Circle chief economist floats higher USDC rates on Aave amid KelpDAO fallout

A Circle executive is pushing a sharp USDC rate increase on Aave as the lending protocol struggles with a liquidity squeeze following the $292 million KelpDAO rsETH exploit.

Gordon Liao, Circle’s chief economist, posted an Aave Request for Comment proposing a recalibration of USDC lending parameters on Aave v3 Ethereum Core after the market was “essentially pinned at full utilization for four days.”

He proposed raising “Slope 2” to 40% as an interim step, with a 50% target, and lowering optimal utilization to help attract new deposits and bring the pool back below its stress point.

Possible fix for Aave’s liquidity bottleneck

Liao’s argument is simple: the current rate is too low to clear the market.

At roughly 14%, he wrote, the pool has continued shrinking because repayments are being absorbed almost dollar-for-dollar by queued withdrawals rather than restoring usable liquidity.

The stress traces back to the KelpDAO crisis.

This week, The Block reported that the $292 million exploit sparked a wider debate over DeFi security after the rsETH incident triggered cascading effects across Aave and other platforms. The fallout left Ethereum and DeFi’s largest lending protocol grappling with potential bad-debt concerns.

Since then, onchain analysts have tracked steep withdrawals and persistent utilization pressure across core markets. The Block’s data now show Aave’s TVL at roughly $15.3 billion, down sharply from levels above $45 billion before the incident.

Liao’s proposal tries to use price, not intervention, to solve the problem.

In his view, if borrowers are temporarily insensitive to higher rates because they are simply trying to escape blocked positions, the only workable lever is to make Aave’s USDC pool so attractive that outside capital rushes in.

He argued a supply rate approaching 40% to 50% under stress should pull in USDC “within hours.”

Counterargument

Not everyone is convinced.

Community feedback on the forum quickly turned to liquidation risk.

One delegate-style analysis shared in response to the proposal found that, under stressed utilization, the target curve could push about $70.1 million of material debt closer to liquidation over 30 days, with one large wallet accounting for most of the exposure.

This view forms the core objection.

A steeper rate curve may attract liquidity, but it also raises borrowing costs for users already trapped in the system.

Critics say that could shift pain from lenders stuck in a withdrawal queue to borrowers operating with thin health-factor cushions.

The proposal has also stirred a second complaint: why Circle, as USDC’s issuer, is trying to fix its flagship stablecoin’s pool through governance incentives rather than direct liquidity support.

Notably, Liao was careful to add that the post reflected “personal views only, not representing those of Circle.”

However, that criticism has sharper edges because Circle was already scrutinized this month after choosing not to freeze USDC tied to the Drift exploit, a decision the company defended at the time on legal and operational grounds.

KelpDAO funds on the move

The wider KelpDAO story is still moving too.

Onchain analyst EmberCN said the attacker has now swapped nearly all 75,700 ETH still under its control — about $175 million worth — into bitcoin over roughly a day and a half, primarily through THORChain.

The same activity generated roughly $800 million in THORChain volume and about $910,000 in fees, according to the analyst.