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.