Headline: Circle economist urges Aave v3 to jack USDC borrow rates to 40–50% to fix rsETH liquidity shock
Circle’s chief economist Gordon Liao has put forward a governance proposal for Aave v3 that would dramatically steepen the USDC interest-rate curve — pushing the so‑called “Slope 2” borrow-rate ceiling into the 40–50% range — in an effort to draw fresh liquidity after a recent rsETH-driven crunch left the pool nearly empty.
Why this matters
- The proposal is a direct response to the KelpDAO rsETH incident, in which attackers routed roughly 116,500 rsETH into Aave and borrowed more than $200 million in ether. That episode sparked heavy withdrawals and drove several stablecoin markets to their supply caps.
- Aave’s USDC in the v3 Ethereum Core pool hit roughly 100% utilization, free liquidity dipped below $3 million for days, and total USDC supply fell by about $60 million in 24 hours. With capped borrow rates near 14%, Liao argues the existing curve “is not clearing the market.”
What Liao proposes
- A two-step recalibration of Slope 2: from roughly 10% today to an interim ~40%, then to a 50% target.
- Reduce the pool’s optimal utilization band: from 92% to 87% in phase one and to 85% in phase two.
- Keep the base rate and Slope 1 unchanged to avoid penalizing moderate borrowers.
- Under the 50% Slope 2 setting, the maximum supply rate at full utilization would be roughly 48% — a yield Liao says would rapidly attract new LP capital and reopen withdrawals “within hours.”
Mechanics in plain language
- Slope 2 governs how aggressively borrow rates rise once utilization passes the pool’s optimal threshold. Steepening it makes borrowing much more expensive at very high utilization, which in turn raises the supply APR paid to lenders at those utilization levels — the intended lure for capital to re-enter the pool.
- Liao contends a “meaningful share of borrowers are rate-insensitive,” using USDC loans to escape withdrawal queues. That means only very high yields will entice new deposits fast enough to relieve the crisis.
Community reaction and risks
- Aave founder Stani Kulechov has acknowledged Liao’s proposal as one option under review. Aave’s total value locked remains substantial — roughly $15.3 billion across networks — and its USDC/USDT markets feed institutional reference rates (CoinDesk Overnight Rates), so parameter changes could have broader DeFi implications.
- Critics warn that near-50% borrow caps could accelerate liquidations for highly leveraged users, especially those holding volatile or thinly traded collateral in the wake of the rsETH shock.
- Supporters counter that the priority is supply attraction: steepening Slope 2 is seen as the fastest, cleanest way to lower utilization, reopen withdrawals, and let rates “re-anchor” as stress eases.
Further reading
For more background, see Phemex’s overview of the USDC liquidity crunch, TechFlow’s breakdown of the proposed rate changes, and Weex’s post‑mortem on the KelpDAO incident. Live pool metrics and token prices can be checked on major DeFi analytics dashboards.
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