A Circle economist recommended on Wednesday an urgent reform of Aave’s lending system, advocating for a drastic increase in interest rates to alleviate a liquidity crisis that has immobilized user funds for the past five days. This proposal follows massive borrowing of stablecoins by users attempting to mitigate risks after Kelp DAO’s $291 million exploit, which quadrupled Aave’s maximum interest rate as per Gordon Liao, Circle Chief Economist and Head of Research.
Liao suggested that raising the cap on USDC borrowing rates to 50% could prompt debt repayments, transforming Aave into a magnet for capital inflows and improving withdrawal chances for depositors. Currently capped at 14%, these rates are seen as insufficiently deterrent for maintaining open positions rather than settling debts. The utilization rate of USDC has hovered around 100% since Sunday, indicating depleted liquidity for lenders, according to Aavescan.
Liao’s proposal is part of broader efforts to restore trust in decentralized finance after users withdrew $12 billion from Aave in recent days due to the crisis. As of Thursday, assets within the protocol stood at approximately $15.47 billion.
The proposal also suggests lowering the ‘optimal’ utilization rate for USDC on Aave from 92% to 85%, aiming to create a sustainable withdrawal buffer and moderate borrowing costs. Although representing personal views, Liao’s suggestion gained traction through Circle co-founder Jeremy Allaire’s X post.
Many users borrowed stablecoins as they couldn’t withdraw Ethereum from Aave after attackers used $292 million from the Kelp DAO exploit for further asset borrowing on the platform. While higher USDC rates could ease issues, some governance forum members fear it might lead to increased liquidations due to rising costs.
Meanwhile, Arbitrum’s security council froze 30,766 Ethereum worth $71 million moved by attackers to layer-2 to minimize Aave users’ potential losses from the Kelp DAO incident. DeFi projects like Lido could also aid; a Thursday proposal suggested a one-time contribution of up to 2,500 stETH for affected user relief.
“The proposal aims to lessen ecosystem spillover and ensure an orderly resolution,” said Lido in an X post. On Saturday, attackers drained 116,000 rsETH from a cross-chain bridge built on LayerZero infrastructure after Kelp DAO pointed out what they argued as the platform’s single point of failure. The issue has been attributed to North Korea’s Lazarus Group.