Curve's founder, Michael Egorov, has put forward a market-based approach to address approximately $700,000 in bad debt associated with LlamaLend, the lending platform of Curve. The proposed solution involves creating a tokenized vault for the affected lender positions, which can then be bought and sold by traders through a dedicated Curve pool. This approach is distinct from the recent Aave bailout, as it relies on market forces to determine the value of the distressed claims rather than seeking a coordinated industry response. The plan aims to provide trapped lenders with a way out, while allowing outside buyers to decide the worth of the claims.

The bad debt in question stems from the October 10 crash, which resulted in significant losses for lenders in the CRV-long market. The market, designed to reduce risk through an automated market maker, was unable to fully mitigate the damage, leaving lenders with deposits backed by only about 70% of their stated value. Egorov's proposal involves packaging the affected lender positions into a tokenized vault, which can be traded on a dedicated Curve pool.

The goal is to give trapped lenders an exit strategy, while allowing buyers to decide the value 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 means the pool would not treat the distressed token as if it were worth its full value, but rather price it closer to its current backing. For trapped depositors, the pool offers a choice: they can either hold on to their vault tokens in anticipation of a CRV recovery or sell them at a discount and move on. For buyers, the trade represents a long-term bet on CRV's potential recovery, with the token having an 'interesting option-like property' that increases in value if CRV's price rises, but does not decrease if CRV's price falls. The proposal has been put forward as a potential model for addressing bad debt in DeFi, distinct from the recent Aave bailout, which has seen a coordinated industry response.

If successful, this approach could be applied to similar situations in the future, providing a market-driven solution to the problem of bad debt in decentralized finance.