Circle Economist Proposes Aave Rate Hikes for USDC Pool

Gordon Liao, chief economist at Circle, the issuer of the USDC stablecoin, has proposed steep increases to borrowing rates on Aave's V3 Ethereum protocol to alleviate a severe liquidity crunch in the USDC pool. The suggestion, outlined in a governance forum post on April 22, comes in the wake of the April 18 KelpDAO exploit, which triggered widespread withdrawals and pushed the pool's utilization to nearly 100 percent for four days.

The KelpDAO incident involved attackers exploiting a vulnerability in the project's cross-chain bridge to generate unbacked rsETH tokens. They deposited the tokens as collateral on Aave V3 and borrowed between 200 million and 300 million in assets, including ether and stablecoins like USDC. Aave responded by freezing rsETH markets on its V3 and V4 versions to prevent further losses, but the move set off a chain reaction. Depositors rushed to withdraw funds, causing Aave's total value locked to fall to about 15.3 billion from higher pre-exploit levels. Core markets for ether, USDT, and USDC hit full utilization, trapping billions in user funds and forcing some to borrow against other stablecoins, such as GHO and DAI, to access liquidity.