The relatively accelerated growth of GHO’s market cap has sparked conversations about a potential buyback initiated by the Aave protocol. The buyback is set to be engaged if the GHO gains another $40M. 

GHO stablecoins continue to grow in supply, moving closer to the 175M token target. Once they reach this target, the Aave (AAVE) protocol will start buybacks for its native token, potentially growing its price further. 

GHO supply is currently at the 135M token mark, after a steep growth rate in August. GHO tokens are still relatively conservative and have only reached three major protocols where they are traded. The tokens have flowed into Curve, Balancer, and have several Uniswap V3 pairings. 

GHO can now be used to farm yield, with risky and high-reward vaults, up to 20% in gains. Yet the stablecoin aims for a more influential role in the Aave ecosystem. GHO is also bringing revenues to Aave DAO as an asset for lending and liquidity pools. 

GHO was held back by selling pressure

GHO is created against a collateral of AAVE, hence its relatively slow start. The DeFi market was also reeling from the de-leveraging and the bear market of 2022. At the same time, GHO was relatively cheap to borrow. DeFi users would borrow GHO and swap it for other stablecoins, which offered better yield on various protocols. 

The selling pressure led GHO to lose its $1 peg and its reputation as a stable asset. Currently, Aave has more checks and a more conservative procedure for borrowing GHO, so the supply growth is more sustainable. As a result, more GHO will remain within the Aave ecosystem, with additional control for spreading to other protocols. 

The Aave community is also discussing each step in the borrowing cap of GHO, to avoid additional deviations from the $1 tether. The end target for GHO is to reach a market cap of $1B, all of which would spread to DeFi. As of September 2024, the borrowing cap is 125M GHO, with a target of 140M. 

At the current rate of approving borrowing caps, this may take years. Compared to GHO, other protocols like Ethena saw their native stablecoins grow much faster. However, Ethena also had to decrease the supply of USDe during unfavorable market conditions. 

Aave will also improve its tokenomics to use multiple types of collateral for covering bad loans. Using only AAVE during loan liquidations puts pressure on the token’s market price. Umbrella will be the new Aave safety module, with multi-asset coverage for bad loans. 

AAVE grows to two-year peak

Aave is still the leading lending protocol, carrying around $11B in value locked. As a result, AAVE now trades at levels similar to May 2022. This year, AAVE recovered above $140 in August and continues to rally on an almost daily basis.

AAVE is considered undervalued and a niche DeFi protocol before its expansion. however, it still managed to rally by 40% in the past 40 days, as both DeFi and stablecoins enjoyed increased demand.

AAVE also reacts to the proposals of having high GHO reserves controlled by Aave DAO. The token may continue to expand thanks to buybacks on the open market. The deadline for the upgrade and buybacks is still uncertain. At this rate of GHO expansion, the target supply of 175M is expected by the end of the year. The token is also expected to become more valuable after the introduction of revenue sharing.

In the short term, AAVE is seen as risky, with a potential to dip from the $140 level with temporary selling pressure. 

Additional demand from Aave may come from the Spark sub-DAO, seeking passive income from the Aave vaults. Marker itself may move into a much more conservative direction, with reserves in the form of US debt. Aave still offers the riskier option of crypto-collateral lending. 

Aave may grow with additional inflows from Spark protocol, especially USDS (formerly DAI before the rebranding).

Recently, Aave also opened a vault for EtherFi, where weETH liquidity tokens could be used as collateral. As of September 2024, Aave covers more than 65% of the crypto loan market, with most of the activity concentrated in V3 vaults. 

Most of the collaterals on Aave are in the form of WETH, weETh, WBTC, USDT and USDC. With the Sky-Aave force partnership, the list of collaterals will increase, specifically adding USDS. Aave users may also receive SPK token allocations in exchange for supporting the Spark protocol with passive income. 

Cryptopolitan reporting by Hristina Vasileva