Circle has proposed an emergency revision to the interest parameters on Aave V3 Ethereum Core’s $USDC pool, which has been set at 99.87% occupancy for four days in the wake of the April 18 KelpDAO exploit.
In a board post published on Tuesday, Circle Chief Economist Gordon Liao argued that Aave’s current interest rate mechanism is failing to clear the market. The pool has $1.89 billion in supply versus $1.89 billion in loans, with less than $3 million in available liquidity. Lending rates are steady at the post-kink cap of roughly 14%, and the pool has shrunk about $60 million in the last 24 hours as repayments are offset dollar for dollar by queued withdrawals.
Liao’s proposal would increase the pool’s Slope 2 parameter $USDC deposit an interest rate from approximately 10% to 40% immediately, via a Risk Steward promotion. That would be followed by the board’s ratification of a 50% target within five to seven days.
Optimal use would drop from 92% to 87% on an interim basis and to 85% after ratification. Under the intended parameters, the maximum supply at 100% occupancy would increase from roughly 12.6% to 48.2%.
Liao’s diagnosis is that current borrowers are using $USDC borrowing as a mechanism to bypass queues to exit trapped positions and are insensitive to interest rates at current levels. The active lever, he argued, is to attract supply: returns between 40 and 50% should pick up $USDC of allocators within hours, restoring healthy usage.
The proposal also recommends pausing Aave’s Slope 2 Risk Oracle $USDCciting the documented underperformance during a WETH spike in February and the April 6 offboarding of the operator, Chaos Labs.
Circle’s intervention is unusual: the stablecoin issuer formally tells Aave that the market for its assets is broken.