Curve's founder, Michael Egorov, has put forth a market-based solution to tackle 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,' which would enable participants to invest in the recovery efforts. 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 stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations within hours. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered damage, with lenders in the CRV-long market left with deposits backed by about 70% of their stated value. Egorov's proposal suggests that the tokenized vault would still hold value, as the loss is not open-ended, and the conversion of CRV to crvUSD would reverse if CRV's price rises above a certain threshold. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee, and liquidity centered around 71% solvency.
This would allow trapped depositors to choose between waiting for a CRV recovery or selling their vault tokens at a discount. For buyers, the trade would represent a long-term bet on CRV's recovery, with the token having 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 plan presents a different model, where Curve would build a market for distressed claims, allowing buyers to determine the price, rather than relying on a coordinated bailout.