Gordon Liao, chief economist at Circle, has submitted an Aave v3 governance proposal that would sharply steepen the USDC interest-rate curve, pushing the Slope 2 borrow rate ceiling into the 40-50% range. The move aims to restore liquidity after the USDC pool ran near 100% utilization for several days, with available free liquidity dropping below $3 million.
KelpDAO rsETH exploit sparked the crunch
The liquidity crisis traces back to the KelpDAO rsETH incident. Attackers routed roughly 116,500 rsETH into Aave and borrowed over $200 million in ether, triggering heavy withdrawals. USDC supply in the Aave v3 Ethereum Core pool shrank by about $60 million in 24 hours, and utilization hovered at 100%. With the borrow rate capped near 14%, the market could not clear through normal price signals.
Liao argued in his forum post that “the rate is not clearing the market” and that “a meaningful share of borrowers are rate-insensitive” — they borrow USDC mainly to bypass withdrawal queues and exit positions. His proposal unfolds in two phases: first raise Slope 2 from roughly 10% to 40%, then to 50%; lower optimal utilization from 92% to 87% and then to 85%. Base rate and Slope 1 remain unchanged to avoid penalizing moderate borrowers.
Rate curve redesign: from 10% to 50%
Under full utilization, the supply rate would approach 48% (with the 50% Slope 2 setting), making Aave’s USDC pool “an irresistible destination for new LP capital,” according to Liao, who expects inflows “within hours.” Once deposits return and utilization drops, rates would “re-anchor automatically” as the pool exits crisis conditions.
Aave founder Stani Kulechov acknowledged the proposal as one of several options under review. The protocol’s total value locked stands at about $15.3 billion, and its USDC and USDT pools already feed into CoinDesk’s Overnight Rates (CDOR), an institutional on-chain lending benchmark. Any structural change to slope parameters could thus ripple beyond a single market.
Liquidation risk and DeFi spillovers
Some DeFi participants warn that pushing borrow rates toward 50% may accelerate liquidations for leveraged users, especially those with volatile collateral and thin liquidity after the rsETH shock. Liao’s camp counters that the primary lever is supply attraction, not borrower deterrence, and that steepening Slope 2 is the cleanest way to reopen withdrawals and lower utilization. Once the pool normalizes, rates can re-anchor automatically.
The proposal has no set voting deadline, but Aave’s community is already debating it hotly. If passed, it would mark one of the most aggressive interest-rate parameter shifts in Aave’s history, testing whether DeFi protocols can resolve extreme liquidity events through radical parameter adjustments.