On April 22nd, Circle presented an emergency proposal to change the USDC pool’s interest rate parameters at Aave’s governance forum, but the USDC pool had been paralyzed for four days with 99.87% utilization and less than $3 million available for withdrawal.
The measure aims to unlock US$1.9 billion in USDC that was locked up as a result of the Kelp DAO hack on April 18th.
The reason why Aave was affected has to do with the fact that rsETH issued by Kelp DAO was accepted on this platform as collateral for borrowing assets such as WETH and USDC. After the Kelp DAO Bridge hack, that support disappeared and Aave ended up with real loans without valid collateral, resulting in bad debt. This resulted in massive withdrawals from other users, filling loan pools such as USDC with loans that could not be returned.
The proposal, signed by Circle Chief Economist Gordon Liao, includes: Suggest increasing parameters slope 2 50% from current 10%. he slope 2 defines how quickly interest rates rise when the pool exceeds its optimal usage level. At current values, the maximum interest rate that the pool can reach is 14% per year. The proposed change would reach 53.5%. The proposal also considers reducing the optimal pool utilization from 92% to 85%.
The logic is that the current 14% is not enough to attract external depositors while the pool is frozen. Currently, an investor holding 100,000 USD in USDC will receive approximately 12,000 USD per year, but cannot withdraw it at any time. At a rate of nearly 48%, The same capital generates $48,000 per year. —about $4,000 per month—a return that justifies taking the risk of temporary illiquidity.
As new depositors come in, attracted by the interest rate, the pool fills up with new USDC and the utilization rate drops below 100%. Trapped people can retreat. The pool has accumulated deposits of USD 1.89 billion against USD 1.89 billion in loans, with approximately USD 60 million committed in the last 24 hours as repayments are immediately absorbed by pending withdrawals.
This proposal considers the first step by risk stewards (rapid decision-making mechanisms). Full governance approvals will follow. within 5 to 7 days.
However, this measure has a counterpart. Those with active loans in USDC will see interest rates rise from 14% to up to 53.5% as long as the pool is saturated. The proposal assumes that these debtors are already in an emergency situation due to the hack and have no plans to repay the price of the credits. As soon as new capital arrives and occupancy rates drop, Rates will automatically drop to normal levelscloser to 3% or 4%.
The hack that caused the crisis
It all started on April 18th, when an attacker breached KelpDAO’s interchain bridge through a flaw in LayerZero’s messaging infrastructure, exfiltrating 116,500 rsETH (equivalent to $292 million), or 18% of the circulating supply, making it the largest DeFi hack of 2026.
Over the next 24 hours, large holders withdrew more than $6 billion from Aave, with the main pool reaching 100% utilization and remaining depositors left trapped. Blocked users then took out nearly $300 million in loansExpecting losses, they attempt to exit the protocol through alternative means using their own stable deposits.
If the proposal is not approved or fails to attract new capital, Aave faces the risk of an indefinite pool shrinkage and a deepening flight of users to competing protocols that are already exploiting the vacuum.
(Tag translation) Aave (ETHLend)
