Circle economist Gordon Liao wants Aave v3’s USDC borrow cap pushed toward 50% and optimal utilization cut, betting sky‑high yields will unclog a rsETH‑driven liquidity crunch.
Summary
- Circle Chief Economist Gordon Liao has proposed raising Aave v3’s top USDC borrow rate to as high as 50% and lowering the pool’s optimal utilization.
- The move aims to end a liquidity crunch that has left Aave’s USDC market near 100% utilization for days following the KelpDAO rsETH exploit.
- Some DeFi participants warn that dramatically higher rates could raise liquidation risks for leveraged borrowers even as they attract fresh USDC deposits.
Circle’s chief economist Gordon Liao has filed an Aave v3 governance proposal to sharply steepen the USDC interest-rate curve, pushing the “Slope 2” borrow rate ceiling into the 40–50% range in a bid to restore liquidity after days of near-total utilization. The proposal follows the KelpDAO rsETH incident, which helped drive Aave’s USDC pool to roughly 100% utilization with less than $3 million in free liquidity and capped borrow rates near 14%, leaving the market unable to clear via normal price mechanisms.
Liao wrote that “the rate is not clearing the market,” arguing that “a parameter recalibration is warranted,” and laid out a two-step plan that would move Slope 2 from about 10% today to a 40% interim level and ultimately a 50% target. Under his suggested parameters, the pool’s optimal utilization would fall from 92% to 87% in the first phase and to 85% in the second, while base and Slope 1 rates stay unchanged to avoid penalizing moderate borrowing.
Liquidity crunch after KelpDAO exploit
The urgency stems from the KelpDAO rsETH exploit, which saw attackers route roughly 116,500 rsETH into Aave and borrow more than $200 million in ether, triggering heavy withdrawals and pushing multiple stablecoin markets against their supply caps. TechFlow noted that USDC supply in the Aave v3 Ethereum Core pool shrank by around $60 million over 24 hours as utilization hovered at 100%, while the available liquidity fell below $3 million for several consecutive days.
In his forum post, Liao argued that “a meaningful share of borrowers are rate-insensitive,” using USDC loans primarily to bypass withdrawal queues and exit positions, which means only much higher yields will attract fresh deposits. He contends that lifting the maximum supply rate into the 40–50% band at full utilization — roughly 48% under the 50% Slope 2 setting — would make Aave’s USDC pool “an irresistible destination for new LP capital” and pull in inflows “within hours.”
Liquidation risk and DeFi spillovers
The proposal, which Aave founder Stani Kulechov has acknowledged as one of several options under review, comes as the protocol’s total value locked sits around $15.3 billion across networks, cementing its role as a key benchmark for DeFi funding rates. Aave’s USDC and USDT pools already inform CoinDesk’s Overnight Rates (CDOR), an institutional reference rate for on-chain lending launched in 2025, so any structural change to slope parameters could ripple beyond a single market.
Some community members and risk commentators have raised concerns that pushing borrow rates toward 50% may accelerate liquidations for leveraged users, particularly those using volatile collateral with thin liquidity after the rsETH shock. Liao’s camp counters that the primary lever in this situation is supply attraction rather than borrower deterrence, and that steepening Slope 2 is the cleanest way to re-open withdrawals, lower utilization, and allow rates to “re-anchor automatically” once the pool exits crisis conditions.
For additional context, see Phemex’s overview of the USDC liquidity crunch, this TechFlow breakdown of the proposed rate changes, and Weex’s post-mortem on how the KelpDAO incident pushed Aave into stress. Live Aave metrics and token pricing are available via major DeFi analytics dashboards.
