With GHO, Aave expects to generate a large amount of revenue and put it into the DAO Treasury.

Bitcoin and Crypto Market Watch Thursday, July 14, 2022 - 18:24

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The concept of decentralized finance (DeFi) is not new, but it is still in its infancy. Among the top DeFi protocols, AAVE is a crypto asset lending company based in London. This platform allows investors to lend and borrow crypto assets at some interest rates. Although DeFi typically involves higher risks, they aim at providing alternative ways to invest in crypto for long term investors. In today’s article, we look at what AAVE is, what it does and their new announcement regarding launching a new stable coin called GHO.

Understanding AAVE with analogy

In traditional finance, when someone buys a house, most people definitely need a housing loan. People put up a down payment of 10%-20% and borrow the remaining sum to purchase the house. Usually, the money for the loan comes from a bank or a financial institution. They lend money by holding the property as collateral, knowing that people pay higher interest and they give this interest to their lenders, after taking their cut. Basically, AAVE is the crypto equivalent of this bank.

Brief on AAVE

AAVE is a decentralized finance application (Dapp) that enables peer-to-peer/peer-to-contract lending of crypto currencies that allows users to borrow/lend crypto currencies and in turn get or pay a fee. They use an algorithm to determine the lending rate and to match the lenders to borrowers. Launched as ETHLend in 2017 in Finland by Stani Kulechov, the project later rebranded itself as AAVE in September 2018.

They utilize smart contracts, where a lender could deposit into a smart contract and earn interest and borrowers could deposit their collateral into another smart contract and can borrow from any other smart contract they want to borrow from. Their algorithm matches the borrowing interest rate, based on how much liquidity is available in each smart contract. Borrowers put up collateral worth up to 125% to 150%, which is automatically liquidated if the volatile crypto markets cause the collateral’s value to drop too low. One of the distinctive characteristics of AAVE is its ability to provide stable borrow rates, which is lacking in other DeFi lending protocols.

AAVE’s growth 

Total value Locked is one of the key metrics that is widely used to measure the value of any defi project. With the launch of new defi protocols and new farming opportunities over the years, AAVE’s TVL started to rise dramatically. From $60M in Jun 2021 to $400M in July to $1.5 Billion in August, 2021 AAVE started gaining popularity and became a strong contender in the DeFi race. By October 2021, it has a whopping ~ $18 Billion in TVL, which has depleted in the recent economic downturn and currently is in ~ $4.5 Billion levels.

<source: DefiLlama>

AAVE’s coming with a stablecoin 

As AAVE has become one of the significant projects in the DeFi space, it is now planning to launch its very own stable coin “GHO”.  All the decisions of the protocol need to be put to a vote in the DAO (Decentralised Autonomous Organisation). If all goes according to plan and AAVE holders vote to approve GHO, the stable coin will be “backed by a diversified set of crypto-assets,” according to the proposal. With GHO, Aave expects to generate a large amount of revenue and put it into the DAO Treasury. This revenue increase is used to support the project’s continued growth, especially during a market downturn, as well as to support the community and governance participants. 

The company behind AAVE stated that GHO is not an algorithmic stable coin and will not have the shortcomings of Terra/LUNA. Given the growing adoption of stable coins, there could be an opportunity for GHO to have widespread usage on layer-2 protocols and a use case for a growing mainstream audience.

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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.

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