Curve founder Michael Egorov has introduced a market-based solution to address approximately $700,000 of bad debt associated with LlamaLend, Curve's lending platform. The proposed plan involves packaging the affected lender positions into a tokenized vault, which would then be traded through a dedicated Curve pool. This approach would enable trapped lenders to exit their positions while allowing outside buyers to determine the value of the distressed claims. The bad debt in question stems from the October 10 crash, which saw over $19 billion in leveraged liquidations and resulted in lenders in the CRV-long market being left with deposits backed by around 70% of their stated value.
Egorov's proposal aims to provide a market-driven solution, contrasting with the recent Aave bailout. The plan would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
This would allow liquidity providers to earn swap fees and CRV incentives, while also giving trapped depositors the option to sell their vault tokens at a discount or wait for a potential CRV recovery. The proposal presents a different model for addressing bad debt in DeFi, one that relies on market forces rather than industry-wide bailouts.