TL;DR:
- The utilization of the USDC pool in Aave V3 Ethereum reached a critical 99.87%, leaving barely 3 million dollars in available liquidity currently.
- Gordon Liao, an economist at Circle, seeks to raise the maximum interest rate from 12.6% to 48.2% to incentivize massive deposits immediately.
- The proposal arises following the KelpDAO exploit on April 18, which caused an operational freeze affecting 1.89 billion dollars in supply.
The stablecoin issuer, Circle, presented an urgent governance proposal to restructure the interest rate parameters in the Aave V3 USDC pool. This measure responds to a liquidity paralysis that has kept market utilization at an alarming 99.87% for the past four consecutive days.
Circle proposes rate changes to break the financial stalemate caused by the KelpDAO exploit occurred on April 18. Circle’s chief economist, Gordon Liao, stated that Aave’s current mechanism fails to balance supply and demand, keeping lending rates stuck at a 14% ceiling.
Currently, the pool manages approximately $1.89 billion in both supply and loans, leaving virtually no operating margin. Technical data reveals that in the last 24 hours, the pool has contracted by $60 million, as repayments are immediately absorbed by queued withdrawals.
Liao’s strategy consists of drastically raising the “Slope 2” parameter for USDC deposits, moving from the current 10% to an immediate 40% through a “Risk Steward” action. Subsequently, governance ratification would be sought to reach a goal of 50% annual yield within five to seven days.
Technical readjustment to restore liquidity in DeFi
Under this new scheme, the optimal utilization of the pool would be reduced from 92% to 85% following official ratification. The aim is for the maximum supply rate—should 100% utilization be reached—to scale from a modest 12.6% to a striking 48.2% annual interest.
The logic behind this aggressive move is to attract external capital through extremely high yields. Liao argues that current borrowers are “rate-insensitive” and are using the pool as an exit mechanism for trapped positions, necessitating a supply shock.
In addition to the interest changes, the proposal suggests pausing Aave’s “Slope 2 Risk Oracle” for the USDC asset. Circle cites poor performance of this oracle during previous volatility spikes and the recent disengagement of Chaos Labs as system maintainer on April 6.
It must be understood that this intervention is unusual in the DeFi ecosystem, as it represents an institutional asset issuer directly intervening in the governance of a decentralized protocol. Circle maintains that the market for its asset is technically “broken” and requires shock measures to avoid a major collapse.
Yields in the 40% to 50% range are expected to attract fresh capital from large allocators within a few hours. This incoming liquidity would allow the utilization rate to normalize and enable users with locked funds to make withdrawals without current restrictions.
Circle seeks to use aggressive economic incentives to force the unlocking of nearly 2 billion dollars in USDC within Aave. If approved, this measure will set a precedent for how stablecoin issuers manage liquidity crises in secondary lending markets.
