Circle enters Aave governance as USDC utilization nears 100%

Aave’s Ethereum platform has been frozen for almost 4 straight days, so Circle’s chief economist, Gordon Liao, proposed an emergency fix in the platform’s governance forum.

Circle rarely speaks directly in third-party governance debates. However, Liao’s post, which he says represents his personal views, and Circle CEO Jeremy Allaire’s endorsement of the proposal on X make it a big deal.

Liao argued that Aave’s current interest rate model failed to respond adequately to the demand shock. Borrow rates capped near 14% were too low to deter borrowing or attract new supply, allowing the imbalance to persist.

How did $1.86 billion get stuck in the first place?

On April 18, 2026, a hacker used fake rsETH tokens to exploit a flaw in KelpDAO‘s bridge and borrow about $292 million in real assets.

When news of the hack spread, whales rushed to withdraw their funds, and more than $6 billion left Aave within 24 hours. As reported by Cryptopolitan, this was the biggest withdrawal event Aave had ever hosted, and the protocol’s value dropped from $25 billion to around $17.5 billion in a single day.

Investors who reacted quickly got their money, while others watched as their funds froze on the platform. As analyst @duonine put it on X:

“I don’t think people realize how bad things are at Aave right now. All core markets are at 100% utilization, which includes $3 billion in USDT and $2 billion in USDC stuck. That means you CANNOT WITHDRAW your money.”

Things got worse when users whose funds were frozen borrowed other coins against their locked deposits and sold those instead. These holders were more than willing to take losses of 10% to 25% just to get back dollar liquidity.

What this panic reaction did was increase utilization because the loans added another $300 million in borrowing to the pool within 72 hours.

Why hasn’t the interest rate fixed this on its own?

Aave’s current borrowing rate of 14% for USDC isn’t enough to attract new deposits or convince borrowers to repay. According to Aavescan data, the 14% rate limit has lasted four days straight. Supply and debt have also dropped by about $60 million per day, but that’s mostly just existing borrowers repaying and investors withdrawing the same amount once it hits the reserves.

Most of the borrowers stuck in the pool are depositors who took loans against their frozen funds. So, a user who’s willing to accept a 25% loss to exit won’t be fazed by a 14% annual rate, since it’s still way less than the losses they’re already absorbing from the hack.

Another reason the interest rates failed to fix the issue is that the automatic rate system, Slope 2 Risk Oracle, built by Chaos Labs, malfunctioned. The reason was that Chaos Labs exited Aave on April 6, 2026, due to misunderstandings, so the tool had no one left to maintain it.

What Circle’s economist is proposing

Gordon Liao suggests Aave raise the maximum interest rate a USDC lender can earn on Aave from about 12.6% to 48%. According to Liao, lenders in lower-yielding places will move their USDC into Aave within hours just to earn those high returns.

Aave’s current risk management firm, LlamaRisk, and Aave Labs can first use a shared control account to attract capital within hours, then hold a community vote in 5 – 7 days to ratify a slightly higher final target.

Liao also proposes that Aave pause the automatic rate-adjustment tool for USDC. This is because the original support team is missing, which poses more risk than a static setting controlled by LlamaRisk.

What Aave’s founder said and what the community thinks

Aave founder Stani Kulechov posted on X, saying the team is working around the clock on multiple paths forward. He also updated everyone about how the Arbitrum Security Council recovered $70 million in ETH during the rsETH situation, which could reduce the unpaid debt.

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

Some users welcomed the proposal, while others pushed back hard. One account, @SiloIntern, called it “the ultimate dupe,” while another, @amorfatiace, suggested Circle should just “supply 1B in USDC and let the market sort itself out 3–6 months.”

Some even said Liao’s proposal to raise rates only hurts the users who can’t withdraw their funds and have to pay interest on emergency loans they took to access their own money.

Liao countered, saying these people have no choice because their money will remain locked indefinitely. According to him, it’s either they hit the victims with high rates for a short period, or keep them locked out indefinitely at low rates.

It’s now up to LlamaRisk and Aave Labs to decide whether to act on the proposal or wait to come up with something better, which means users will remain locked out of their funds.

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