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. Egorov outlined a 'free-market based method of recovery' that would enable trapped lenders to sell tokenized claims on deposits, providing buyers with an option-like opportunity to bet on CRV's potential recovery. The bad debt is currently situated in LlamaLend's CRV-long market, which permits users to borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token.
The trade functions as a bet that CRV will maintain its value or increase. If CRV declines too rapidly, the collateral may not be sold quickly enough to repay lenders in full. This scenario occurred following the October 10 crash, triggered by President Donald Trump's announcement of tariffs on all Chinese goods via a post on Truth Social.
Rather than requesting Curve's DAO to cover the shortfall, Egorov proposes packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. The objective is to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims. The bad debt resulted from the crash, which saw over $19 billion in leveraged liquidations within hours, the largest single-day deleveraging on record.
Curve's crvUSD minting markets withstood the sell-off, but LlamaLend did not fully escape the damage. Prices fell 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 approximately 70% of their stated value. Egorov argued that the token still holds value because the loss is not open-ended.
The distressed positions already hold crvUSD that was converted from CRV, so further CRV declines should not deepen the shortfall. If CRV rises above roughly $0.96, the conversion starts to reverse, and the positions begin taking in CRV collateral again. Full recovery would occur around $1.24. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value.
For trapped depositors, the pool offers a choice: they can wait for a CRV recovery or sell their vault tokens at a discount and move on. For buyers, the trade resembles a long-term bet on CRV, as they purchase a claim that is partly backed today and could become more valuable if CRV recovers.
The token has an 'interesting option-like property' on CRV's recovery, with some backing already in place. Liquidity providers in the new pool would earn swap fees and any CRV incentives that Curve's DAO chooses to allocate. The proposal's timing has added significance, given the recent exploit of Kelp DAO's LayerZero bridge, which resulted in Aave facing up to $230 million in bad debt.
The industry response has been a coordinated bailout through DeFi United, a recovery effort led by Aave service providers. Egorov is presenting Curve's pool as an alternative model, where instead of relying on a bailout, the platform would create a market for distressed claims and allow buyers to determine the price.