Circle Economist Calls for Increased USDC Rates on Aave

TLDR

• Circle’s chief economist has put forward a proposal to raise USDC lending rates on Aave v3 to resolve ongoing liquidity pressure.
• Gordon Liao recommended increasing Slope 2 to 40% as a temporary intermediate measure, with a 50% target set for stress scenarios.
• He stated that the current rate of around 14% has not succeeded in restoring available liquidity to the USDC pool.
• The proposal was introduced after the $292 million KelpDAO rsETH exploit, which sparked large-scale withdrawals across the Aave platform.
• Onchain data indicates that Aave’s total value locked has declined to roughly $15.3 billion in the aftermath of the incident.

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(SeaPRwire) –   Circle’s chief economist has proposed substantial hikes to USDC rates on Aave following a liquidity crunch tied to the $292 million KelpDAO exploit. Gordon Liao submitted a governance post calling for more aggressive lending parameters on Aave v3 Ethereum Core. He argued that higher rates could bring back liquidity, as the pool has remained near full utilization for four consecutive days.

Circle and USDC Rate Proposal Targets Aave Pool Stress

Gordon Liao published an Aave Request for Comment that outlines adjustments to USDC parameters on Ethereum Core. He noted that the market stayed “effectively stuck at full utilization for four straight days.” He proposed lifting Slope 2 to 40% as an interim step and setting a 50% target during periods of stress.

He also suggested lowering optimal utilization levels to draw new deposits into the USDC pool. He wrote that the current rate of roughly 14% has failed to balance the market. Repayments, he explained, are absorbed almost dollar for dollar by pending withdrawal requests.

Liao argued that pricing, rather than direct intervention, provides the practical solution. He said borrowers are likely to tolerate higher rates as they unwind their locked positions. As such, he wrote that a supply rate between 40% and 50% should attract USDC liquidity “within hours.”

The liquidity pressure emerged after the KelpDAO rsETH exploit that drained $292 million in funds. The incident triggered stress across Aave and other DeFi platforms. Onchain data shows Aave’s total value locked currently sits at approximately $15.3 billion.

This figure is well below the pre-incident level of over $45 billion. Analysts have recorded sharp withdrawals and sustained utilization pressure across core markets. The stress has raised concerns over possible bad debt accumulation on the protocol.

Community Flags Liquidation Risk as KelpDAO Funds Move

Community members have responded with worries over liquidation risk under the proposed rate curve. One delegate-style analysis estimated that roughly $70.1 million in significant debt could move closer to liquidation over a 30-day window. The analysis noted that one large wallet accounts for the majority of this exposure.

Critics argued that a steeper curve may raise costs for borrowers with low health factors. They said the change could shift pressure from lenders waiting in withdrawal queues to trapped borrowers. Liao clarified that his post reflected “personal views only, and do not represent the stance of Circle.”

Some users also questioned why Circle has not provided direct liquidity support. They asked why governance incentives are being used as the main response for USDC’s flagship pool. Circle faced scrutiny earlier this month over a separate decision related to frozen funds.

The company chose not to freeze USDC linked to the Drift exploit. Circle defended that decision on legal and operational grounds. This context has added further tension to the ongoing governance debate.

Meanwhile, onchain analyst EmberCN tracked fund movements connected to the KelpDAO attacker. The analyst said the attacker swapped almost all of the 75,700 ETH under their control into bitcoin. That sum is worth roughly $175 million and was transferred mostly through THORChain.

EmberCN reported that this activity generated around $800 million in THORChain trading volume. The swaps also brought in roughly $910,000 in fees, per the analyst. These fund movements are the latest observable activity tied to the exploit.