GHO: Aave's Decentralized Stablecoin That Generates Revenue for the Protocol

In the decentralized finance landscape, few innovations have the structural impact of a proprietary stablecoin. GHO represents exactly that: it is not just a stablecoin, but a fundamental element of the Aave ecosystem that distributes recurring revenue to the DAO treasury. Launched in July 2023 after community approval, GHO embodies Aave’s vision of creating a decentralized, transparent, and sustainable alternative to traditional centralized stablecoins like USDT and USDC. In less than two years, growth from 35 million tokens to over 200 million in the first quarter of 2025 demonstrates the potential of this asset in the DeFi market.

GHO: What Sets It Apart from Other Stablecoins?

GHO is a US dollar-pegged stablecoin with a 1:1 ratio, built on Ethereum and managed by the Aave protocol. But what makes it different from USDT, USDC, and other competitors? The key difference lies in its architecture and governance.

Unlike centralized stablecoins, which rely on reserves held in traditional banks (often with transparency issues regarding audits, as happened with USDT), GHO is fully backed by over-collateralized crypto assets. These assets – ETH, AAVE, DAI, and others approved by Aave DAO – remain on the blockchain, publicly verifiable in real time. There is no central entity controlling the supply or access to reserves: everything is governed by an on-chain democracy where AAVE token holders vote on critical decisions.

Another crucial distinction: GHO is not issued by any private for-profit entity. The interest generated from GHO loans directly funds the development of the Aave protocol, creating a virtuous cycle where the growth of the stablecoin strengthens the entire ecosystem.

The Mechanisms Behind GHO’s Stability

To understand how GHO maintains its value, it’s necessary to explore the creation, management, and control system that supports it.

The Creation and Destruction Process

To obtain GHO, users deposit crypto assets into the Aave V3 market as collateral. For example, they might need to deposit ETH worth $150 to borrow $100 of GHO. This over-collateralization ratio (150% in this case) creates a safety buffer: even if ETH’s value drops, the loan remains covered.

A distinctive element: users continue to earn interest on their collateral assets while using them to generate GHO. It’s not a “capital freeze,” but a dual yield generation.

When the user repays the borrowed GHO, that same amount is burned (“destroyed”) on the blockchain. This burning mechanism automatically reduces circulating supply and ensures that every GHO in circulation always has a collateral counterpart.

Automatic Liquidation

If the collateral value suddenly plummets – always a possibility in the volatile crypto market – the system triggers automatic liquidations. Assets are sold to repay the GHO loan, protecting the entire protocol from under-collateralization scenarios.

The Stability Module: Arbitrage at the Service of Parity

Despite control mechanisms, in the initial months GHO traded below $1 (down to $0.985 at the end of 2023). To address this, Aave implemented the GHO Stability Module (GSM): a mechanism allowing 1:1 swaps between GHO and other stablecoins like USDC.

If GHO drops to $0.95, an arbitrage opportunity arises: buy GHO at a discount, exchange it via GSM at parity, and pocket the profit. This economic incentive naturally restores the peg. Conversely, if GHO exceeds $1.00, users can mint GHO at the parity price and sell it on the market for arbitrage gains, creating downward pressure.

Economic Benefits and Ecosystem Integration

Beyond technical stability, GHO offers tangible economic benefits for users and the protocol.

Discounts on Borrowing Rates for AAVE Stakeholders

A key incentive: users who lock AAVE in the Safety Module (stkAAVE) receive a discount on interest when borrowing GHO. For every 100 stkAAVE, they might get a discount on a certain amount of borrowed GHO. This mechanism encourages long-term holding of the native token, increasing its value and strengthening protocol security.

Recurring Revenue for the DAO

Unlike other assets on Aave where interest goes to liquidity providers, all interest on GHO flows directly into the Aave DAO treasury. With an initial cap of 35 million GHO, Aave estimated generating about $2.1 million annually. As the supply expands beyond 200 million tokens in 2025, these revenues have significantly funded protocol development, security improvements, and community initiatives.

Incentive Programs

Aave launched the Merit program to stimulate active adoption of GHO. Participants receive additional rewards in AAVE tokens or interest discounts, creating a liquidity and acceptance flywheel.

GHO Staking (stkGHO)

Users can stake GHO directly to earn yields, paid in AAVE or other incentives. Besides returns, staking helps protect the protocol from emerging risks, creating a shared security system.

The Flashmint Function

GHO supports Flashmint: instant collateral-free loans, provided the loan is repaid within the same transaction. A valuable tool for sophisticated arbitrage and advanced liquidity farming.

Practical Use Cases for GHO in DeFi

GHO’s utility is not theoretical but concrete in various DeFi scenarios.

Stablecoin for Value Preservation

In volatile crypto markets, GHO offers a safe haven without needing to convert to fiat currency. Useful when exiting long positions on altcoins while maintaining exposure to the ecosystem.

Liquidity and Yield Farming

Providing GHO to stablecoin pools on AMMs like Uniswap or Maverick generates trading fees and incentives. An ideal tool for those seeking stable yields on stable capital.

Structured Arbitrage

Thanks to GSM and fixed-price mechanisms in Aave, GHO offers regular arbitrage opportunities for sophisticated traders, with controlled risks.

Collateral Component in Complex Strategies

Some DeFi protocols accept GHO as collateral. This opens opportunities for multi-layered strategies: depositing GHO on Aave, borrowing additional assets, and managing more complex positions.

Payments and Transfers

Although not yet mainstream outside DeFi, GHO is perfectly functional for quick on-chain transfers at minimal costs, possibly toward decentralized exchanges or vendors that accept it.

Challenges to Address: What You Need to Know Before Using GHO

Despite advantages, GHO is not without risks and critical limitations.

Volatile Collateral Risk

GHO is safe only if collateral assets maintain their value. In a scenario of severe crypto market contraction, where ETH and AAVE collapse simultaneously, the system could face significant pressures. Although Aave mitigates this with over-collateralization (150% or more) and automatic liquidations, the risk of inefficiency during extreme volatility persists.

Maintaining the Peg Under Stress Conditions

In the first months after launch, keeping GHO at $1.00 was a technical and market challenge. Despite GSM and incentive programs, the peg is not guaranteed forever, especially if GSM liquidity runs out.

Smart Contract Vulnerabilities

GHO and the Aave protocol depend on smart contracts, which, despite audits, remain subject to undiscovered technical risks. The DeFi history is filled with unexpected vulnerabilities. Aave mitigates this with continuous updates and the Safety Module, but technological risk remains a legitimate concern.

Limited Market Size

With less than three years of history, GHO remains small compared to USDT or USDC, which have established global capitalization and acceptance. GHO is practically usable only within the DeFi ecosystem and lacks significant penetration in retail payments or international transfers.

Intense Competition

MakerDAO (DAI), Curve (crvUSD), and other decentralized solutions compete for the same niche. USDT and USDC maintain their dominant positions. For GHO, the path to leadership involves technical differentiation and network effects, not guaranteed.

GHO for Different User Types

GHO’s value heavily depends on the user profile.

Active DeFi Participants

If you already regularly participate in lending, DEX, and farming, GHO offers numerous advantages: discounted rates, staking yields, arbitrage opportunities, and deep integration with the Aave ecosystem. For this profile, GHO is a natural tool.

AAVE Holders

If you hold AAVE tokens, staking them and leveraging GHO benefits (discounts, governance) is strategic. Moreover, GHO’s success increases the value of your stake in the system.

Capital Conservators

If you seek pure stability without additional yields, USDC and USDT remain more widespread and liquid. GHO is suitable for those comfortable operating within DeFi but not necessarily looking for a “plug-and-play” alternative to traditional stablecoins.

Speculators

If your hope is that GHO will increase in price, it’s not the right asset. By design, GHO remains pegged to $1.00. If you want exposure to Aave’s growth, investing in AAVE tokens is the correct route.

Long-Term Vision: Where Is GHO Going?

Aave has significant ambitions for GHO beyond 2025. Expansion to other blockchains (Arbitrum, Optimism, Polygon) via decentralized facilitators is already underway. Integration with more DeFi protocols, partnerships with AMMs for deep liquidity, and improvements to stability mechanisms (advanced GSM versions) are on the roadmap.

The stated goal: make GHO the “stablecoin for everyone on the internet,” not limited to DeFi, but suitable for payments, remittances, and everyday applications. To achieve this, GHO will need to address the challenges above and build widespread acceptance outside the Aave ecosystem.

The growth from 35 to over 200 million tokens in less than two years suggests a positive direction. However, the path to mainstream adoption remains long and uncertain.

Conclusion

GHO is more than just a stablecoin: it’s a pragmatic experiment in how a DAO can generate recurring revenue, govern a critical asset, and distribute value to stakeholders transparently. With its over-collateralization model, democratic governance, and deep integration with Aave, GHO offers a unique value proposition in the decentralized stablecoin market.

Whether you’re exploring GHO as a tool for advanced DeFi strategies, as a portfolio diversification component, or simply to understand the future of decentralized finance, the advice remains the same: start by directly participating in the Aave protocol, deposit collateral on Ethereum V3, experiment with GHO mechanics, and stay updated on DAO progress. The on-chain transparency of GHO allows anyone to verify system status and make informed decisions.

The evolution of GHO will be one of the most interesting chapters in DeFi in the coming years. It’s worth following closely.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always do your own research before making decisions. We are not responsible for the consequences of your actions.