The End is Near for GHO's Peg Woes

As discussed in our recent report, GHO has struggled mightily to maintain its peg since launch. As a result, many frustrated DeFi users have called GHO’s entire design into question. I find this to be a short-sighted reaction, considering the mere ~23M GHO supply and short amount of time since launch. The GHO Stability Module (GSM) will dramatically improve peg stability once it is live. In the meantime, there are two governance initiatives set to offer a lucrative opportunity if GHO remains at $0.96.

The two proposals passed quorum with ease, and can be found on Snapshot.

  • sDAI Aave V3 Onboarding – Will onboard sDAI as a collateral-only asset, allowing users to mint GHO against liquid DSR deposit tokens.

  • wGHO Aave V3 Onboarding –  Would onboard wrapped GHO as a collateral-only asset, and create a new stablecoin e-mode for wGHO, USDC, USDT, DAI, LUSD.

The sDAI Onboarding proposal is now posted to the official Aave Governance dashboard, with voting starting later today. Once these proposals are integrated, there will be some popular new yield strategies.

The new stablecoin e-mode offers 87.5% LTV, a 90% liquidation threshold, and a 1% liquidation penalty. If GHO were to remain at $0.96, a user would be able to generate around 7x leverage on a repeg, earning 5% on the original capital via the DSR while waiting. 

There is risk involved with this strategy, and there have been some close calls in the past with ETH/stETH looping strategies. But generous liquidation penalty and the high degree of upside available for a return to peg on an overcollateralized asset will surely lure plenty of capital, providing a much needed counterweight to the current peg situation.

Even if GHO returns to peg, e-mode will offer new yield strategies. Users will be able to loop GHO back into DAI and lever up on the DSR. There is an ongoing proposal to increase the GHO borrow rate to 2.5%, but a user max looping with this strategy could approach low double-digit yields via the DSR (especially if they have the 30% GHO borrow discount via stkAAVE).

It will be interesting to watch the next few weeks for GHO. Up until now, new GHO minters have had to bear the cost of GHO trading under peg, severely limiting its growth. A GHO at peg would remove this obstacle, and new strategies will generate an influx of new users and a shift in sentiment.

GHO is still young and the GSM is not yet live. It will be interesting to see how these mechanisms can support the peg of GHO as its supply rapidly balloons to the 100M supply cap.

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