Curve founder Michael Egorov has unveiled a market-driven approach to address approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' which would function as an investment opportunity for those willing to participate.
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 the October 10 crash, which resulted in over $19 billion in leveraged liquidations within hours, the largest single-day deleveraging on record. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered damage due to rapid price declines and rising gas costs, leading to a scenario where some liquidations could not occur in time.
As a result, lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. Egorov's proposal seeks to address this issue by creating a market for distressed claims, allowing buyers to decide the price. The plan is in contrast to the recent Aave bailout, where the industry responded with a coordinated effort to raise funds to cover the bad debt. Egorov's approach presents a different model, where Curve would build a market for distressed claims, rather than relying on a bailout.
If successful, this pilot study could be applied to similar situations at Curve or other protocols.