Curve founder Michael Egorov has unveiled a market-based approach to address approximately $700,000 in bad debt tied to LlamaLend, Curve's lending platform. The plan involves packaging affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This would provide trapped lenders with an exit option 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 incomplete liquidations.
Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. Egorov's proposal aims to give these lenders a way out while allowing buyers 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. For trapped depositors, the pool offers a choice: they can wait for a CRV recovery or sell their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV, with the token having an 'interesting option-like property' on CRV's recovery.
The proposal comes as Aave faces up to $230 million in bad debt following an exploit, with the industry responding through a coordinated bailout effort. Egorov's approach presents a different model, where Curve would build a market for distressed claims and let buyers determine the price, rather than relying on a bailout.