AAVE Crypto Drops as Community Looks to Create New Stablecoin Venture

  • The Aave (AAVE-USD) network is going to release a native algorithmic stablecoin.
  • The decision comes after a proposal on the matter was overwhelmingly approved by AAVE holders.
  • Developers will over-collateralize the stablecoin with a deep reserve of other assets.
AAVE crypto - AAVE Crypto Drops as Community Looks to Create New Stablecoin Venture

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Aave (AAVE-USD) has been in the news a lot recently, but not for anything pertaining to the network itself. However, that’s changing this week, as the community makes a big developmental decision. The project is preparing to embrace an algorithmic stablecoin. But with recent turmoil striking the world’s most prominent algorithmic stablecoin, investors wonder if it’s a good idea. As a result, the AAVE crypto is on the skids.

Most recent mentions of Aave have not been in reference to the DeFi platform’s growth and development. Rather, the project has taken an interesting role in the wake of the crypto crash that recently gripped the market.

Indeed, the DeFi platform’s recent relevancy stems from its use as a crypto lending network. Users and institutional investors alike can turn to Aave for a crypto loan. Typically, these loans are quite friendly to borrowers, allowing them to even pick whether they want a variable or stable interest rate on their loans. It’s this user-friendliness which has turned Aave into a favorite for investors and yield farmers; as the crypto bubble continued to inflate, borrowing crypto became an easy way to multiply profits by double or even more.

But when the crypto crash occurred, the project became one of the key players driving the bankruptcy of crypto hedge funds. Companies like Celsius (CEL-USD) failed to meet Aave market calls, plunging them into massive debts. Celsius ended up falling into bankruptcy as a result of its massive debts to Aave and other lenders.

AAVE Crypto Prices Tumble With Algorithmic Stablecoin Plan

Obviously, Aave has been a major point of interest for investors watching recent events unfold. The crypto crash has shown just how much power lenders yield, even if they seem very user friendly on paper. But this week, the project is making a different kind of wave. And while some users are looking to embrace an Aave-native stablecoin, others are skeptical. The AAVE crypto is seeing a downturn as a result.

After a voting period which began on July 28, AAVE holders have overwhelmingly voted in support of a proposal to add an algorithmic stablecoin to the Aave ecosytem. The stablecoin, called GHO, will be built on Ethereum (ETH-USD) and used to underlie DeFi tools on Aave.

Although the vote was hugely in favor of the change, many are criticizing the choice. The idea of creating an algorithmic stablecoin is highly unappealing to most crypto investors right now, especially after the Terra Classic (LUNC-USD) network’s collapse. The project — one of the world’s largest at the time — fell apart almost entirely after its own algorithmic stablecoin depegged from its $1 peg.

To counter this, the proposal calls for a reserve of assets which will keep the stablecoin pegged to $1. Even if the algorithm fails on its own, these reserves should preserve the peg. To be absolutely confident in this failsafe, the proposal calls to over-collateralize the coin with several different assets.

It’s a move that’s being viewed as risky; even with collateralization, there’s still chances of a stablecoin failing out. After all, Terra’s stablecoin was collateralized. Developers mishandled how they used the reserves, though, making things worse. Given Aave’s status as a flagship DeFi project, many in favor of the stablecoin have faith in the project doing things by the book. In the meantime, though, the AAVE crypto is seeing a slightly slump. Prices are down by 8%.

On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Brenden Rearick is a Financial News Writer for InvestorPlace’s Today’s Market team. He mainly covers digital assets and tech stocks, with a focus on crypto regulation and DeFi.

Article printed from InvestorPlace Media, https://investorplace.com/2022/08/aave-crypto-drops-as-community-looks-to-create-new-stablecoin-venture/.

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