Circle economist urges 50% USDC rate on Aave V3

On April 22, Gordon Liao, Circle’s chief economist, filed an Aave Request for Comment proposing a steep increase in USDC borrow rates on the Aave V3 Ethereum Core market to restore liquidity. The filing asks Aave’s Risk Steward to immediately raise Slope 2 from 10% to 40% and lower the optimal utilization point from 92% to 87%. A follow-up governance vote would set Slope 2 at 50% and the optimal utilization at 85%. The proposal keeps Slope 1 at 3.5%, the base rate at 0% and the reserve factor at 10%. An approved interim Risk Steward action could take effect the same day, while the full configuration requires a standard five- to seven-day governance vote.

The proposal links the change to an April 18 exploit of KelpDAO’s cross-chain bridge that allowed attackers to mint unbacked rsETH, deposit it as collateral on Aave V3 and withdraw an estimated $200 million to $300 million in assets. The exploit has been described as a $292 million attack. Aave froze rsETH markets on V3 and V4 to limit further exposure. The incident triggered large outflows from Aave’s core markets and a decline in total value locked; estimates show the protocol lost as much as $15.1 billion in TVL within days. Some users borrowed other stablecoins such as GHO, DAI and USDe to access liquidity indirectly.

Aave data cited in the filing showed USDC total supply and borrows each near $1.89 billion on April 22, with available liquidity under $3 million. The pool sat at about 99.87% utilization for four consecutive days. Variable borrow rates were capped near 13.82% and supply rates were around 12.42%. Under Liao’s proposed target configuration, borrowers at full utilization would face a maximum variable rate of roughly 53.5%, compared with the current ceiling near 14%.

The proposal states the current, relatively flat post-kink Slope 2 allows some borrowers who are insensitive to rates to treat the fee as a cost to bypass withdrawal queues rather than an incentive to reduce positions. Liao pointed to short-term cash markets such as repurchase agreements and federal funds as examples where steeper rate curves help resolve temporary funding shortages. He noted his views are personal and not official Circle policy.

Aave has published an rsETH incident report outlining possible recovery paths. Estimates of unrecoverable losses tied to the exploit range from about $124 million to $230 million depending on how losses are allocated. Governance discussions have included potential mechanisms to absorb bad debt, including options that could affect staked AAVE (stkAAVE). Risk service providers Llamarisk and Aave Labs are expected to participate in the deliberations. Circle CEO Jeremy Allaire shared the proposal publicly on X. The AAVE token price fell roughly 20% to 26% in the days after the exploit as liquidity drained from the protocol.

If the Risk Steward implements the interim parameter change, the new slope and utilization target could take effect immediately; the proposed full-rate configuration would follow a standard governance vote lasting several days.