Why does Aave need its own stablecoin?
The field of decentralized finance (DeFi) has become a pioneering concept in the financial industry, offering the market a decentralized lending system secured by crypto assets directly between users without the involvement of intermediaries. One of the first and most popular credit services was Aave. On July 15, its developers launched their own stablecoin — a token with a fixed exchange rate — which differs in design from what market-leading issuers offer. RBC Crypto.
Loans without banks
The Aave lending platform eliminates traditional intermediaries in the face of banks, the service runs on the Ethereum blockchain and uses software smart contracts to automate lending and borrowing operations. Aave was founded in 2017 by Stani Kulechov, a Finnish entrepreneur with a background in law and finance.
A user-friendly interface and a number of innovative functional solutions have made Aave one of the leading DeFi platforms. The protocol allows users to earn interest on their crypto assets by investing them in so-called liquidity pools. From these pools, loans are provided to borrowers. They pay interest for the use of funds that are shared between users-creditors and the site itself. Interest rates depend on market conditions and are set based on supply and demand.
To work with Aave, it is enough to have a crypto wallet with a transaction signing function, such as MetaMask, and a cryptocurrency to be entered into the protocol. After depositing funds, it immediately becomes possible either to lend them, receiving interest, or to borrow some assets against their security. Borrowers have access to a variety of assets, including Bitcoin (BTC) and Ethereum (ETH) cryptocurrencies, as well as the largest stablecoins by capitalization – Tether USD (USDT) and USD Coin (USDC). It is on the territory of the latter that Aave now enters, but uses a slightly different approach.
secured by collateral
Dollar-pegged stablecoins are one of the most popular assets on Aave and other similar platforms. The most capitalized stablecoins are USDT and USDC, issued by Tether and Circle, respectively. Both coins are managed by centralized entities that maintain reserves for their “stablecoins” in fiat currencies, gold, securities and other assets. These reserves provide exchange rate stability, and the loss of this stability, even short-term, is considered an anomalous event for the market.
However, Aave’s own stablecoin, which is issued under the ticker symbol GHO, is backed by Aave-backed assets and is programmed to always have a value of exactly $1 on the Aave network. This is another attempt by the crypto market to create less volatile cryptocurrencies that are not dependent on a centralized issuer.
Borrowers often pledge cryptocurrencies to Aave to borrow stablecoins. Due to the lack of exchange rate volatility, they can be more convenient for payments than, for example, the same bitcoin.
There are already several decentralized (algorithmic) stablecoins on the market. The most capitalized of these is Dai (DAI), run by MakerDAO, a DeFi lending platform that competes with Aave.
Like Dai, GHO will not be issued by a single issuer. It will be managed by a decentralized autonomous organization (DAO), known as AaveDAO, and will be issued through operations on a lending platform. To simplify somewhat, it will actually be secured by collateral.
Network effect
“The platform’s native stablecoin helps diversify [традиционные] stablecoins, including those in the Aave protocol itself,” Kulechov wrote in a comment for Bloomberg. He said the income from the GHO, generated from interest charged on borrowers in the Aave protocol, will allow AaveDAO to allocate more funds to community members, including risk managers, developers, and security experts.
Kulechov hopes that the GHO, in its own way, will help popularize the DeFi sphere as a crypto asset that is not subject to volatility. Now his company is also developing the Lens social protocol, which needs a network effect and interested users. Based on this protocol, it is possible to build full-fledged analogues of existing social networks, and accessibility to a wide mass of users is a critical point.
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