On April 22, 2026, Gordon Liao, Chief Economist at Circle, filed a governance proposal (ARC) urging Aave to sharply increase USDC borrowing rates on its V3 Ethereum Core market. The proposal is a direct response to the April 18 KelpDAO rsETH bridge exploit, which drained $292 million from the protocol and triggered a severe liquidity crisis across Aave’s core markets. For four consecutive days, the USDC pool operated at 99.87% utilization, with available liquidity plummeting below $3 million.
The KelpDAO Exploit and Its Fallout
The attack exploited a vulnerability in KelpDAO’s cross-chain bridge, allowing hackers to deposit unbacked rsETH as collateral on Aave V3 and borrow an estimated $200–300 million in assets, including WETH and stablecoins. Aave froze rsETH markets on V3 and V4 to contain the damage, but the liquidity crisis had already spread. Aave’s total value locked (TVL) shed billions within days, with ETH, USDT, and USDC core markets hitting 100% utilization, effectively trapping depositor funds. Some users resorted to borrowing against GHO, DAI, and USDe to access liquidity indirectly.
According to Aavescan data from April 22, the USDC pool’s total supply and borrows each hovered near $1.89 billion, while available liquidity stood at less than $3 million. The variable borrow rate capped at approximately 13.82%, and the supply rate was around 12.42%. Liao identified the flat post-kink slope as the core problem: rate-insensitive borrowers treated the ~14% cost as a fee to bypass withdrawal queues rather than an incentive to exit, causing the market to fail to clear.
Two-Phase Rate Restructuring
Liao’s proposal is structured in two phases. The first phase, which can be executed immediately by Aave’s Risk Steward, would raise the Slope 2 parameter from 10% to 40% and reduce the optimal utilization rate from 92% to 87%. The second phase, subject to a standard five-to-seven-day governance vote, would push Slope 2 to 50% and optimal utilization to 85%. Under the target configuration at 100% utilization, USDC borrowers would face a maximum annual rate of approximately 53.5%, compared to the current ceiling of roughly 14%. Slope 1 remains at 3.5%, the base rate at 0%, and the reserve factor at 10%.
Liao argued that a steeply sloped kink curve would enable price discovery, deter indifferent borrowers, and attract new USDC supply within hours. He cited precedents in Treasury repo and fed funds markets where steep curves resolved short-term liquidity dislocations. Circle CEO Jeremy Allaire publicly shared the proposal on X, drawing attention to the governance discussion. Risk service providers Llamarisk and Aave Labs have been identified as key participants expected to weigh in.
Following the exploit, AAVE’s token price fell approximately 20–26% amid the outflow wave. Market observers interpreted the rate proposal as a stabilizing signal. The KelpDAO incident did not compromise Aave’s smart contracts directly; the vulnerability originated in KelpDAO’s bridge. However, it exposed how unbacked collateral entering through bridge exploits can create systemic bad debt. Estimates of unrecoverable losses across Aave markets range from $124 million to $230 million, depending on how losses are ultimately allocated. Aave has published an incident report outlining recovery paths, including potential absorption through slashing stkAAVE.
Liao noted his views are personal and not official Circle policy. The interim Risk Steward action could take effect on the same day if approved, while the full target configuration requires a governance vote. The proposal is currently open for community discussion.