(Bloomberg) — Aave, a peer-to-peer crypto lender, is jumping into the increasingly crowded stablecoin industry.
Aave’s lending platform cuts out traditional intermediaries like banks and operates on blockchains including Ethereum, where it sets interest rates based on supply and demand.
Stablecoins, which are typically pegged at a value of $1, are popular on such platforms. Aave’s new stablecoin, GHO, will be backed by assets supported on Aave, and coded to always be worth exactly $1 on Aave’s network, according to the lender. The offering is the latest in a flurry of efforts to create less volatile cryptocurrencies without having to rely on a centralized issuer.
Borrowers often pledge their crypto on Aave to borrow stablecoins, which can be a more convenient means of payment because they are designed to be less volatile than crypto tokens such as Bitcoin.
But crypto-lending and stablecoins are struggling to overcome a series of scandals, most notably the collapse of TerraUSD, an algorithmic stablecoin. That failure contributed to the later bankruptcies of lending platforms like Genesis Global Holdco and cryptocurrency exchange FTX.
DeFi projects like Aave have struggled to find growth in the aftermath. According to data from DeFiLlama, the total value of cryptocurrencies sent to the DeFi sector has remained relatively unchanged for almost a year at about $46 billion.
Still, the best-known reserve-backed stablecoins, USDT and USDC, issued by Tether and Circle Internet Financial Ltd., respectively, remain popular. Both are managed by centralized organizations that maintain pools of assets designed to be sufficient to protect each coins $1 value.
There’ve been several efforts to develop decentralized stablecoins. Dai, a stablecoin managed by MakerDAO, a DeFi lending platform that competes with Aave, is now the third largest stablecoin by market value according to token tracking site Coingecko.
Like Dai, GHO will not be issued by a centralized entity, but be managed by a decentralized autonomous organization known as AaveDAO. DAOs are organizations governed by holders of a special token.
“A native stablecoin actually helps to diversify the stablecoins, including in Aave protocol itself,” Stani Kulechov, founder and chief executive officer of Aave and of GHO developer Aave Companies, said in an interview.
The income generated by GHO, coming from interest charged to borrowers of the currency on the Aave protocol, will enable AaveDAO to allocate more funds to community contributors, including risk managers, developers, and security experts, according to Kulechov.
Kulechov, whose company also develops Lens Protocol, a blockchain-based social media project, hopes that GHO can speed up the mainstream adoption of the DeFi industry.
“More than two years ago, the Aave community recognized the need for an Aave-native decentralized and overcollateralized stablecoin that would empower users and serve as a payment layer,” reads an Aave blog post previewed by Bloomberg News.
“Stablecoins have the potential to become the payment layer for web3 because of their speed without the price volatility that has deterred consumers and merchants from using digital currencies.”
Image by: Cryptologos