David Angliss, an analyst with Australia’s leading cryptocurrency investment firm, Apollo Capital, shares the fund’s regular take on what’s happening in the fast-changing and volatile cryptocurrency space.

As Apollo Capital’s David Angliss puts it, stablecoins are the lifeblood of DeFi (decentralised finance). And now Aave (AAVE), one of the original DeFi protocols (and one of the most robust) is making a move into this important crypto niche with a collateralised, yield-generating stablecoin of its own, dubbed GHO.

According to Angliss, this could help propel the AAVE token to new heights given more favourable market conditions – whenever those happen to return for a hopefully more definitive stay. And it could help bring about a stronger and resurgent Ethereum DeFi ecosystem in the process.

(Sidenote: ‘Aave’, which was founded by programmer and entrepreneur Stani Kulechov, means ‘ghost’ in Finnish. Housed on the Ethereum blockchain, it was originally called ETHLend and the protocol lets users lend and borrow crypto without any of those pesky centralised intermediaries. According to data from DeFiLlama, Aave’s total value locked [TVL] is more than US$6.97 billion – comprised of various cryptocurrencies on supported networks.)

Meanwhile, as the analyst notes, another Ethereum-based DeFi “blue chip” – Curve (CRV) – could also follow suit sometime soon and enter what he refers to as the “stablecoin arms race”.

We’ll touch on why these developments matter below, but first a bit of a quick refresh on the different types of stablecoins and where GHO slots in…


Stablecoin types… which ones does Apollo favour?

To crypto outsiders, or to those with a tunnel-visioned vendetta against the asset class in general (howz it going, US Democratic Senator Elizabeth “Rabs” Warren?), stablecoins might be a bit of a dirty word. And that’d partly be thanks to the reputational damage caused by the UST/Terra LUNA implosion a few months ago.

But true crypto and DeFi believers, such as Apollo Capital, remain undeterred. As Angliss points out, Apollo is constantly transacting, swapping, distributing and harvesting stablecoins to earn yield for its market-neutral funds.

“Our yield farming covers many activities such as providing liquidity to automated market makers, bootstrapping protocols and decentralised lending,” he notes. 

At the moment, there are three stablecoin categories:

  • Fiat Backed (eg. USDT, USDC, BUSD)
  • Collateralised (eg. DAI, MIM, LUSD)
  • Algorithmic (eg. UST, AMPL, FRAX)
Image courtesy of Apollo Capital.


Fiat-backed stablecoins are backed 1:1 with a corresponding fiat currency, for example the US dollar, and are governed by centralised entities. These are overwhelmingly the largest used category of stablecoins. But as Angliss points out, centralised governance of these assets leads to regulatory risks, “which is less of a concern for decentralised stablecoins”. 

Apollo utilises USDT and USDC when engaging with DeFi protocols for yield farming and maintains a weighting of 45% – 75% holdings of stablecoins in fiat stablecoins. It does, however, practise particular caution about how much it uses Tether (USDT), given persistent concerns around the transparency about the assets backing USDT.

The firm also holds about 20% to 40% of its stablecoin position in decentralised, collateralised stablecoins, which are generated by crypto assets being locked up in an over-collateralised manner, normally above a liquidation ratio of 150%. 

This is a category pioneered by MakerDAO and its DAI stablecoin. Aave’s GHO and Curve’s stablecoin, if that one transpires, will be competitors in this sub-category.

As for algorthmic (algo) stablecoins, perhaps the less said about this category the better in this article. Innovative, sure, but definitely the riskiest grouping. (Right, Do Kwon?) Essentially, they’re designed to keep a peg (e.g. to the US dollar) by “algorithmic minting and burning of a volatile crypto asset and corresponding stablecoins,” explains Angliss.

Apollo Capital has lost faith in algorithmic stablecoins and, notes the analyst, “is in the process of eliminating the last <5% exposure as locked positions become liquid”.

This Messari.com chart explains the three stablecoin categories further.


So what’s the GHO value prop for Aave?

Now that GHO has been approved by the Aave DAO (decentralised autonomous organisation), Aave users will soon be able to mint the protocol’s native stablecoin against their supplied collaterals, which can be a diverse grouping of crypto assets chosen by the user.

And the beauty of this is, GHO holders will continue to earn interest on the supplied collateral, as per other lending transactions on Aave. Further to that, the interest payments on the stablecoin will be sent to Aave’s DAO, generating revenue for the community.

“We believe this recent update by Aave validates collateralised stablecoins’ use case and position in the DeFi ecosystem,” said Angliss, adding: 

“We’re confident stablecoins will eventually reach a trillion-dollar market value collectively as they continue to play an important role in the crypto ecosystem through providing decentralised insurance, prediction markets, savings accounts, decentralised exchange trading pairs, credit and debt markets, remittances, and more.

“While there are different approaches to creating a decentralised stablecoin, ultimately the market will decide which ones will emerge as the winners.

“If successful, though, Aave’s GHO could well significantly eat into the fiat-backed stablecoin market share.”

Incidentally, since the GHO proposal was approved a week ago, the AAVE token is up about 6% in value, and has been gaining strength for about a month, inclining more than 40% over the past 30 days, according to CoinGecko.


Can we expect Curve to enter the stablecoin race soon, too?

Angliss says a Curve decentralised stablecoin is also highly likely because the GHO development has created a pretty big wave through the DeFi community, which is beginning to wake up to new possibilities of strengthening the wider decentralised crypto ecosystem.

“It’s sort of created an arms race if you like for stablecoins. We expect to see a couple more similar DeFi protocols potentially coming out to to create their own stablecoin. So it’s created a bit of urgency for protocols to host their own native decentralised stablecoins.”

He also points out that Curve’s CEO, Michael Egorov, gave a pretty clear indication of the intention during a recent conversation with The Spartan Group co-founder Kelvin Koh. Curve’s stablecoin would apparently have an over-collateralisation mechanism – similar to GHO. 


Bonus yield-farming alpha 

Regarding stablecoins and the “de-pegging” risk from their 1:1 backing-asset value (of which UST has been the most dramatic recent example), Angliss has an interesting tip for mitigating this. That is, if you’re into crypto yield farming. 

“There are ways to hedge a stablecoin yield-farming position from a ‘de-pegging’ event,” he reveals…

“Utilising DeFi, a user can put up collateral on a borrowing and lending platform (such as Aave) to borrow a ‘riskier’ stablecoin instead of buying it.

“Through this method, the user can engage in yield farming with the borrowed coins and not worry about the ‘depeg’ of that stablecoin. To repay the loan, all that is required are the units borrowed, not the loan’s value when it was initiated.”

Now that… is some next-level crypto knowledge right there.


None of the views expressed in this article represent financial advice. At the time of writing, Apollo Capital holds positions in Aave, Curve and other DeFi/crypto products.