Curve's founder, Michael Egorov, has introduced a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposed plan involves packaging affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool.
This approach aims to provide trapped lenders with an exit option while allowing outside buyers to determine the value of the distressed claims. The bad debt stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations, the largest single-day deleveraging on record. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price declines and increased gas costs, leading to a scenario where some liquidations could not occur in time.
Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. Egorov's proposal involves creating a tokenized vault and letting traders buy and sell the affected positions, giving lenders a way out and allowing buyers to decide the value of the distressed claims. The plan is designed to provide a market-based solution, contrasting with the coordinated bailout approach taken by Aave in response to its own bad debt.
If successful, this pilot study could be applied to similar situations at Curve or other protocols, offering a new model for addressing bad debt in the DeFi space.