Risk Analysis of Stablecoin GHO Launched by Aave
Risk Analysis of Aave's Stablecoin GHO
Author: IntoTheBlock Translation: Shanolba, LianGuai
Stablecoins are the cornerstone of the decentralized finance (DeFi) ecosystem and an important tool for helping users manage risk and return in their strategies. However, without careful monitoring, events like decoupling and liquidation can pose significant losses to DeFi users’ strategies.
Overview of GHO Risk Indicators
Aave is one of the most well-known protocols in the DeFi space and the largest lending platform in the field, with over $7 billion TVL across 8 different blockchains. Aave’s design offers users a permissionless way to borrow and lend assets through overcollateralized loans. As one of the most tested protocols in the field, the protocol has decided to introduce the Collateral Debt Position (CDP) stablecoin GHO as a new product for its users.
It is well known that stablecoins are difficult to manage, as seen in major decoupling events in the past in the crypto space and the infamous collapse of Terra UST. Besides these larger events, users may also face everyday economic risks, such as loan liquidation in the lending markets or high slippage fees when trying to withdraw assets from decentralized exchanges (DEX) liquidity pools.
The 20 new indicators released in the GHO Risk Radar aim to provide users with a transparent way to address stablecoin-related risks and help guide their strategies with informed decisions. Below, we will focus on some indicators in the GHO Risk Radar version and how to use them to navigate the market.
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GHO Peg Performance
One key indicator for monitoring stablecoins is their ability to maintain their peg. The GHO Peg Performance indicator tracks how well GHO stays pegged to other stablecoins in the liquidity pool.
From the chart above, we can see that GHO has some difficulty in maintaining its peg with other stablecoins like crvUSD, FRAX, and USDC. This is common for newly launched stablecoins as it expands the total supply and liquidity in the pool starts to deepen.
Collateral Allocation Behind Borrowing
From the chart, it is evident that the most commonly used collateral for minting GHO is wstETH, followed by WETH. This means that users need to be cautious if there is a significant drop in ETH price, as it may result in a substantial decrease in GHO supply. As GHO issuers repay their debts or get liquidated, the supply of stablecoins in the liquidity pool may decrease, leading to significant slippage for users looking to exit.
Whale Credit Records
The behavior of whales in the market can have a significant impact on the overall health of other users and protocols. If there are known risky behaviors by whales in the market, this information can help other users establish their own risk positions in the market accordingly.
From the current snapshot of GHO whales, we can see that the borrowing share distribution is good, and known addresses have minted more than 10% of the total supply of GHO. In addition, we can see that these addresses have not been liquidated in the past, but there have been some repayments. This may indicate that the whales in the current market are actively managing risks.
