Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt related to LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault to package the affected lender positions, 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 a crash on October 10, which resulted in over $19 billion in leveraged liquidations. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price drops and rising gas costs, leaving lenders with deposits backed by only about 70% of their stated value.
Egorov's plan allows buyers to purchase claims that are partly backed, with the potential to increase in value if CRV recovers. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This approach offers trapped depositors a choice: wait for a CRV recovery or sell their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV's potential recovery, with some backing already in place.
The proposal comes as the DeFi industry faces a significant bad debt issue, with Aave currently addressing up to $230 million in bad debt resulting from an exploit. Egorov's market-driven solution presents an alternative to the coordinated bailout efforts, allowing buyers to determine the price of distressed claims.