Curve's founder, Michael Egorov, has put forth a market-based solution to address approximately $700,000 in bad debt tied to LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault for affected lender positions, which can then be bought and sold 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 plan is an alternative to seeking a bailout from Curve's DAO.
The bad debt stems from a crash that resulted in over $19 billion in leveraged liquidations, with LlamaLend's lenders left with deposits backed by about 70% of their stated value. Egorov's proposal seeks to give these lenders a way out while enabling buyers to make a long-term bet on CRV's recovery. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
This would allow the pool to price the distressed token closer to its current backing rather than its full value. For trapped depositors, the pool offers a choice: they can either hold on to their vault tokens in hopes of a CRV recovery or sell them at a discount and move on. For buyers, the trade represents a long-term bet on CRV, with the potential for increased value if CRV recovers.
The proposal comes at a time when the DeFi industry is grappling with bad debt, including Aave's recent $230 million shortfall. Egorov's approach presents a different model, one that relies on market forces to determine the value of distressed claims rather than seeking a coordinated bailout.
If successful, this pilot study could be applied to similar situations at Curve or other protocols in the future.