Curve's founder, Michael Egorov, has put forth a market-driven approach to resolve approximately $700,000 in bad debt tied to LlamaLend, the lending platform of Curve. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff' that functions as an investment opportunity for those who wish to participate. The proposed plan involves packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool.
This approach aims to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims. The bad debt in question stems from a crash that saw over $19 billion in leveraged liquidations, resulting in lenders in the CRV-long market being left with deposits backed by about 70% of their stated value.
Egorov's solution involves creating a market for these distressed claims, allowing buyers to decide their worth. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. For trapped depositors, this offers a choice between waiting for a CRV recovery or selling their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV's potential recovery, with the token possessing an 'interesting option-like property.' The proposal comes at a time when the DeFi industry is addressing bad debt, with Aave facing up to $230 million in bad debt following an exploit.
Egorov's approach presents a different model, one that relies on building a market for distressed claims rather than seeking a coordinated bailout.