Aave raises core GHO borrow rate as redemption reserves run thin

Key Takeaways:*

• Aave's GHO borrow rate has been raised to 5% on Ethereum, with the Prime market following suit at 3%.
• The move aims to end the 'free lunch' by aligning the borrow cost with the savings yield, and to address the reserve problem behind the rate hikes.
• The USDC GSM has been depleted, and the USDT GSM holds approximately 22.5M USDT.
• Higher borrow rates are expected to encourage repayment flows back into the stability modules.
• The reserve problem is a key issue, as GHO is an overcollateralized stablecoin, and Aave's control over the borrow rate gives it a unique leverage.

Market Impact:

• Borrowers will need to recheck their numbers, as the cost of holding a GHO loan on Ethereum Core has increased.
• sGHO holders will see the end of the 'borrow-to-stake' loop, which reduced artificial GHO supply.
• The empty USDC module is the number to watch, as higher rates may drive repayments and refill the module.

What's Next:

• Aave may need to continue pushing rates higher to address the reserve problem, within its per-update limits.
• The move is part of a pattern, with Aave having raised the Core borrow rate twice in the past few months.
• The long-term implications of this move will depend on the effectiveness of the strategy in addressing the reserve problem and encouraging repayment flows back into the stability modules.