Circle Proposes Aave Rate Overhaul to Fix USDC Liquidity Crisis

Circle’s Chief Economist Gordon Liao has proposed a major recalibration of Aave’s USD Coin (USDC) interest rate model. The proposal aims to restore Aave USDC liquidity on Ethereum after days of full utilization.

Circle CEO Jeremy Allaire endorsed the governance proposal on X, calling attention to Liao’s recommended parameter changes.

Why Aave USDC Liquidity Dried Up

USDC on Aave v3 Ethereum Core has been pinned at 99.87% utilization for four consecutive days. Available liquidity sits below $3 million, while total supply contracted by roughly $60 million in 24 hours.

The freeze traces back to the April 18 KelpDAO rsETH exploit, which triggered approximately $300 million in incremental borrowing.

Trapped suppliers began borrowing stablecoins against their own deposits to exit via decentralized exchanges.

These borrowers are structurally rate-insensitive, according to Liao’s analysis.

At 14%, one week of carry costs just 27 basis points. That makes the current rate ceiling insufficient to deter borrowing or attract new capital.

A Two-Step Rate Fix

Liao proposed a two-phase approach. The first step involves a same-day Risk Steward action to raise Slope 2 to 40% and lower optimal utilization to 87%. A full governance vote within five to seven days would then push the parameters to final targets.

At the proposed 50% Slope 2, the maximum supply rate would reach approximately 48%. Liao argued that level should pull capital from allocators across venues within hours, pushing utilization back below the kink.

Aave Working Toward Resolution

Meanwhile, Aave founder Stani Kulechov said the team is working around the clock on multiple paths forward. He noted the Arbitrum Security Council recovered $70 million in ETH, which could meaningfully reduce exposure.

“Every decision we are making is aimed at an orderly return to normal market conditions and the best possible outcome for everyone involved,” wrote Kulechov in a post.

The proposal now awaits input from LlamaRisk, Aave’s remaining risk service provider since Chaos Labs departed earlier this month.

Whether the interim parameters take effect depends on a Risk Steward multisig action.

Despite this news, AAVE token price is up by nearly 5% in the last 24 hours, and was trading for $95.21 as of this writing.