Lots of people are dunking on the Circle proposal to shift Aave rates, and I have, inevitably, been asked my opinion. I’ll share it here publicly. Gordon’s proposal is not incorrect directionally. He correctly diagnoses that the market is not clearing, and provides a pretty standard solution that would fit into half the textbooks on my bookshelf. Where I disagree with him are on his rate (in)sensitivity assumptions. Going straight to 40% seems destined to force liquidations. In the current market, contagion risk is already high, so cascades would need to be mitigated. I don’t know if Aave can throttle the liquidation throughput like the old Maker vaults could, but that would be a way to do that. It’s an open question whether this would be a good idea. I’m open to considering it, but am not convinced at this time. Gordon doesn’t say that the goal is repayment or liquidation, though. He believes this is a way to finance attracting supply, which I agree WOULD be the best way to unstick the market for the moment. However, the rate can’t just be the usual mechanics. For starters, anyone who has been in DeFi knows that juicy rates get diluted quickly in a floating rate lending protocol. Given the high probability of at least some loss, why would a lender put their stables to work even for a temporary (maybe a week?) 40% rate? Imagine you had $100m, and you saw this 40% deposit rate on Aave. Knowing there is more than $1b of impaired collateral in the system, are you going to risk your clients’ money for $109k/day? You’d need a week and a half just to break even on a 1% loss to your deposited funds. Except this is a floating rate. Once danger has passed, the rates drop down. And if they stay elevated it’s likely because the situation hasn’t gotten better. The calculus COULD be different if it was 40% for 6 months or a year. But you’re really just getting outsized rates for a few days in the best case scenario, and it is rising or realized risk that would let you keep earning that rate. This is at its heart a risk that is unmeasured, and so you can’t know what is the correct rate to price it at. You can’t tell if this is picking up nickels in front of a steam roller or the trade of the century. So I think depositors are the most rate insensitive group at the moment, and due to a very wide range of possible outcomes at the intersection of distressed collateral assets, ultimate recovery rates on those assets, timeline to realize that recovery, secondary damage that has created bad debt, and governance risk around things like implementation of Umbrella or the funds seized by Arbitrum. Basically everyone is standing around keeping rsETH marked to some imaginary number because we don’t have enough guidance from Kelp (and possibly L0 and now Arbitrum) for Aave to know how to begin liquidations and realize losses without accidentally taking on someone else’s loss because they were too pessimistic in valuing the impaired collateral. I do think at this point, Aave would be better off making an “ok” plan and acting today than waiting for a “good” plan that requires information from Kelp/L0/Arbitrum/law enforcement that may not be available for some time.