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. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' inviting Curve DAO to participate but not requiring its involvement. The proposed solution involves packaging affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool.
This approach aims to provide trapped lenders with an exit option while allowing outside buyers to determine the value of the distressed claims. The bad debt stemmed from a crash on October 10, resulting in over $19 billion in leveraged liquidations and causing prices to plummet while gas costs soared. As a result, lenders in the CRV-long market were left with deposits backed by only about 70% of their stated value. Egorov's plan seeks to address this issue by creating a market for these distressed claims, thereby giving lenders a way out and allowing buyers to bet on the potential recovery of CRV.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable trapped depositors to sell their vault tokens at a discount or wait for a CRV recovery, while buyers would be making a long-term bet on CRV's potential resurgence.
The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attacker's exploitation of Kelp DAO's LayerZero bridge, which resulted in Aave facing up to $230 million in bad debt. In contrast to the coordinated bailout efforts for Aave, Egorov's plan presents a market-driven solution, allowing buyers to determine the price of distressed claims rather than relying on industry-wide contributions.