Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The proposed method involves packaging the 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, which allows users to borrow Curve's crvUSD stablecoin against CRV, saw lenders left with deposits backed by about 70% of their stated value. Egorov's plan seeks to address this issue by creating a market for the distressed claims, thereby giving lenders a way out and buyers a chance to 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 buyers to purchase the distressed token at a discount, with the potential for it to increase in value if CRV recovers. The plan also provides an alternative to the recent Aave bailout, which has been coordinated through DeFi United. Instead of relying on industry-wide contributions, Curve's solution would create a market-driven approach to addressing bad debt.
If successful, this pilot study could be applied to similar situations in the future, providing a new model for the DeFi industry.