Curve founder Michael Egorov has introduced a market-driven approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov's proposal involves creating a tokenized vault for the affected lender positions, allowing them to be bought and sold through a dedicated Curve pool. This approach would give trapped lenders an exit option while enabling outside buyers to determine the value of the distressed claims.
The plan is an alternative to seeking a bailout from Curve's DAO. The bad debt resulted from a crash on October 10, which caused over $19 billion in leveraged liquidations and led to a significant decline in CRV's value. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. Egorov's proposal aims to provide a solution to this issue by creating a market for the distressed claims, allowing buyers to purchase them at a discounted price.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable liquidity providers to earn swap fees and CRV incentives while providing a potential long-term bet on CRV's recovery for buyers. 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 on Kelp DAO's LayerZero bridge.
Egorov's approach presents a different model for resolving bad debt, one that relies on market forces rather than a coordinated bailout.