Apollo’s Moonshots: Aave Squeezes GHO onto Native Revenue-Generating Stablecoins. curve next?

David Angliss, analyst at Australia’s leading cryptocurrency investment firm, Apollo capitalshares the fund’s regular perspective on what’s happening in the rapidly changing and volatile cryptocurrency space.

As David Angliss of Apollo Capital puts it, stablecoins are the lifeblood of DeFi (decentralized finance). And now, one of the original DeFi protocols (and one of the most robust), Aave (AAVE) is making a move into this important crypto niche with its own collateralized, revenue-generating stablecoin called GHO.

According to Angliss, this could help propel the AAVE token to new highs given more favorable market conditions – whenever they return for what will hopefully be a more definitive stay. And it could help create a stronger and resurgent Ethereum DeFi ecosystem.

(Side note: Aave, founded by programmer and entrepreneur Stani Kulechov, means spirit in Finnish. It was housed on the Ethereum blockchain and was originally called ETHLend, and the protocol allows users to lend and borrow crypto without those pesky centralized intermediaries borrow. According to data from DeFiLlama, Aave’s Total Value Locked (TVL) is more than $6.97 billion — comprised of various cryptocurrencies across supported networks.)

Meanwhile, the analyst notes, another Ethereum-based DeFi “blue chip” – Curve (CRV) – could also soon follow and take part in what he calls a “stablecoin arms race.”

We’ll get into why these developments matter below, but first a quick refresher on the different types of stablecoins and where GHO comes in…

Stablecoin Types… Which Does Apollo Prefer?

For crypto outsiders, or for those with a tunnel vision vendetta against the asset class in general (what next, US Democratic Senator Elizabeth “Rabs” Warren?), stablecoins could be a dirty word. And that would be thanks in part to the reputational damage caused by the UST/Terra LUNA implosion a few months ago.

But true crypto and DeFi believers like Apollo Capital remain undeterred. As Anglis points out, Apollo constantly trades, exchanges, distributes, and harvests stablecoins to generate income for its market-neutral funds.

“Our yield farming includes many activities such as providing liquidity to automated market makers, bootstrapping protocols, and decentralized lending,” he notes.

At the moment there are three stablecoin categories:

• Fiat supported (e.g. USDT, USDC, BUSD)
• secured (e.g. DAI, MIM, LUSD)
• Algorithmic (e.g. UST, AMPL, FRAX)

Image courtesy of Apollo Capital.

Fiat-backed stablecoins are backed 1:1 with a corresponding fiat currency, such as the US dollar, and are managed by centralized entities. This is overwhelmingly the largest used category of stablecoins. But as Angliss points out, the centralized management of these assets introduces regulatory risks, “which is less relevant for decentralized stablecoins.”

Apollo uses USDT and USDC when dealing with DeFi protocols for yield farming and maintains a 45% – 75% weighting of stablecoin holdings in fiat stablecoins. However, amid ongoing concerns about the transparency of the assets backing USDT, she is exercising particular caution when using Tether (USDT).

The company also holds about 20% to 40% of its stablecoin position in decentralized, collateralized stablecoins generated by over-collateralised crypto assets, typically above a 150% liquidation rate.

This is a category developed by MakerDAO and its DAI stablecoin. Aave’s GHO and Curve’s stablecoin will, if it turns out, be competitors in this subcategory.

As for algorithmic (algo) stablecoins, perhaps the less said about this category the better in this article. Innovative, sure, but definitely the riskiest grouping. (Right, Do Kwon?) Essentially, they are ddesigned to maintain a peg (say, to the US dollar) by “algorithmically minting and burning a volatile crypto asset and corresponding stablecoins,” explains Angliss.

Apollo Capital has lost faith in algorithmic stablecoins and, according to the analyst, “is in the process of eliminating <5% recent exposure as locked positions become liquid.”

This Messari.com chart further explains the three stablecoin categories.

So what is the GHO value for Aave?

Now that GHO has been approved by the Aave DAO (Decentralized Autonomous Organization), Aave users will soon be able to mint the protocol’s native stablecoin against their provided collateral, which is a diverse grouping of crypto assets can act, which can be selected by the user.

And the beauty of it is that GHO holders will continue to earn interest on the collateral provided, like other lending transactions on Aave. In addition, interest payments on the stablecoin are sent to Aave’s DAO, generating revenue for the community.

“We believe this recent update from Aave validates the use case and position of collateralized stablecoins in the DeFi ecosystem,” Angliss said, adding:

“We are confident that eventually stablecoins will collectively reach trillions of dollars in market value as they continue to play an important role in the crypto ecosystem by providing decentralized insurance, prediction markets, savings accounts, decentralized exchange trading pairs, credit and debt markets, remittance, and more.

“While there are different approaches to creating a decentralized stablecoin, ultimately the market will decide which will emerge as winners.

“However, if it is successful, Aave’s GHO could significantly hurt the market share of fiat-backed stablecoins.”

Incidentally, since the GHO proposal was approved a week ago, the AAVE token is up about 6% in value and has been gaining strength for about a month, up more than 40% over the past 30 days, according to CoinGecko.

Can we expect Curve to enter the stablecoin race soon as well?

Angliss says that a Curve decentralized stablecoin is also very likely because GHO development has sparked quite a big wave through the DeFi community, which is starting to see new opportunities to boost the broader decentralized crypto ecosystem.

“It kind of started a stablecoins arms race, if you will. We anticipate that a few more similar DeFi protocols may come out to create their own stablecoin. As such, there has become a little more urgency for protocols to host their own native, decentralized stablecoins.”

He also points out that Curve’s CEO, Michael Egorov, gave pretty clear indications of intent during a recent conversation with me Kelvin Koh, co-founder of Spartan Group. Curve’s stablecoin would appear to have an over-collateralization mechanism – similar to GHO.

Bonus Yield Farming Alpha

Regarding stablecoins and the risk of “de-pegging” due to their 1:1 backing asset value (of which UST was the most dramatic recent example), Angliss has an interesting tip for mitigating this. That is, if you are interested in crypto yield farming.

“There are ways to hedge a stablecoin yield farming position against a ‘de-pegging’ event,” he reveals…

“By using DeFi, a user can deposit collateral on a lending and lending platform (like Aave) to borrow a ‘riskier’ stablecoin instead of buying it.

“Through this method, the user can yield farm the borrowed coins and not worry about the ‘depeg’ of this stablecoin. Only the units borrowed are required to repay the loan, not the value of the loan at initiation.”

Well, that… is some next-level crypto knowledge.

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