Risk Analysis of Aave’s Stablecoin GHO

Author: IntoTheBlock Compiler: Shan Ouba, Jinse Finance

Stablecoins are a cornerstone of the decentralized finance (DeFi) ecosystem and are an important tool to help users manage risk and reward in their strategies. However, if not carefully monitored, economic risks such as decoupling events and liquidations can cause 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 space, with over $7 billion in TVL across 8 different blockchains. Aave is designed to provide users with a permissionless method to lend and borrow assets through overcollateralized loans. One of the most tested protocols in the space, the protocol has decided to launch Collateralized Debt Position (CDP) stablecoin GHO as a new product for users.

Stablecoins are notoriously difficult to manage, as has been the case with major decoupling events in the cryptocurrency space and the infamous Terra UST debacle in the past. In addition to these larger events, users may also face day-to-day economic risks, such as liquidation of loans in the lending market or high slippage fees when attempting to withdraw assets from a liquidity pool on a decentralized exchange (DEX)

The 20 new indicators published in the GHO Risk Radar aim to provide users with a transparent way to navigate the risks associated with stablecoins and help users make informed decisions about their strategies. Below, we highlight some of the indicators in the GHO Risk Radar Edition and how they can be used to guide the market.

GHO hook properties

A key metric to monitor for a stablecoin is its ability to maintain the peg. The GHO pegged performance metric tracks the pegged performance of GHO relative to other stablecoins in the liquidity pool.

From the above we can see that GHO is having a slight difficulty maintaining its peg to other stablecoins such as crvUSD, FRAX and USDC. This is common for newly launched stablecoins as it expands the total supply and the liquidity in the liquidity pool starts to deepen.

Collateral allocation behind borrowing

As can be seen from the chart, the most commonly used collateral for minting GHO is wstETH, followed by WETH. This means that users need to be concerned if the price of ETH drops significantly, as this could lead to a significant reduction in the supply of GHO. As GHO minters repay debt or liquidate, the supply of stablecoins in the liquidity pool may decrease, which may cause significant slippage for users who want to exit.

Giant Whale Credit Record

The behavior of whales in the market can have a significant impact on other users and the overall health of the protocol. If there are known risky whales on the market, this information can help other users build their own risk profile in the market accordingly.

From the snapshot of the current GHO whales, we can see that the borrow share is well distributed, with addresses known to have minted over 10% of the total GHO supply. Additionally, we can see that no liquidations have occurred in the past for these addresses, but there have been some paybacks. This can indicate that the whales in the current market are actively managing risks.