The Peg Isn’t Broken, But It’s Not Exactly Healthy Either

GHO, the native stablecoin minted through Aave v3, launched in mid-2023 with a straightforward premise: borrow against collateral deposited in Aave, receive GHO at a protocol-set interest rate, use it like any other stablecoin. The design was clean. The execution has been messier.

For most of its first two years, GHO traded below $1 - sometimes significantly. At various points in late 2024 it sat near $0.97, which doesn’t sound catastrophic but matters enormously for a stablecoin’s credibility and for borrowers trying to manage positions priced in a unit that isn’t actually worth a unit.

Aave governance responded by deploying GHO Stability Module (GSM) contracts, which allow arbitrageurs to swap other approved stablecoins for GHO at or near $1. The logic is standard: give the market a reliable exit and entrance at the target price, and traders will enforce the peg through arbitrage. It works in theory. In practice, the GSM has helped - GHO has traded closer to $1 through much of 2025 - but the restoration has been gradual rather than decisive.

Why the Peg Drifts

The core tension is structural. GHO is minted by borrowers who have an inherent incentive to sell it - they borrow to do something with the liquidity, typically to buy other assets or provide liquidity elsewhere. That creates persistent sell pressure on the open market. Unlike algorithmic stablecoins that mint and burn to chase price, GHO relies on demand-side absorption to keep the peg. When demand for holding GHO isn’t strong enough to match the sell pressure from borrowers, price slips.

The interest rate mechanism is supposed to self-correct: if GHO trades below $1, Aave governance can raise borrowing rates to reduce minting incentives. This has been used, but rate adjustments through governance are slow, and crypto markets move fast.

What’s Actually Holding It Together

Integration with Aave’s Safety Module - where stkAAVE holders get discounted GHO borrowing rates - creates a base of demand from within the Aave ecosystem itself. It’s not nothing. GHO’s circulating supply has grown past $200 million at points, which suggests genuine usage rather than pure arbitrage churn.

But the honest read is that GHO’s stability currently depends more on active governance management than on a self-reinforcing mechanism. That’s not inherently disqualifying - USDC depends on Coinbase’s balance sheet - but it should shape how DeFi users think about GHO as collateral or a yield-bearing asset in other protocols. A stablecoin that needs regular rate adjustments to stay near $1 is a protocol parameter, not a peg.