutions.

In August, when Curve’s founder faced liquidation of their collateralized borrowing position and planned to sell CRV tokens at a discount through OTC, Aave initiated a proposal to purchase 5 million CRV for $2 million. Although the proposal was controversial and received only 57.81% approval, it was still passed. This will allow the Aave DAO to strategically start laying out the “Curve War” and attract liquidity for GHO on Curve.

On October 4th, Aave announced the Aave grant projects for August, including the DeFi research platform Dojo, the Sommelier developing Turbo GHO Vault, CIAN using Aave to develop Delta neutral strategies, Altitude for active management of collateral debt, DeFi Simulator for simulating DeFi asset risk parameters, Aave RFPs and service provider terms of service (ToS), Revelo Intel providing comprehensive reports for Aave, and Laval University for developing blockchain and DeFi courses. These projects are all aimed at developing or taking measures to strengthen the adoption of GHO within Aave.

On October 22nd, Aave executed a proposal to spend aDAI v2, TUSD, BUSD, aEthDAI v3, and aUSDT v2 from the Aave DAO to purchase GHO. It is expected to receive a total of $1.6 million from the secondary market, and the acquired GHO will be used for Aave grants, events, sponsorships, and the work of the GHO Liquidity Committee.

On October 23rd, Aave executed a proposal to increase the GHO borrowing rate from 2.5% to 3%, with the aim of strengthening the peg between GHO and the US dollar and increasing the protocol’s income generated from GHO.

Also on October 23rd, the GHO Liquidity Committee launched a 3-month incentive program on Sommelier Finance to enhance GHO liquidity and strengthen the peg between GHO and the US dollar. Turbo GHO users can receive both GHO and SOMM rewards. Turbo GHO is a multi-strategy Vault that utilizes funds for operations such as providing GHO/USDC liquidity on Uniswap v3.

According to the Sommelier Finance website, the current yield of this strategy is approximately 21.99%, with 9.12% being SOMM rewards, 9.89% being GHO rewards, and the remaining portion possibly coming from the strategy’s actual income.

However, the price of GHO has not yet recovered. Although there is a liquidity pool for crvUSD/GHO on Curve, it only has $210,000 in liquidity and no incentives. If Aave can utilize the CRV token and attract liquidity on Curve, the effect may be better. When Frax was launched on GHO, they proposed adding Curve GHO/FRAXBP to the FXS gauge. If they can cooperate, it would also be a measure to enhance liquidity.

Summary

Aave V3 has introduced various new features and helped Aave gain a market share in the multi-chain ecosystem. Since its launch a year and a half ago, the TVL of the V3 version has finally surpassed that of V2, potentially bringing new opportunities for Aave.

In July, Aave launched another significant product, its native stablecoin GHO. However, GHO has maintained a negative premium, and for this reason, Aave has prepared various measures to enhance GHO liquidity and its peg to the US dollar.

In addition, Aave and GHO have recently made some progress, including integrating LianGuairaSwap on the App page to provide trading functionality and the ability to purchase GHO with fiat on Mt Pelerin or convert GHO into fiat, among others.

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