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Aave’s GHO and Curve’s crvUSD: How Will These New Decentralized Stablecoins Work?

Lincoln Murr

Summary: Ever since the fall of UST, a decentralized stablecoin algorithmically pegged to the dollar through the Terra LUNA cryptocurrency, investors have been skeptical of the promise of a decentralized stablecoin whose assets are stored in a smart contract instead of a bank. Two of the biggest and most established DeFi projects, Aave and Curve, have ...

Ever since the fall of UST, a decentralized stablecoin algorithmically pegged to the dollar through the Terra LUNA cryptocurrency, investors have been skeptical of the promise of a decentralized stablecoin whose assets are stored in a smart contract instead of a bank. Two of the biggest and most established DeFi projects, Aave and Curve, have recently released plans to create decentralized stablecoins, GHO and crvUSD respectively, and each has a unique mechanism to ensure that they do not suffer the same fate as UST. Let’s look at both GHO and crvUSD and analyze their potential future.

Aave is an Ethereum-based decentralized borrowing and lending protocol that allows anyone to borrow or lend their assets and receive a competitive interest rate. It is currently the third biggest DeFi protocol in terms of total value locked, with almost $4 billion deposited. Since its release in 2017, it has established itself as a DeFi “blue chip” and is one of the most reputable DeFi projects in the space. 

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On July 7, 2022, Aave announced a proposal to release GHO, a decentralized collateral-backed stablecoin. GHO will be minted by providing an overcollateralized amount of backing, such as $1.20 ETH for every $1 GHO. If the value of the collateral falls below a set liquidation threshold (in our example the ETH becomes worth $1.10), the collateral will automatically be liquidated to ensure that the collateral never becomes worth less than GHO. Any interest accrued while borrowing GHO will go to the AaveDAO treasury. Additionally, only facilitators approved by Aave Governance will be able to mint GHO and only a certain amount.

GHO’s native interest rate will not be dynamically decided based on supply/demand conditions since there is no supply side; instead, the AaveDAO will vote on an interest rate, allowing monetary policy to be decentralized. Additionally, holders of staked AAVE can get a discount on GHO borrowing, creating an incentive to secure the protocol.

The GHO design is unique in its simplicity, and on paper appears to be a suitable way to create a fully decentralized asset pegged to the dollar. It’s similar to DAI in its over-collateralization but dissimilar in its minting and burning mechanisms and its integration with a DeFi primitive.

On the other hand, crvUSD takes a much more complex approach. Its main innovation is its automated self-liquidation feature known as LLAMMA, “Lending-Liquidating AMM Algorithm.” As we see with GHO and most other lending platforms, when the liquidity value drops below a certain threshold, the entire position is liquidated. With crvUSD’s model, whenever the value of one’s liquidity drops, LLAMMA automatically liquidates the collateral to crvUSD and rebuys the collateral if the prices go back up. This creates a continuous liquidation curve instead of a sharp cutoff point, which is significantly better for passive portfolio management and preventing massive instantaneous losses. In addition, minting fees will go to the Curve treasury and could provide significant value to the protocol. As DefiMoon pointed out on Twitter, if crvUSD can reach the same market capitalization as DAI at $5 billion and charges a 1% minting fee, it could generate $50 million annually for CRV holders. 

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GHO and crvUSD provide novel mechanisms to bring stability and security to the decentralized stablecoin industry. GHO’s main innovations are in the benefits of native association with the top DeFi lending protocol and the potential of decentralized monetary policy decisions. On the other hand, crvUSD provides unparalleled protection against liquidations and a new level of stability among stablecoins. With both products expected to release in 2023, it will be exciting to see them fight for market share and adoption in DeFi.

By Lincoln Murr

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