Michael Egorov, the founder of Curve, has put forth a market-oriented approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a free-market-based method of recovery with an option-like payoff, open to all who wish to participate. This approach contrasts with a bailout, instead allowing the market to determine the value of the distressed claims. The bad debt is a result of the October 10 crash, which caused more than $19 billion in leveraged liquidations and saw Curve's CRV-long market suffer significant losses.
The proposed solution involves packaging the affected lender positions into a tokenized vault and allowing traders to buy and sell them through a dedicated Curve pool. This would provide trapped lenders with an exit strategy while enabling outside buyers to decide the worth of the distressed claims. The tokenized claims would have an option-like quality, with their value potentially increasing if CRV recovers but not decreasing if CRV's price falls further. Egorov's proposal comes at a time when the DeFi industry is grappling with bad debt, notably Aave's recent issues following an exploit.
Curve's approach differs from Aave's coordinated bailout effort, instead relying on market forces to resolve the bad debt. If successful, this model could be applied to similar situations in the future, providing an alternative to industry-wide bailouts.