Circle Economist Proposes 50% Cap on Aave USDC Loans

Circle chief economist Gordon Liao proposed raising Aave’s maximum borrowing rate for USDC to 50% to prompt borrowers to repay and help restore liquidity after a protocol-wide squeeze tied to a recent Kelp DAO exploit.

Under Liao’s proposal, the current 14% cap on USDC borrowing would be quadrupled and the protocol’s optimal utilization rate for USDC would be lowered from 92% to 85%. Liao said the higher cap would encourage borrowers to close positions, free up assets for depositors and attract fresh capital. He described the suggestion as his personal view; Circle co-founder Jeremy Allaire amplified the idea on X.

The liquidity stress began after attackers exploited a cross-chain bridge used to move rsETH issued by Kelp DAO. About 116,000 rsETH were taken and then used to borrow assets on Aave, leaving some users unable to withdraw Ethereum and driving Aave’s USDC utilization toward 100%, a level that indicates lenders had little usable cash on hand.

On-chain activity showed the utilization spike persisted through the weekend and users pulled roughly $12 billion from the protocol over several days. Aave’s protocol still held about $15.47 billion in total assets as of Thursday.

Some participants in Aave governance cautioned that a sharp rise in borrowing costs could force liquidations for already stressed positions, potentially deepening losses for vulnerable users. Earlier this week, the security council overseeing Arbitrum froze 30,766 ETH, roughly $71 million, after attackers moved funds to that layer-2 network; the freeze reduced the haircut Aave users might face if losses are socialized.

Other decentralized finance projects proposed support measures. Liquid staking protocol Lido received a governance proposal to contribute up to 2,500 stETH to a relief vehicle for affected Aave users. Lido wrote on X that the proposal is “designed to reduce broader ecosystem spillover and support an orderly resolution for affected users.”

The exploited bridge used LayerZero infrastructure. LayerZero blamed Kelp DAO for relying on a single point of failure in its design, while Kelp DAO said only LayerZero systems were impacted. Investigations have linked the attack to the Lazarus Group, an organization tied to North Korea.

Aave’s interest-rate model raises borrowing costs as utilization climbs. Liao’s plan would lower the utilization threshold that triggers steep rate increases and raise the top rate to levels intended to push borrowers to repay or close positions. Supporters argue that would free liquidity for lenders; critics warn it could cause additional liquidations.

Aave governance discussions remain active as the protocol’s operators and other ecosystem participants weigh technical, financial and reputational trade-offs while working to restore normal withdrawal conditions for affected users.