Curve founder Michael Egorov has introduced a market-based approach to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff' that enables trapped lenders to sell their tokenized claims on deposits to buyers, who can then bet on the potential recovery of CRV. The bad debt is currently tied to LlamaLend's CRV-long market, where users can borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token. However, after the October 10 crash, lenders in this market were left with deposits backed by only about 70% of their stated value.
Egorov's proposal involves packaging the affected lender positions into a tokenized vault and allowing traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with a way out while enabling outside buyers to determine the value of the distressed claims. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
For trapped depositors, the pool offers a choice to either wait for a CRV recovery or sell their vault tokens at a discount and move on. Meanwhile, buyers can purchase a claim that is partly backed today and may increase in value if CRV recovers, essentially making it a long-term bet on CRV. The proposal comes at a time when the DeFi industry is grappling with bad debt, particularly in the aftermath of an attacker exploiting Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt. In contrast to the coordinated bailout effort for Aave, Egorov's proposal presents a market-driven solution, where Curve would build a market for distressed claims and let buyers decide the price.