Curve's founder, Michael Egorov, has put forth a market-driven solution to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The plan involves packaging affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool.
This approach aims to provide an exit strategy for trapped lenders while enabling outside buyers to determine the value of the distressed claims. The bad debt is a result of the October 10 crash, which led to over $19 billion in leveraged liquidations within hours, causing prices to fall rapidly and gas costs to rise. As a result, some liquidations could not occur in time, leaving lenders in the CRV-long market with deposits backed by about 70% of their stated value.
Egorov's proposal allows for a free-market-based method of recovery, with an option-like payoff, working as an investment for those who wish to participate. The goal is to give trapped lenders a way out while allowing outside buyers to decide the worth of the distressed claims. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency, rather than full value. This means the pool would not treat the distressed token as if it were worth one dollar on the dollar but would price it closer to the amount currently backing it.
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. For buyers, the trade resembles a long-term bet on CRV, as they purchase a claim that is partly backed today and could become worth more if CRV recovers.
The token has an 'interesting option-like property' on CRV's recovery, with some backing already in place. The proposal comes at a time when Aave is facing up to $230 million in bad debt due to an exploit, with the industry responding through a coordinated bailout.
Egorov's approach presents a different model, where Curve would build a market for distressed claims and let buyers decide the price, rather than relying on a bailout.