Circle Economist Proposes Higher USDC Rates on Aave V3 After KelpDAO Exploit

Key Takeaways:

• Circle’s Chief Economist Gordon Liao proposed raising USDC’s Aave V3 Slope 2 rate to 50% to restore liquidity after a KelpDAO exploit.
• A $292 million KelpDAO rsETH bridge attack on April 18 drained Aave of up to $15.1 billion in TVL within days.
• Aave’s USDC pool sat at 99.87% utilization for four days, with under $3 million in available liquidity as of April 22.

Circle Chief Economist Proposes Higher USDC Rates on Aave V3 to Restore Liquidity After KelpDAO Exploit

The proposal, filed as an Aave Request for Comment, asks Aave’s Risk Steward to immediately raise Slope 2 from 10% to 40% and lower optimal utilization from 92% to 87%. A follow-on governance vote would push Slope 2 to 50% and optimal utilization to 85%. At 100% utilization under the target configuration, USDC borrowers would face a maximum rate of approximately 53.5%, compared to the current ceiling of roughly 14%.

Liao, who noted his views are personal and not official Circle policy, tied the proposal directly to the April 18 KelpDAO rsETH exploit. Attackers exploited a vulnerability in KelpDAO’s bridge to siphon unbacked rsETH, deposit it as collateral on Aave V3, and borrow an estimated $200 million to $300 million in assets, including WETH and stablecoins. Aave froze rsETH markets on V3 and V4 to limit further damage, but not before triggering what became a widespread liquidity crisis.

The fallout was severe. Aave’s total value locked (TVL) shed billions in a matter of days. Core markets, including ETH, USDT, and USDC hit 100% utilization, effectively trapping depositor funds. Some users resorted to borrowing against stablecoins like GHO, DAI, and USDe to access liquidity indirectly.

The USDC pool became a focal point. According to Aavescan data from April 22, total supply and borrows each sat near $1.89 billion, with available liquidity below $3 million. The pool had been pinned at approximately 99.87% utilization for four days, with variable borrow rates capped near 13.82% and supply rates around 12.42%.

Liao’s proposal frames the flat post-kink rate as the core problem. Because the current Slope 2 is low, rate-insensitive borrowers treated the roughly 14% cost as a fee to bypass queues rather than a signal to exit. The result was a market that failed to clear even as depositors attempted to withdraw.

Raising the kink-slope steeply, Liao argued, would enable price discovery, deter borrowers indifferent to rate levels, and attract new USDC supply within hours. He cited Treasury repo and fed funds markets as precedent for how steep curves resolve short-term liquidity dislocations.

Circle CEO Jeremy Allaire publicly shared the proposal on X, drawing broader attention to the governance discussion. Risk service providers Llamarisk and Aave Labs have been identified as key participants expected to weigh in.

AAVE’s token price fell roughly 20% to 26% in the days following the exploit amid the outflow wave. The governance proposal has been interpreted by some market observers as a stabilizing signal.

The KelpDAO incident did not compromise Aave‘s smart contracts directly. The vulnerability originated in KelpDAO’s cross-chain bridge infrastructure. But the episode exposed how unbacked collateral entering through bridge exploits can generate bad debt at a protocol level, with estimates of unrecoverable losses ranging from $124 million to $230 million across Aave markets, depending on how losses are ultimately distributed.

Aave published an rsETH incident report outlining recovery paths. Discussions about potential bad debt absorption through mechanisms like slashing stkAAVE are ongoing.

Liao’s two-phase approach keeps Slope 1 at 3.5%, the base rate at 0%, and the reserve factor at 10% unchanged. The interim Risk Steward action could take effect the same day if approved, while the full target configuration requires a standard five-to-seven-day governance vote.