Curve's founder, Michael Egorov, has put forth a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposed method involves packaging affected lender positions into tokenized vaults, which can then be bought and sold through a dedicated Curve pool.
This approach aims to provide trapped lenders with a way out while allowing outside buyers to determine the worth of the distressed claims. The bad debt in question stems from a crash on October 10, which saw over $19 billion in leveraged liquidations, resulting in lenders in the CRV-long market being left with deposits backed by only about 70% of their stated value.
Egorov's plan involves creating a tokenized vault and letting traders buy and sell the affected positions, giving lenders the option to sell at a discount or hold on to their positions in anticipation of a CRV price recovery. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency, rather than full value. For buyers, this trade represents a long-term bet on CRV's recovery, with the token having an 'interesting option-like property' that could increase in value if CRV's price rises. The timing of this proposal coincides with Aave's recent bad debt issue, which has led to a coordinated bailout effort.
In contrast, Curve's approach focuses on creating a market for distressed claims, allowing buyers to determine the price, rather than relying on a bailout.