Michael Egorov, the founder of Curve, has put forward a market-driven approach to resolve approximately $700,000 in bad debt linked to LlamaLend, Curve's lending platform. The proposed 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 trapped lenders with an exit option while enabling outside buyers to determine the value of the distressed claims. The bad debt stems from a crash on October 10, which saw over $19 billion in leveraged liquidations, resulting in lenders in the CRV-long market being left with deposits backed by about 70% of their stated value.
Egorov's plan is designed to give these lenders a way out while allowing the market 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 would enable buyers to purchase claims that are partly backed, with the potential to increase in value if CRV recovers. For trapped depositors, the pool offers a choice between waiting for a CRV recovery or selling their vault tokens at a discount. The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attack on Kelp DAO's LayerZero bridge, which resulted in Aave facing up to $230 million in bad debt. Egorov's plan presents a different approach to addressing bad debt, one that relies on market forces rather than a coordinated bailout effort.