Curve's founder, Michael Egorov, has outlined a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The plan involves packaging the affected lender positions into a tokenized vault, enabling traders to buy and sell them through a specialized Curve pool.
This method offers trapped lenders 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's automated market maker, LLAMMA, aims to reduce risk by converting collateral in steps as the market moves. However, during the crash, prices fell rapidly, and some lender positions became trapped in a vault token that cannot be redeemed at full value. Egorov's proposal involves creating a pool that uses Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow trapped depositors to sell their vault tokens at a discount or wait for a potential CRV recovery.
For buyers, the trade represents a long-term bet on CRV's recovery, with the token having an 'interesting option-like property.' The proposal comes as Aave faces a significant bad debt issue following an exploit, with the industry responding through a coordinated bailout effort. Egorov's approach presents a different model, relying on market forces to determine the value of distressed claims rather than seeking a bailout.