Key Points
- Gordon Liao from Circle recommended increasing USDC lending rates on Aave v3 to resolve ongoing liquidity challenges.
- The proposal suggests raising Slope 2 to 40% initially, with potential adjustment to 50% during high-stress periods.
- Current rates hovering around 14% have proven insufficient to restore adequate liquidity in the USDC lending pool.
- The recommendation comes after the $292 million KelpDAO rsETH security breach sparked significant withdrawal activity on Aave.
- Blockchain data indicates Aave’s total value locked declined to approximately $15.3 billion following the exploit.
Circle’s chief economist has put forward a recommendation to substantially increase USDC lending rates on Aave after liquidity constraints emerged following the KelpDAO exploit worth $292 million. Gordon Liao submitted a governance proposal calling for adjusted lending parameters on Aave v3 Ethereum Core. His recommendation centers on higher rates as a mechanism to restore pool liquidity after four consecutive days of near-maximum utilization.
Liao’s Proposal Addresses Persistent USDC Pool Utilization
Gordon Liao published an Aave Request for Comment detailing recommended adjustments to USDC parameters on Ethereum Core. He noted the market has remained “essentially pinned at full utilization for four days.” His proposal calls for raising Slope 2 to 40% as an initial measure, with a potential 50% adjustment during periods of elevated stress.
The proposal also includes lowering optimal utilization thresholds to encourage additional deposits into the USDC pool. Liao stated that current rates around 14% have proven inadequate for market clearing. According to his analysis, repayments are immediately offset by pending withdrawal requests on a nearly one-to-one basis.
Liao emphasized that market-based pricing, rather than direct intervention, represents the most effective approach. He suggested borrowers may accept elevated rates while unwinding positions affected by liquidity constraints. His assessment indicates that supply rates in the 40% to 50% range could attract USDC liquidity “within hours.”
The liquidity challenges emerged after the KelpDAO rsETH exploit that resulted in $292 million in losses. The incident created ripple effects across Aave and additional DeFi protocols. Blockchain data reveals Aave’s total value locked currently stands at approximately $15.3 billion.
This represents a significant decline from levels exceeding $45 billion recorded before the security incident. Market observers documented substantial withdrawal activity and sustained utilization pressure across primary markets. The situation has generated concerns regarding potential bad debt accumulation on the protocol.
Governance Discussion Highlights Liquidation Concerns as Stolen Funds Transfer
Community participants expressed concerns about liquidation exposure under the suggested rate curve. One delegate-focused analysis calculated that approximately $70.1 million in significant debt positions could approach liquidation thresholds within 30 days. The analysis identified a single large wallet as the primary source of this exposure.
Some voices in the discussion argued that a more aggressive curve could increase financial burdens for borrowers operating with limited health factors. They suggested the adjustment might transfer pressure from lenders awaiting withdrawals to borrowers with constrained positions. Liao clarified that his submission reflected “personal views only, not representing those of Circle.”
Community members also raised questions about why Circle has avoided providing direct liquidity assistance. They questioned why governance-based incentives constitute the primary response mechanism for USDC’s major pool. Circle encountered scrutiny earlier this month regarding another decision involving restricted funds.
The company declined to freeze USDC connected to the Drift exploit. Circle justified that position based on legal and operational considerations. This background has added complexity to the ongoing governance discussion.
Meanwhile, blockchain analyst EmberCN tracked transaction patterns associated with the KelpDAO attacker. The analyst reported the attacker converted nearly all 75,700 ETH under their control into bitcoin. This amount represents approximately $175 million and primarily moved through THORChain.
EmberCN documented that this activity generated approximately $800 million in THORChain transaction volume. The swaps also produced roughly $910,000 in platform fees, based on the analyst’s data. These fund movements represent the most recent observable activity connected to the exploit.
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