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GUSD Borrow Rates Spike From Brief Hysteria


blockworks.co 16 November 2022 17:40, UTC
Reading time: ~3 m

Borrowing rates of Gemini’s stablecoin GUSD jumped to 73% on decentralized lending platform Aave on Wednesday morning after the centralized exchange announced that it would be halting the Gemini Earn program.

Gemini is among the many major crypto companies affected by the suspension of customer redemptions at digital currency broker Genesis, one of the latest crypto giants affected by SBF’s reckless behavior.

Speculators assumed that many were shorting the asset, betting on Gemini’s collapse and a GUSD depeg.

$GUSD borrowing rate on Aave is spiking. Probably because people are shorting it on a bet it will fail when Gemini fails.

This bet was triggered when Gemini Earn program halted, because Gemini partner Genesis is in trouble over FTX fall-out.

Hope Gemini & GUSD will stand.

— Sandpath 🆙 🐰🥚 (@sandpath0x) November 16, 2022

Increased interest rates reflect a sudden surge in demand for the stablecoin as the utilization of available GUSD supplied to the protocol approaches 100%. Unlike other assets, such as USDC, DAI and ETH, GUSD cannot be used as collateral, so depositors can only provide GUSD for the purpose of earning the prevailing interest rate.

Risk to MakerDAO and DAI

If GUSD were at risk, DeFi users wondered, what impact would this have on MakerDAO — one of the most prominent DeFi lending protocols and the issuer of stablecoin DAI?

Earlier this year, Gemini co-founder Tyler Winklevoss revealed that the company would be partnering with MakerDAO to offer 1.25% in staking rewards for any GUSD present in Maker’s Peg Stability Module (PSM) — a mechanism that ensures DAI keeps its peg to the dollar.

So, in the case that GUSD were to depeg — DAI’s collateral base would deteriorate.

But GUSD saw no unusual volatility today, according to data from CoinGecko, nor would it be expected to be at risk from the problems of Gemini Earn’s counterparty Genesis, as Marshall Beard, the chief strategy officer at Gemini, wrote in a MakerDAO forum.

“Gemini user funds outside of Gemini Earn are unaffected.”

Beard noted, “Gemini holds customer fiat currency in accounts that are segregated from our business, operating, and reserve bank accounts established specifically for the benefit of Gemini customers. We do not do anything with customer fiat funds unless explicitly authorized and directed to do so.”

Further, GUSD is a heavily regulated asset — Gemini Trust Company, LLC is regulated by the New York Department of Financial Services (NYDFS) — and Gemini’s latest custody reserve audits reveal that each token is backed 1:1 by US dollars held across multiple financial institutions including State Street Bank and Trust Company, Signature Bank, Silvergate Bank, and within money-market funds managed by Goldman Sachs Asset Management, just to name a few.

MakerDAO also clarified the situation in a tweet, noting, “all GUSD held in the PSM is always liquid and accessible by all DAI holders and MakerDAO, at all times.”

MakerDAO holds ~483 million GUSD in the PSM, a module fully controlled by MakerDAO and the Maker Protocol as a smart contract system publicly deployed on the Ethereum network.

1/ pic.twitter.com/016YjAD86F

— Maker (@MakerDAO) November 16, 2022

At the end of the day, it seems that skittish investors who shorted the asset just gave liquidity providers the opportunity to earn a freakishly high yield, if only for a while.

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