Michael Egorov, the founder of Curve, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a plan that enables trapped lenders to sell tokenized claims on deposits, offering buyers an option-like investment opportunity in the recovery of CRV.
This approach is in contrast to the recent Aave bailout, where the industry came together to raise funds to cover the bad debt. The bad debt in question stems from the October 10 crash, which resulted in over $19 billion in leveraged liquidations, causing prices to fall rapidly while gas costs rose, leading to a scenario where some liquidations could not occur in time. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
Egorov's proposal involves packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. The goal is to provide trapped lenders with an exit while allowing outside buyers to determine 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 either wait for a CRV recovery or sell their vault tokens at a discount and move on. For buyers, the trade represents a long-term bet on CRV, with the potential for the token to increase in value if CRV recovers.
The proposal is seen as an alternative to the industry's response to Aave's bad debt, where a coordinated bailout effort was undertaken. Egorov believes that this market-driven approach could be applied to similar situations in the future, providing a new model for addressing bad debt in the DeFi space.