AAVE: How traders benefit from GHO’s depegging

Posted: September 12, 2023

• Aave’s stablecoin GHO struggled to maintain its $1 peg.
• Aave Governance took steps to reduce GHO’s supply and address its pegging issues.

Aave [AAVE]’s stablecoin GHO faced challenges in maintaining its peg at $1 since its launch in mid-July. The main cause of its struggle could be attributed to one particular trading strategy – the carry trade.

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Under this strategy, traders borrowed GHO at a low rate of 1.51% and sold it for another stablecoin, typically DAI. They then deposited this stablecoin into yield-bearing opportunities, generating sell pressure on GHO and pushing its price below $1.

Aave’s GHO stablecoin has remained depegged since its July launch, currently trading at $0.974.

The cause?

GHO is on the ‘short’ side of a carry trade where traders:

1. Borrow GHO cheaply (@ 1.51%)
2. Sell for stablecoin (typically DAI)
3. Deposit stablecoin into yield… pic.twitter.com/mUUFIBwjiA

— Messari (@MessariCrypto) September 11, 2023

Steps to address the issue

To address GHO’s pegging issues, Aave Governance took action through two governance proposals. The first proposal, titled “GHO update on Aave V3 Ethereum Pool,” reduced the stablecoin’s borrowing cap on the Aave V3 Ethereum [ETH] Pool from 100 million to 35 million.

The second proposal, titled “Increase GHO Borrow Rate,” aimed to raise the borrowing rate for GHO from 1.5% to 2.5%.

Both proposals were targeted towards a reduction in the supply of GHO. The first explicitly achieved this by reducing the borrowing cap, while the second aimed to implicitly reduce supply by making borrowing more costly.

However, it’s crucial to understand that these measures alone might not fully restore GHO’s peg. According to Messari’s data, stablecoin prices hinge on the fundamental principles of supply and demand.

If demand surpasses supply, a stablecoin’s price can exceed $1. In GHO’s case, however, oversupply has pushed its price below this mark.

Aave’s network growth sustains

Despite Aave’s proactive efforts, its network growth was on the decline at press time. This suggested that new addresses showed a decreasing interest in GHO.

The AAVE token also experienced a decline in its price.

Source: Santiment

Realistic or not, here’s Aave’s market cap in BTC’s terms

Nevertheless, amidst GHO’s struggles, the Aave protocol continued to exhibit high levels of activity. Notably, daily active users for the protocol surged by 32.9% over the last month.

Additionally, the protocol’s revenue witnessed substantial growth, with a 43.9% increase in the last 24 hours.

Source: Token Terminal