Aave revealed that it will create its own stablecoin, GHO. The stablecoin is backed by collateral and pegged to the value of the U.S. dollar, however the collateral consists primarily of other cryptocurrencies, reports said Friday.

The governance proposal states, GHO would be backed by a varied set of crypto-assets chosen at the users' option, while borrowers continue to receive interest on their underlying collateral.

The announcement comes in the wake of growing scrutiny of stablecoins following the collapse of Terra's UST and Luna in May.

Shortly after the collapse, CFPB Director Rohit Chopra stated that stablecoins were not ready for consumer payments.

After the comment period, a DAO composed of all Aave token holders will vote on the proposal.

Senators Cynthia Lummis and Kirsten Gillibrand's cryptocurrency regulation bill would require all stablecoins to be backed by USD reserves. 

The EU's landmark MiCA regulatory framework, for which a draft accord was revealed last week, would also require stablecoins to be supported by sufficient liquid reserves.

In its current form, the GHO plan does not require liquid reserves, instead collateralizing the currency with a variety of crypto assets.

Initial collateral would come from the deposits of individual minters, and the DAO will establish interest rates.

This is unlike algorithmically backed stablecoins such as UST, which relied on the real-time burning and minting of companion coin luna to maintain its dollar peg. 

The GHO mechanism has received more scrutiny than those using liquid assets, such as USDC. For instance, the price of DAI, which implements a stabilizing mechanism quite similar to the GHO concept, fluctuated because of heavy demand following UST's collapse.

For the Aave protocol, GHO is not an exact clone of DAI. There are multiple pre-approved routes for entities - termed "facilitators" in the proposal - to automatically burn and generate GHO.

The DAO can also approve additional use cases that cause combustion or GHO production.

However, notwithstanding the peculiarities of GHO, internet responses to the news were noticeably skeptical. 

Thousands of retail investors suffered large losses as a result of the UST-luna crash, which continues to have repercussions throughout the crypto industry, including a liquidity issue at crypto lender Celsius.

However, Maker, the founder of DAI, and Aave are two of the few lenders Celsius has repaid to date, so they may have cause to be bold while the rest of the sector freezes.