Aave (AAVE) Protocol Considers Buybacks as GHO Stablecoin Market Cap Grows

The relatively accelerated growth of GHO’s market cap has sparked conversations about a potential buyback initiated by the Aave protocol.

GHO stablecoin supply continues to grow, moving closer to the 175M token target. Once they reach this goal, the Aave (AAVE) protocol will begin buybacks for its native token, potentially increasing its price further.

As of September 2024, GHO supply stands at 135M tokens, following a rapid growth spurt in August. GHO tokens are still being traded on a limited number of major protocols, with three main platforms handling the majority of the volume. The tokens are now available on Curve, Balancer, and several Uniswap V3 pairings.

GHO can now be used to farm yield, with risky vaults offering up to 20% gains. However, the stablecoin is also aiming for a more influential role within the Aave ecosystem. GHO is generating revenue for the Aave DAO as an asset in lending and liquidity pools.

GHO was previously facing selling pressure

GHO is minted against AAVE collateral, which contributed to its slower initial growth. The DeFi market was also reeling from the de-leveraging and bear market of 2022. At the same time, GHO was still 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 caused GHO to lose its $1 peg and its reputation as a stable asset.

Currently, Aave has more checks and a more conservative procedure in place for borrowing GHO, which is making the supply growth more sustainable. As a result, more GHO will remain within the Aave ecosystem, with additional controls for spreading to other protocols.

The Aave community is also discussing each step in the borrowing cap of GHO, to avoid any further deviations from the $1 tether. The end goal for GHO is to reach a market cap of $1 billion, all of which would be circulating in DeFi.

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 be improving 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 rises to two-year peak

Aave is still the leading lending protocol, carrying around $11 billion 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. Nevertheless, 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 the 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 for Aave may come from the Spark sub-DAO, seeking passive income from the Aave vaults. Maker itself may move in a much more conservative direction, with reserves in the form of U.S. 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.