Curve founder Michael Egorov has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. 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 strategy while allowing outside buyers to determine the value of the distressed claims. The bad debt resulted from a significant crash on October 10, which led to over $19 billion in leveraged liquidations and caused prices to fall rapidly while gas costs rose. As a result, some liquidations could not occur in time, leaving lenders in the CRV-long market with deposits backed by only about 70% of their stated value.
Egorov's plan offers a free-market-based method of recovery with an option-like payoff, allowing participants to invest in the effort. The goal is to give trapped lenders a way out while letting buyers 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.
This would enable buyers to purchase claims that are partly backed, with the potential to increase in value if CRV recovers. The plan is being presented as an alternative to the coordinated bailout approach taken by Aave, which faces up to $230 million in bad debt following an exploit.
Egorov believes that if this pilot study proves successful, it could be applied to similar situations at Curve or other protocols, providing a market-driven solution to address bad debt in the DeFi space.