Circle is under fire after a proposal tied to its chief economist suggested sharply raising borrowing costs for USDC on Aave. The move comes as the lending pool struggles with a liquidity crunch that has persisted since the KelpDAO exploit.
Many DeFi users argue that the proposal could worsen conditions for participants already stuck in a dysfunctional market.
Plan Aims to Adjust Borrowing Dynamics
On April 22, Circle CEO Jeremy Allaire shared a forum post by economist Gordon Liao outlining potential changes to Aave v3 parameters. The goal was to address what he described as a non clearing market for USDC.
The pool has remained near full utilization for several days, with available liquidity dropping below three million dollars. Borrowing rates have stayed around 14 percent even as about sixty million dollars exited the pool in a single day.
Liao proposed increasing the Slope 2 parameter, which determines how sharply borrowing costs rise at high utilization. His plan suggested pushing rates as high as 50 percent while also lowering the optimal utilization level.
He argued that the current rate is too low to attract new capital, noting that many borrowers are not sensitive to interest costs because they are trying to exit positions trapped after the KelpDAO exploit. In his view, higher rates could draw in liquidity, similar to how traditional financial markets respond to rising yields.
At maximum utilization, the proposal could push supply rates close to 48 percent. Liao clarified that the idea reflected his personal opinion rather than an official stance from Circle.
Concerns Grow Over Impact on Users
After discussions with the community, Liao later acknowledged that liquidation thresholds were lower than he initially expected and softened parts of the proposal.
The underlying issue traces back to the KelpDAO exploit, which drained nearly three hundred million dollars. Attackers used compromised rsETH as collateral on Aave to borrow large amounts of real assets, leaving behind bad debt and frozen positions.
Strong Backlash From the DeFi Community
The response from the community was largely negative. Some users argued that raising rates to extreme levels would punish borrowers who are unable to reduce their positions.
Others stressed that Aave should focus on restoring confidence rather than forcing market adjustments through aggressive interest rate changes. Concerns were raised about the risk of cascading liquidations and further instability.
Critics on social media were even more direct, with some calling for leadership changes at Circle and suggesting the company should inject liquidity into the pool instead of proposing governance changes.
A few analysts offered a more balanced view, acknowledging that while the diagnosis of the problem may be accurate, the proposed solution could be too aggressive. They warned that sharply increasing rates might trigger forced liquidations and questioned whether lenders would commit capital without clarity on the scale of bad debt in the system.
Uncertainty Remains Around Market Stability
At the core of the debate is a deeper concern about risk. With the extent of bad debt still unclear, some analysts believe the situation remains difficult to evaluate, making any aggressive policy response potentially dangerous for the broader market.#crypto#cryptonews https://coinsignals.net https://t.me/coinsignalpublic
