Circle steps into Aave governance as USDC liquidity locks at 99% utilization, following a prolonged liquidity crunch that has restricted withdrawals on the protocol.
The disruption has persisted for nearly four days, leaving billions in stablecoins inaccessible to users.
The intervention comes after a major exploit triggered panic withdrawals and exposed weaknesses in Aave’s rate adjustment system.
Liquidity shock triggers prolonged freeze
The crisis began on April 18, 2026, when an attacker used fraudulent rsETH tokens to exploit a vulnerability in KelpDAO’s bridge, borrowing roughly $292 million in real assets.
The incident quickly shook market confidence and led to a rush for exits. Within 24 hours, more than $6 billion was withdrawn from Aave, marking the largest outflow in the protocol’s history.
Aave’s total value locked dropped sharply from about $25 billion to $17.5 billion during the sell-off.
While early movers managed to exit, others were left unable to withdraw funds as utilization across core markets surged to near full capacity.
Estimates indicated that around $3 billion in USDT and $2 billion in USDC became effectively trapped.
Some users attempted to regain liquidity by borrowing against their locked positions and selling borrowed assets at losses ranging between 10% and 25%.
This reaction added further pressure, increasing borrowing demand and pushing utilization even higher.
Interest rate model fails to stabilize markets
Aave’s borrowing rate for USDC remained capped near 14% during the crisis, which proved insufficient to restore balance.
The rate failed to attract fresh deposits or encourage borrowers to repay loans. Data showed a gradual decline in both supply and debt, but the changes reflected routine repayments rather than meaningful recovery.
The situation was compounded by the failure of the Slope 2 Risk Oracle, an automated rate adjustment system developed by Chaos Labs.
The firm had exited Aave earlier in April, leaving the tool without active maintenance. As a result, the protocol lacked a responsive mechanism to adapt to the sudden demand shock.
Market participants noted that borrowers facing steep exit losses were unlikely to respond to relatively low annual rates.
This dynamic limited the effectiveness of Aave’s existing model during extreme stress conditions.
Circle proposes emergency rate increase
Circle’s chief economist, Gordon Liao, proposed a temporary increase in borrowing rates to as high as 50% to attract new liquidity and break the gridlock.
He argued that higher yields would incentivize capital inflows from other platforms within hours.
The proposal also includes pausing the automated rate system and shifting control to Aave Labs and LlamaRisk until stability returns. A community vote is expected within a week to determine a longer-term framework.
Aave founder Stani Kulechov stated that the team is working continuously to restore normal conditions.
Community response remains divided, with some supporting urgent intervention while others warn of added pressure on affected users.
