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. 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 stems from a crash that resulted in over $19 billion in leveraged liquidations, with LlamaLend's CRV-long market being particularly affected.
The market is designed to mitigate risk through an automated market maker, but the crash led to a scenario where some liquidations could not occur in time, leaving lenders with deposits backed by only about 70% of their stated value. Egorov's proposal seeks to create a market for these distressed claims, offering buyers an option-like bet on the recovery of CRV. The plan would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This approach differs from the coordinated bailout effort underway for Aave, which faces up to $230 million in bad debt following an exploit.
Egorov's proposal presents an alternative model, where Curve would build a market for distressed claims, allowing buyers to determine the price, rather than relying on an industry-wide bailout.