Curve founder Michael Egorov has put forth a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The proposal involves creating a tokenized vault to package the affected lender positions, 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 on October 10, which resulted in over $19 billion in leveraged liquidations and caused 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 plan is to use Curve's Stableswap design for the proposed pool, with a 1% swap fee and liquidity centered around 71% solvency.
This would enable trapped depositors to either wait for a CRV recovery or sell their vault tokens at a discount. For buyers, the trade would resemble a long-term bet on CRV, with the potential for the token's value to increase if CRV recovers. The proposal comes at a time when the DeFi industry is addressing bad debt, with Aave facing up to $230 million in bad debt following an exploit.
Egorov's market-driven approach presents an alternative to the coordinated bailout efforts seen in the industry, instead allowing the market to determine the price of distressed claims.