[ARC]: Implementing a GHO Backstop for Aave

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The discussion focused on EitanKat's proposal to implement a user-based backstop for GHO on Aave DAO, powered by B.Protocol, to enhance liquidation mechanics and foster trust in GHO stability during severe market conditions. While the proposal received mixed reactions due to concerns about risks and profitability, the consensus leaned towards the potential benefits of increased trust and stability in GHO.

The discussion primarily revolved around the proposal by EitanKat to introduce a user-based backstop for GHO on Aave DAO. The backstop is intended to ensure safer and more robust liquidation mechanics, particularly for less liquid collaterals and during extreme market conditions1. The backstop would act as a buffer, amplifying existing DEX liquidity and facilitating liquidations with a fixed slippage. The proposal also suggested that the backstop could foster better trust in a new stable during severe market conditions, as more robust liquidation mechanics would maintain a better GHO peg1.

The backstop would be powered by B.Protocol, which pools users’ funds into segregated Backstop pools. These pools are used for liquidations on the integrated platform, such as Aave. Once a liquidation takes place, the Backstop AMM smart contract pulls the needed funds from the backstop to facilitate the liquidation and automatically puts the seized collateral for sale according to a market price feed. The return is then deposited back to the backstop pool, and profits are accrued1.

The discussion also included a debate on the risks and benefits of the backstop. Eboado raised questions about the backstop's GHO-specific usage and the pricing of the risk taken by backstop suppliers2. Yaron responded by explaining that the backstop would act when the position is below 1 HF and that the liquidators bear a real risk, hence the need for incentives3. Semicrypto questioned the profitability of allocating $3M to backstop $GHO at low $GHO issuance levels4. Eboado also discussed the potential for bad debt to be covered automatically given the nature of GHO as an overcollateralized asset5. Yaron reiterated his belief that a backstop could potentially make profits and be more efficient than an insurance fund6.

In conclusion, the proposal for a GHO backstop was met with mixed reactions, with some members expressing concerns about the risks and profitability. However, the general consensus was that a backstop could potentially increase community trust in the stability of GHO and mitigate concerns about how new collateral listing would affect the stability of GHO. The B.Protocol team is seeking further feedback from the Aave community on this proposal1.

Posted a year ago

Last reply a year ago

Summary updated 2 months ago

Last updated 06/12 00:43