Circle's Chief Economist Gordon Liao has published an Aave governance proposal to raise the interest rate slope on the USDC market on Aave v3 Ethereum Core from 10% to 40% initially, with a target of 50%. He believes that higher rates will attract new USDC liquidity providers in an effort to bring utilization back down. The proposal comes in response to the KelpDAO exploit, which has driven the USDC lending market on Aave to 100% utilization for the last four days, leaving lenders unable to withdraw their funds due to insufficient liquidity.

As the proposal notes, debt repayments are being immediately absorbed by a queued withdrawal backlog. The proposal faced community pushback as raising the rate slope can accelerate harm. Higher rates risk triggering liquidations for borrowers who are already trapped. Liquidity providers are reluctant to deposit due to the current uncertainty around a potential lender haircut.

Circle has also faced broader criticism for not offering to inject liquidity directly into its own asset pool as the issuer of USDC. Earlier this month, Circle failed to freeze USDC connected to the DPRK in the Drift Protocol exploit.

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Fluid launched the aWETH Redemption Protocol, allowing Aave lenders to swap aWETH collateral for wstETH or weETH at a cost of approximately 2%. The service aims to help Aave users stranded by the market cascade amid frozen markets on Aave following the KelpDAO bridge exploit. It allows users to regain control of a liquid, unaffected collateral asset without needing to close or unwind their position.

Fluid is able to offer the service because it operates a leveraged looping vault holding $144 million in Aave positions that it is looking to unwind. By buying aWETH from trapped lenders and using it to repay its own ETH debt on Aave, Fluid simultaneously frees users, creating a mutually beneficial solution. The solution currently only supports swaps on Ethereum mainnet.

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As the secondary shock of KelpDAO's $290 million exploit rippled through DeFi, large depositors including Justin Sun and MEXC withdrew millions from Aave. To mitigate impact, Aave disabled rsETH markets on V3 and V4, disabled WETH markets across Ethereum, Arbitrum, Base, Mantle, and Linea, and disabled borrowing on all LST and LRT collateral types.

Unable to withdraw from the frozen markets, users swapped their collateral to adjacent markets, sending the ETH, USDC, and USDT markets to 100% utilization. The stablecoin supply rates also surged above 13%. When markets are at 100% utilization, lenders are unable to withdraw, and many were stuck paying elevated interest on debt with frozen collateral. Aave's TVL has fallen by $8.4 billion in the last 48 hours. Fluid launched an aWETH redemption protocol offering stranded lenders a ~2% exit to wstETH or weETH.

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Disclaimer: Content is for informational purposes only, not endorsement or investment advice. The accuracy of information is not guaranteed.