Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposed solution involves packaging affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This method enables trapped lenders to exit their positions while permitting outside buyers to determine the value of the distressed claims.
The bad debt resulted from a crash on October 10, which led to over $19 billion in leveraged liquidations and caused prices to plummet while gas costs rose, resulting in delayed liquidations. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. Egorov's plan aims to give these lenders a way out while allowing buyers to bet on the potential recovery of CRV. 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: they can either wait for a CRV recovery or sell their vault tokens at a discount and move on. Buyers, on the other hand, can purchase a claim that is partly backed and may increase in value if CRV recovers. The token has an 'interesting option-like property,' with its fair price and price floor increasing if CRV's price rises, but not decreasing if CRV's price falls.
The proposal comes at a time when the DeFi industry is dealing with the aftermath of an exploit that left Aave facing up to $230 million in bad debt, with a coordinated bailout effort underway. Egorov's approach presents a different model, where instead of relying on a bailout, Curve would create a market for distressed claims, allowing buyers to determine the price.