GHO Stablecoin Fails to Enforce Dollar Peg Amid Criticism, Receives D Grade From Bluechip

December 24, 2023 | by


The GHO stablecoin, launched by Avara, has faced criticism for failing to enforce its intended dollar peg, receiving a D grade from independent stablecoin rating agency, Bluechip. Despite briefly reaching $0.98 per coin in November, GHO has consistently fallen short of maintaining its peg, dropping to $0.975 on December 11. With an introduction of 10 million additional coins since October, the stablecoin’s market capitalization barely exceeds $34 million due to its price not aligning with the dollar. The lack of strong stability mechanisms and a reserve redemption mechanism contribute to the unstable nature of GHO, prompting caution from Bluechip against holding the stablecoin. However, the agency believes that with necessary stability-enhancing changes, GHO has the potential to become a safe decentralized stablecoin.

GHO Stablecoin Fails to Enforce Dollar Peg Amid Criticism, Receives D Grade From Bluechip

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GHO’s Struggle for Stability

The stablecoin GHO, launched by Avara (formerly known as Aave), has been grappling with maintaining stability and enforcing its dollar peg since its inception in mid-July. Despite efforts to improve stability, GHO has consistently fallen short of achieving its intended goal of a $1 peg. This struggle for stability has raised concerns and garnered criticism from experts and critics in the industry.

GHO’s Inception and Dollar Peg Issues

GHO was introduced to the market as a dollar-pegged token, aiming to maintain a 1:1 ratio with the U.S. dollar. However, it has faced challenges in maintaining this peg throughout its existence. Despite reaching a low point of $0.917 on October 24, 2023, GHO experienced a brief upswing towards the end of November, reaching $0.98 per coin. This improvement in stability was short-lived, as GHO dropped to $0.975 on December 11 and has yet to reach the intended $1 mark.

GHO’s Initial Stability and Setbacks

Initially, GHO showed promise in achieving stability, but setbacks have hindered its progress. The introduction of an additional 10 million coins since October 21 has contributed to the instability of GHO. With a total of 34.72 million coins in circulation, GHO’s market capitalization barely exceeds $34 million, primarily due to its price not aligning with the dollar. These fluctuations have sparked criticism and concerns about the reliability and effectiveness of GHO as a stablecoin.

Introduction of Additional Coins

The introduction of additional coins into circulation has been a contributing factor to GHO’s struggle for stability. While the exact reasoning behind this decision is unclear, it has resulted in increased volatility and a lack of confidence in the stablecoin. Critics argue that this move does not address the root cause of the stability issues and may further exacerbate the problem.

Criticism of GHO’s Supply Side Focus

One of the main criticisms directed towards GHO is its focus on the supply side without sufficient attention to creating demand for the stablecoin. Jack Longarzo, an expert from Chroma, highlighted this issue, stating that scaling stablecoins is a demand-side problem rather than a supply-side problem. He emphasized that GHO’s reliance on its supply side advantage may hinder its ability to create sufficient demand and ultimately limit its scalability. This critique has raised questions about GHO’s long-term viability and sustainability.

Remarks by Jack Longarzo

In response to GHO’s supply side focus, Jack Longarzo remarked on social media platform X, stating that Aave, the creator of GHO, should shift its focus and build something else. He argued that GHO’s supply-side advantage alone is not enough to drive its scalability and suggested that Aave should explore other avenues to address the demand-side problem.

Response from Stani Kulechov

Stani Kulechov, the founder and CEO of Avara, defended GHO’s approach and expressed optimism about its future prospects. He highlighted the revenue generated by GHO, which amounts to 2.1 million annually, and emphasized the improving peg of GHO as factors that contribute to its potential for scalability. Kulechov believes that with time, GHO will be ready for scale, leading to increased revenue for the Aave DAO.

Bluechip Stablecoin Ratings

To assess the stability and risk factors of stablecoins, Bluechip, an independent, nonprofit stablecoin rating agency, has assigned GHO a D grade. This rating reflects the consistent underperformance of GHO relative to its $1 peg. Bluechip’s report on GHO points out the lack of strong stability mechanisms to enforce the $1 peg as a significant contributing factor to GHO’s struggles. The report also cautions against holding GHO due to its current form being deemed unsafe. However, the report suggests that GHO has the potential to improve to a higher rating with the implementation of stability-enhancing changes.

D Grade Assessment for GHO

The D grade assessment given to GHO by Bluechip raises concerns about its reliability and trustworthiness as a stablecoin. Users are cautioned against holding GHO due to its failure to maintain a stable peg to the U.S. dollar. The issues surrounding GHO’s stability and adherence to its intended peg have highlighted the need for improvements and changes in its design to enhance stability and regain market confidence.

In conclusion, GHO’s struggle for stability has become a significant challenge for the stablecoin since its inception. Despite initial promises of achieving a $1 peg, GHO has consistently fallen short of this goal, leading to criticism and concerns within the industry. The introduction of additional coins and the supply-side focus of GHO have been key factors contributing to its instability. While some experts have provided criticism and recommendations for improvement, others remain optimistic about GHO’s future prospects. The D grade assessment by Bluechip further underscores the need for GHO to address its stability issues and implement changes to enhance its reliability as a stablecoin.

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