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. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' inviting Curve DAO to participate but not requiring its involvement. The bad debt stems from LlamaLend's CRV-long market, where users can borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token. This trade functions as a wager that CRV will maintain its value or increase.
However, if CRV declines rapidly, the collateral may not be sold quickly enough to repay lenders in full. Following the October 10 crash, triggered by President Donald Trump's announcement of tariffs on Chinese goods via Truth Social, the loss from the bad debt became apparent in LlamaLend's CRV-long market. Rather than seeking a bailout from Curve's DAO, 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.
LlamaLend's bad debt resulted from the crash, which saw over $19 billion in leveraged liquidations within hours, marking the largest single-day deleveraging on record. Although Curve's crvUSD minting markets withstood the sell-off, LlamaLend was not entirely unaffected. Prices plummeted, and 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.
The market is designed to mitigate this risk through an automated market maker built into the lending system, LLAMMA. Egorov argued that the token still holds value because the loss is not open-ended. The distressed positions already hold crvUSD converted from CRV, so further CRV declines should not exacerbate 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, purchasing a claim that is partly backed today and could increase in value if CRV recovers. This gives the token 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 allocated by Curve's DAO.
Admin fees would partly accrue in the distressed vault token itself. The proposal's timing carries added weight, given the recent exploit of Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt. Egorov presents Curve's pool as a distinct model, allowing a market for distressed claims to determine the price rather than relying on a coordinated bailout.