Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault to package affected lender positions, allowing them to be bought and sold through a dedicated Curve pool. This approach would provide trapped lenders with an exit option while enabling 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.
LlamaLend's CRV-long market was impacted, with lenders left with deposits backed by only about 70% of their stated value. Egorov's plan aims to give these lenders a way out while allowing the market to dictate the price of the distressed claims. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
This would enable buyers to purchase claims that are partly backed, with the potential to increase in value if CRV recovers. The proposal comes as the DeFi industry is grappling with the issue of bad debt, with Aave facing a potential $230 million shortfall following an exploit.
Egorov's market-driven approach offers an alternative to the coordinated bailout efforts seen in the industry, instead relying on market forces to determine the value of distressed claims.