Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault for the affected lender positions, enabling traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while allowing outside buyers to determine the value of the distressed claims.
The bad debt stems from a market crash that resulted in significant losses for lenders in the CRV-long market, which allows users to borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. For trapped depositors, the pool offers a choice between waiting for a CRV recovery or selling their vault tokens at a discount. Buyers, on the other hand, can purchase a claim that is partly backed, with the potential to increase in value if CRV recovers.
The proposal presents an alternative to the industry's typical response to bad debt, which often involves coordinated bailouts. Instead, Curve's pool would create a market for distressed claims, allowing buyers to determine the price. If successful, this approach could be applied to similar situations at Curve or other protocols.