(P1) Circle's chief economist has proposed an emergency recalibration of Aave's interest rate model to resolve a four-day USDC liquidity freeze, suggesting a new maximum supply rate of approximately 48 percent.
(P2) "These borrowers are structurally rate-insensitive," Gordon Liao, Circle's Chief Economist, said in an Aave governance forum post. He argued the current 14 percent rate ceiling is insufficient to deter borrowing from trapped suppliers trying to exit their positions.
(P3) USDC utilization on Aave's v3 Ethereum market has been pinned at 99.87 percent for four days, with available liquidity under $3 million. The crisis was triggered by a ~$300 million borrowing wave following the April 18 KelpDAO exploit, which has since caused Aave's total deposits to fall by $16.2 billion, or roughly 35 percent.
(P4) The proposal aims to restore normal market function by making borrowing significantly more expensive, which should attract new capital within hours and push utilization below the 87 percent optimal target. The next step is a Risk Steward action, followed by a full governance vote within seven days to implement the final parameters.
Liao's proposal outlines a two-phase approach to quickly restore liquidity. The first step is an immediate action by Aave's Risk Steward to raise the secondary interest rate slope (Slope 2) to 40 percent and lower the optimal utilization target from 90 percent to 87 percent.
A full governance vote, expected within five to seven days, would then implement the final target of a 50 percent Slope 2. At that level, the maximum supply rate would reach approximately 48 percent, a level Liao argued should attract significant capital from other venues and push utilization back below the kink. Circle CEO Jeremy Allaire endorsed the proposal on X.
The episode highlights the interconnected risks within decentralized finance. The initial exploit on KelpDAO cascaded into a "broader liquidity crunch" on Aave, Tanay Ved, a senior research associate at Talos, told Cointelegraph. Blockchain data shows that rival lending protocol SparkLend saw its total value locked increase by $1.3 billion as funds exited Aave.
Aave founder Stani Kulechov said the team is working on multiple solutions, noting the Arbitrum Security Council recovered $70 million in ETH that could reduce exposure. Meanwhile, Aave's risk manager has outlined scenarios that could leave the protocol with bad debt ranging from $123 million to $230 million, depending on how losses from the exploit are socialized.
This article is for informational purposes only and does not constitute investment advice.
