Curve's founder, Michael Egorov, has unveiled a market-driven approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a free-market-based method of recovery, which functions as an investment opportunity for those willing to participate.
The plan involves packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims. The bad debt stems from the October 10 crash, which resulted in over $19 billion in leveraged liquidations within hours, marking the largest single-day deleveraging on record.
LlamaLend's CRV-long market, which allows users to borrow Curve's crvUSD stablecoin against CRV, was impacted by the crash. The market is designed to mitigate risk through an automated market maker built into the lending system, LLAMMA. However, during the October 10 crash, the market moved too quickly, and some lender positions ended up in a vault token that cannot be redeemed at full value.
Egorov argued that the token still holds value, as the loss is not open-ended. If CRV rises above a certain threshold, the conversion starts to reverse, and the positions begin taking in CRV collateral again.
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 token having an 'interesting option-like property' on CRV's recovery. Liquidity providers in the new pool would earn swap fees and any CRV incentives allocated by Curve's DAO.
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 plan presents a different model, where Curve would build a market for distressed claims, allowing buyers to determine the price, rather than relying on a coordinated bailout.