Circle Proposes Emergency Rate Changes to Unstick Aave's Frozen USDC Pool

In response to the KelpDAO exploit on April 18, Circle is urging Aave to implement drastic changes to the interest rate parameters governing the $USDC pool on Aave V3 Ethereum Core. The pool has been operating at an alarming 99.87% utilization rate for four consecutive days, prompting Circle Chief Economist Gordon Liao to sound the alarm. As of now, the pool boasts a substantial $1.89 billion in both supply and borrows, yet available liquidity has dwindled to a mere $3 million. Over the past 24 hours, the pool has shrunk by approximately $60 million due to repayments being offset by withdrawals.

Liao has put forth a proposal to rectify the situation by significantly adjusting the Slope 2 parameter for $USDC deposits. This parameter, currently set at around 10%, would be rapidly increased to 40% through a Risk Steward action, with the goal of achieving a 50% target within a week. As a result, the optimal utilization rate would temporarily decrease from 92% to 87%, eventually settling at 85% upon ratification. Furthermore, the maximum supply rate at full utilization would surge from approximately 12.6% to 48.2%, a substantial increase aimed at restoring balance to the market.

According to Liao, the current borrowers are exploiting $USDC borrowing as a means to circumvent queues and exit trapped positions, rendering them indifferent to the prevailing interest rates. Instead, he suggests that the key to resolving the issue lies in attracting additional supply, which can be achieved by offering yields in the range of 40-50%. This, he argues, would incentivize $USDC allocators to inject fresh capital into the pool within a matter of hours, thereby restoring a healthier utilization rate.

Notably, the proposal also calls for a temporary pause of Aave's Slope 2 Risk Oracle for $USDC, citing its poor performance during the February WETH spike and the subsequent offboarding of its maintainer, Chaos Labs, on April 6. This unprecedented intervention by Circle, the issuer of the USDC stablecoin, effectively alerts Aave that the market for its asset is malfunctioning and in need of urgent correction. By taking this step, Circle is, in effect, informing Aave that the current state of the $USDC market is unsustainable and requires immediate attention.