Circle Economist Urges Aave to Raise USDC Borrow Rates as Liquidity Stress Deepens

• Circle’s Gordon Liao has proposed an emergency change to Aave that could lift the maximum USDC borrowing rate to 50%.
• The move is meant to push borrowers to repay debt and attract fresh capital after five days of withdrawal stress tied to the Kelp exploit fallout.

Aave USDC liquidity crunch is now drawing proposals from outside its own core contributor circle, and the latest one is blunt.

Gordon Liao, Circle’s chief economist and head of research, has proposed an emergency overhaul of Aave’s lending mechanics that would raise the protocol’s maximum USDC borrowing rate to as high as 50%.

The goal is straightforward enough. Make it expensive to stay borrowed, push some users to unwind positions, and bring enough capital back into the market to let stuck depositors withdraw.

Circle’s proposal is aimed at breaking the gridlock

The backdrop is the now-familiar mess left by the Kelp DAO exploit, which triggered heavy stablecoin borrowing as users scrambled to escape related market stress. According to Liao, that surge in demand has left Aave’s USDC market badly imbalanced for the better part of five days.

His argument is that the system needs a shock, not a gentle nudge. By sharply increasing the maximum rate, Aave could force a repricing of leverage fast enough to restore liquidity. Liao wrote that higher rates would both encourage debt repayment and make the protocol a more attractive place for capital to return.

That is the theory, at least. In stressed lending markets, pricing is often the quickest lever available.

Users fear the cure could create a second problem

Not everyone is comfortable with the proposal. Some users on Aave’s governance forum pushed back, warning that such a steep jump in borrowing costs could trigger a new wave of liquidations rather than a clean recovery.

That concern is not hard to understand. When rates rise that sharply, highly leveraged users do not always unwind in an orderly way. Some simply hit their limits faster.

So the debate is now centering on a familiar DeFi question. When a protocol is trapped between illiquidity and forced deleveraging, how hard should governance push to restore balance?

Liao’s proposal makes Circle’s view fairly plain. Better to reprice aggressively and reopen withdrawals than leave the market frozen. Whether Aave users agree may depend on how much pain they think the system can absorb before a liquidity fix starts to look like a liquidation event in its own right.

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