Circle Calls on Aave to Raise Borrowing Rates, Yields to End Liquidity Crisis

In a governance proposal published by Gordon Liao, Circle's chief economist and head of research, the USDC issuer urged Aave to raise borrowing rates on its main USDC market and rebuild a liquidity buffer after utilisation hit near 100%, leaving little cash immediately available for users wanting to withdraw or borrow more. Circle Chief Executive Officer Jeremy Allaire also shared the proposal on X on 22 Apr.

Liao said in the proposal that Aave's USDC pool on Ethereum had been "essentially pinned at full utilization for four days," with borrowing costs stuck near their current ceiling while users queued to withdraw funds.

"The rate is not clearing the market," Liao wrote, arguing that Aave should sharply raise penalty rates for heavy borrowing and lower the pool's optimal utilisation threshold to restore a liquidity buffer.  

Liquidity stress

Aave is one of decentralized finance's largest lending platforms. When a pool utilisation reaches 100%, nearly all deposited funds have already been lent out. That can slow withdrawals, restrict new borrowing and create pressure across traders.

Data from Aave's public dashboard on 22 Apr showed the Ethereum v3 USDC market at nearly 100.0% utilisation, with borrowing costs around 14% as demand for remaining liquidity surged.

Circle's proposed fix

Circle's proposal centres on raising the rates charged to borrowers when liquidity becomes scarce, while increasing yields paid to depositors willing to supply USDC during stressed conditions.

Liao proposed increasing Aave's "Slope 2" parameter – the higher interest rate applied when borrowing demand exceeds a threshold – from about 10% to 50%, with an interim increase to 40%. He also proposed lowering the protocol's optimal utilisation level from 92% to 85%, meaning rates would rise earlier as liquidity tightens.  

"The intent is narrow: restore the post-kink region as a functional price discovery range so the pool can clear through price instead of through the withdrawal queue," Liao wrote, arguing that higher rates would attract fresh deposits faster and encourage some borrowers to repay, helping normal liquidity conditions return.

Kelp hack sparks withdrawals

Pressure on Aave intensified after users pulled nearly $6bn from the protocol over the weekend following a major exploit involving Kelp DAO, among the largest DeFi breaches of 2026. Hackers stole about $292mn in rsETH tokens, then pledged the assets on Aave to borrow wrapped Ether (ETH), leaving estimated bad debt of up to $196mn.

The proposal asks Aave's risk stewards, including LlamaRisk and Aave Labs, to make immediate temporary adjustments before a full governance vote within five to seven days.

Community pushback  

The proposal drew criticism from some Aave community members, who argued that sharply higher borrowing costs could worsen stress rather than restore confidence.

One commenter said an immediate and aggressive rate increase would "accelerate capital flight from both USDC and AAVE," calling the proposal a "terrible idea."

Another user criticised the suggested 50% rate level, arguing it would penalise borrowers who may be unable to reduce leverage while markets remain disrupted.