Aave hikes GHO borrow rate as stability reserves dwindle

Aave has increased the borrowing rate for its stablecoin, GHO, on Ethereum. According to The Defiant, the new core GHO borrow rate stands at 5%, up from previous levels. This adjustment comes as the Ethereum USDC conversion module, a key mechanism maintaining GHO's dollar peg, was nearly depleted.

The change follows a proposal by TokenLogic, one of the GHO Stewards, which recommended raising the borrow rate to align it with the Aave Savings Rate. The goal was to close a 25-basis-point gap that allowed users to borrow GHO cheaply and stake it for higher returns. The Prime market's base rate also saw an increase from 2.75% to 3.00%.

The move is part of a broader strategy to address the depletion of the GHO Stability Modules (GSMs). These modules allow users to swap stablecoins for GHO and vice versa, helping maintain the stablecoin's peg. With the USDC module nearly empty and the USDT module holding around 22.5M USDT, higher borrow rates aim to encourage repayments and refill the reserves.

This is the third rate adjustment in as many months, reflecting Aave's proactive approach to managing GHO's stability. For borrowers, the cost of holding GHO loans has risen, while sGHO holders may see reduced artificial supply driven by yield chasing. The effectiveness of the strategy will be measured by whether the GSMs begin to refill.