Circle economist proposes higher USDC rates on Aave

TLDR

• Circle’s chief economist proposed raising USDC lending rates on Aave v3 to address persistent liquidity pressure.
• Gordon Liao suggested increasing Slope 2 to 40% as an interim step, with a 50% target under stress conditions.
• He argued that the current roughly 14% rate has failed to restore usable liquidity in the USDC pool.
• The proposal followed the $292 million KelpDAO rsETH exploit, which triggered heavy withdrawals across Aave.
• Onchain data show Aave’s total value locked has dropped to about $15.3 billion after the incident.

Circle’s chief economist has proposed sharply higher USDC rates on Aave following a liquidity squeeze linked to KelpDAO’s $292 million exploit. Gordon Liao submitted a governance post seeking steeper lending parameters on Aave v3 Ethereum Core. He argued that higher rates could restore liquidity as the pool stayed near full utilization for four days.

Circle and USDC Rate Proposal Targets Aave Pool Stress

Gordon Liao posted an Aave Request for Comment outlining changes to USDC parameters on Ethereum Core. He said the market remained “essentially pinned at full utilization for four days.” He proposed raising Slope 2 to 40% as an interim step and targeting 50% under stress.

He also proposed lowering optimal utilization to attract fresh deposits into the USDC pool. He wrote that the current roughly 14% rate has failed to clear the market. Repayments, he said, get absorbed almost dollar-for-dollar by queued withdrawals.

Liao argued that price, rather than intervention, offers the workable lever. He said borrowers may tolerate higher rates while they unwind blocked positions. Therefore, he wrote that a supply rate near 40% to 50% should pull USDC liquidity “within hours.”

The liquidity pressure followed the KelpDAO rsETH exploit that drained $292 million. The incident triggered stress across Aave and other DeFi platforms. Onchain data show Aave’s total value locked at about $15.3 billion.

That figure stands below levels above $45 billion before the incident. Analysts tracked steep withdrawals and persistent utilization pressure across core markets. The stress raised concerns about potential bad debt on the protocol.

Community Flags Liquidation Risk as KelpDAO Funds Move

Community members responded with concerns about liquidation risk under the proposed curve. One delegate-style analysis estimated about $70.1 million of material debt could move closer to liquidation over 30 days. The analysis said one large wallet accounts for most of that exposure.

Critics argued that a steeper curve may increase costs for borrowers with thin health factors. They said the change could shift pressure from lenders in withdrawal queues to trapped borrowers. Liao stated that his post reflected “personal views only, not representing those of Circle.”

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

The company chose not to freeze USDC tied to the Drift exploit. Circle defended that decision on legal and operational grounds. That context added tension to the current governance debate.

Meanwhile, onchain analyst EmberCN tracked movements linked to the KelpDAO attacker. The analyst said the attacker swapped nearly all 75,700 ETH under control into bitcoin. That amount equals about $175 million and moved mainly through THORChain.

EmberCN reported that the activity generated about $800 million in THORChain volume. The swaps also produced roughly $910,000 in fees, according to the analyst. The fund movements mark the latest observable activity tied to the exploit.

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