Curve's founder, Michael Egorov, has put forth a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposed plan 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 occurred on October 10, resulting in over $19 billion in leveraged liquidations. Egorov's plan is distinct from the recent Aave bailout, instead opting for a market-driven approach where buyers can purchase tokenized claims with an 'option-like' payoff, tied to the potential recovery of CRV.
If CRV's price rises above a certain threshold, the conversion of collateral starts to reverse, and positions begin to take in CRV collateral again, potentially leading to full recovery. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee, and liquidity centered around 71% solvency. This would allow trapped depositors to choose between waiting for a CRV recovery or selling their vault tokens at a discount.
For buyers, the trade represents a long-term bet on CRV's potential recovery, with the token having an 'interesting option-like property.' The proposal has been presented as a potential pilot study, which, if successful, could be applied to similar situations at Curve or other protocols.