EDIT: Changes in the proposed parameters, following feedback from Risk Service Providers.
Summary
This publication proposes the deprecation of the legacy USDC market on the Aave Gnosis Chain deployment.
The deprecation will be executed by freezing the reserve (preventing new deposits, borrows, or collateral usage) and immediately increasing the Reserve Factor (RF) to 80%.
This aligns with the broader ecosystem effort to establish USDC.e (Circle-supported) as the canonical USDC representation on Gnosis Chain, consolidating liquidity and improving capital efficiency across Aave markets.
Motivation
The Gnosis Chain ecosystem has grown significantly since the initial deployment of assets on the Aave GC instance. With Circle-supported USDC.e now established as the canonical USDC representation, it is important to accelerate the transition away from legacy USDC to prevent liquidity fragmentation and enhance capital efficiency.
To promote the migration from USDC to USDC.e and concentrate liquidity in a single canonical market, this proposal introduces a progressive parameter adjustment schedule:
Freeze the market — Preventing new positions from being created and new deposits.
Reserve Factor Increase — USDC’s (old) RF will be increased to 80%, incentivising lenders to migrate to USDC.e.
Specification
The following table shows the current parameters and proposed adjustments for USDC (old) in the first AIP (updated upon receiving feedback from both @LlamaRisk and @ChaosLabs):
Parameter
Current
Proposed
RF
40%
80%
The USDC (old) reserve will be frozen — preventing new deposits, borrows, or collateral enablement.
The Reserve Factor will be immediately increased to 80%, redirecting most of the yield to the protocol and incentivising migration to USDC.e.
Existing positions remain unaffected, but users are encouraged to unwind and migrate voluntarily to USDC.e.
Disclosure
kpk has not received payment for this proposal. kpk is a delegate within the Aave community.
Next Steps
Gather feedback from the community.
If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
If Snapshot outcome is YAE, escalate this proposal to AIP stage
In favour, perhaps we could do the same for different versions of USDC in other networks as well, while not being super aggressive.
Iirc, we have different USDC versions listed on Base, Optimism, Arbitrum…
One small nitpick, better to update SupplyCap to 1, as updating to 0 means unlimited caps.
LlamaRisk supports the proposal brought forward kpk and the overall initiative to deprecate assets across various Aave markets, which will soon be presented by @ChaosLabs. We also note both user experience and governance efficiency as priorities, and, following the discussions with other SPs, we propose minor adjustments to the offboarding approach.
To optimize governance efficiency and minimize the number of AIPs required to raise the reserve factor, we recommend executing an immediate RF increase to 80%. This rate of increase is unlikely to significantly impact the market, as rate-sensitive leverage looping positions are not dominant in the USDC reserve. At the same time, since this market is to be phased off completely, we propose a reserve freeze instead of caps modification. This will achieve exactly the same properties as supply & borrow caps reduction to 1, while also hiding the frozen asset from the general market on Aave’s UI and, therefore, avoiding confusion.
Current USDC.e supply and borrow caps are sufficient to accommodate the migration of positions from USDC. The largest loans backed by USDC primarily involve EURe and GNO as borrowed assets, while USDC borrows are predominantly backed by GNO and WETH. Notably, a single loan accounts for the majority of USDC borrows (736k USDC out of a total of 788k USDC borrows).
Disclaimer
This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.
Chaos Labs supports this proposal to effectively deprecate the legacy USDC reserve on the Aave Gnosis Chain deployment. Over the past year, the USDC reserve on the Gnosis Chain has shown clear signs of contraction, with the reserve decreasing by ~70% and aggregate borrows consistently remaining below $1M over the last 6 months. At current rates and a 40% reserve factor, the reserve generates only around $23K annually in protocol revenue, immaterial relative to overall market activity.
Borrowing demand is highly concentrated, with a single entity accounting for virtually all of the outstanding borrows, indicating that the market no longer serves a meaningful function for broader users. In addition, most USDC-collateralized debt, roughly $300K in value, is denominated in EURe, implying delta risk from the USDC migration is highly minimal given the composition of active positions.
Given these dynamics, we are aligned with an immediate increase of the Reserve Factor to 80% to improve operational efficiency and simplify management of the frozen reserve. However, we recommend freezing the reserve in its entirety rather than only disabling borrowing, to ensure that existing USDC-collateralized debt positions cannot increase their effective debt exposure. Overall, Chaos Labs views this as a prudent and operationally sound measure that supports the continued efficiency and consolidation of liquidity on Aave’s Gnosis deployment, while aligning the protocol with the broader stablecoin standardization efforts across the ecosystem.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
