Circle Pushes Aave USDC Rate Model Revamp as Ethereum Liquidity Hits Crunch

Circle Chief Economist Gordon Liao has put forward a sweeping update to Aave's USD Coin (USDC) interest-rate framework, seeking to revive USDC liquidity on Aave v3's Ethereum Core market after several days of near-total utilization. Circle CEO Jeremy Allaire amplified the governance proposal on X, highlighting Liao's suggested parameter changes. Aave v3 Ethereum Core's USDC market has held at 99.87% utilization for four straight days. Available liquidity is under $3 million, while total supply fell by about $60 million over the past 24 hours. Liao links the dislocation to the April 18 KelpDAO rsETH exploit, which drove roughly $300 million in additional borrowing. With liquidity constrained, some suppliers effectively borrowed stablecoins against their own deposits to unwind positions via decentralized exchanges. Liao describes these borrowers as structurally rate-insensitive. He argues the current rate ceiling is not high enough to curb demand or attract new supply: at a 14% rate, a week of carry costs is only 27 basis points. Liao proposes a two-step adjustment. First, a same-day Risk Steward action would raise Slope 2 to 40% and reduce optimal utilization to 87%. Second, a full governance vote within five to seven days would move parameters to their final settings. Under the proposed 50% Slope 2, the maximum supply rate would rise to about 48%, which Liao says could draw capital from allocators across venues within hours and push utilization back below the kink. Aave founder Stani Kulechov said the team is working around the clock on multiple solutions. He noted the Arbitrum Security Council recovered $70 million in ETH, which could materially 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," Kulechov wrote. The proposal is awaiting feedback from LlamaRisk, Aave's remaining risk service provider after Chaos Labs departed earlier this month. Whether interim parameters are enacted depends on a Risk Steward multisig action. AAVE gained nearly 5% over the past 24 hours and was trading at $95.21 at the time of writing.