Curve founder Michael Egorov has introduced a market-based approach to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The proposed solution involves packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This method gives trapped lenders an exit option while enabling outside buyers to determine the value of the distressed claims. The goal is to provide a market-driven fix for the bad debt, which resulted from a crash that saw over $19 billion in leveraged liquidations.
The plan is an alternative to a bailout, with the tokenized vault offering an 'option-like' bet on CRV's recovery, and its value potentially increasing if CRV's price rises. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee, and liquidity centered around 71% solvency. This approach would allow liquidity providers to earn swap fees and CRV incentives, while also potentially moving some of the bad debt onto Curve's balance sheet.
The proposal comes at a time when the DeFi industry is grappling with bad debt, following an exploit that left Aave facing up to $230 million in bad debt. The industry response has been a coordinated bailout effort, but Egorov's proposal presents a different model, where a market for distressed claims is created, and buyers determine the price.