Circle's Chief Economist Backs Raising Aave's USDC Borrow Cap to 50% to Unclog Liquidity
Circle Chief Economist and Head of Research Gordon Liao has urged an emergency change to Aave's USDC interest-rate parameters, arguing that a sharp increase in borrowing costs is needed to unwind a liquidity squeeze that has left users unable to withdraw funds for roughly five days, CoinDesk reported.
Liao said Circle's stablecoin inflows were intended to cushion the fallout from Kelp DAO's recent $291 million exploit. His proposal would lift Aave's maximum USDC borrow rate as high as 50% — roughly four times current settings — to encourage borrowers to repay and to attract fresh capital, improving the odds that depositors can access liquidity.
He pointed to the current cap of about 14% as a key reason borrowers have been slow to deleverage, keeping funding costs low and making it rational to maintain positions rather than repay. Since Sunday, USDC utilization on Aave has hovered near 100%, a sign that available lender liquidity has effectively been exhausted.
The proposal also calls for lowering USDC's "optimal" utilization rate on Aave to 85% from 92%, a move intended to create a more durable cash buffer for withdrawals.
Liao said the submission reflects his personal view. Circle co-founder and CEO Jeremy Allaire later discussed the idea in a post on X on Thursday.
The liquidity crunch has contributed to broader stress across decentralized finance, with alerts prompting users to pull about $12 billion in digital assets from some of the sector's most established protocols over a matter of days. As of Thursday, Aave's total assets were about $15.47 billion.
The episode traces back to the Kelp DAO exploit, in which an attacker stole about $292 million in crypto and then used the proceeds to borrow on Aave, pressuring liquidity. While higher rates could ease the imbalance, some Aave governance participants oppose the move, warning that steep carrying costs could force liquidations.
Earlier this week, the council overseeing an arbitration tribunal effectively blocked the attacker's transfer of 30,766 ETH, worth about $71 million, to a layer-2 network, limiting potential losses Aave users might have faced if losses tied to the Kelp DAO bug had been socialized.
Other DeFi projects may also step in. Lido, the liquid staking protocol, received a proposal on Thursday to make a one-time donation of up to 2,500 stETH to a dedicated relief fund. "The scheme aims to minimize the impact on the broader ecosystem and support an orderly resolution for affected users," Lido said in an X post.
The attack began Saturday, when hackers drained 116,000 rsETH from a cross-chain bridge used to move tokens backed by staked Ether between networks. rsETH is issued by Kelp DAO as a tradable receipt for depositors in DeFi protocols. The bridge was built on infrastructure from interoperability protocol LayerZero, sparking accusations that Kelp DAO relied on a single point of failure. Kelp DAO blamed LayerZero in return.
The breach was reported to have affected only LayerZero's system and was later linked to North Korea's Lazarus Group.
