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Circle’s Chief Economist Gordon Liao has proposed recalibrating Aave’s USD Coin (USDC) interest rate model to address a persistent liquidity crunch on Aave v3 Ethereum. The proposal follows a sharp rise in USDC utilization to nearly 100%, leaving less than $3 million in available liquidity and raising concerns across decentralized finance (DeFi).
The liquidity shortage began after the April 18 exploit involving KelpDAO’s rsETH, which reportedly led to approximately $300 million in additional borrowing activity. After the incident, USDC pools on Aave became heavily utilized, with utilization rates reaching 99.87% for several consecutive days.
At the same time, total USDC supply on the platform fell by about $60 million within 24 hours, worsening the imbalance between borrowing demand and available liquidity.
Liao said the problem is partly driven by how some users are using Aave. He noted that many borrowers are taking out stablecoin loans against their own deposits to exit positions through decentralized exchanges. According to his analysis, these borrowers are relatively insensitive to interest rates, which means current borrowing costs are too low to deter activity or to attract new liquidity providers.
He added that even at a 14% rate, the short-term cost remains minimal, limiting the ability of the existing interest rate model to rebalance supply and demand.
To respond, Liao outlined a two-step adjustment to Aave’s interest rate parameters.
The proposal is designed to raise returns for suppliers quickly, drawing capital back into the protocol and helping restore healthier utilization levels.
Circle CEO Jeremy Allaire publicly supported the proposal. Aave founder Stani Kulechov said the team is actively working on multiple solutions. Separately, the recovery of $70 million in ETH by the Arbitrum Security Council may help ease broader market pressure.
Despite the disruption, the AAVE token price rose 5% over the past 24 hours, suggesting cautious optimism among investors as the DeFi platform works toward stabilization.
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