Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, the lending platform of Curve. The proposed plan involves packaging the affected lender positions into a tokenized vault, which would then be made available for traders to buy and sell through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit option while allowing outside buyers to determine the value of the distressed claims. The bad debt in question arose from the October 10 crash, which resulted in over $19 billion in leveraged liquidations within a single day, the largest deleveraging event on record.
The crash led to a situation where lenders in the CRV-long market were left with deposits backed by only about 70% of their stated value. Egorov's proposal suggests creating a tokenized vault and a dedicated Curve pool, utilizing the Stableswap design with a 1% swap fee, to facilitate the buying and selling of these distressed claims. This would give trapped lenders the choice to either hold on to their positions in hopes of a CRV recovery or sell their vault tokens at a discount. For buyers, this represents a long-term bet on CRV's potential recovery, with the token possessing an 'interesting option-like property' that could increase in value if CRV's price rises.
The proposal is being presented as an alternative to the coordinated bailout approach taken by Aave in response to its own bad debt issues, instead opting for a market-driven solution that allows buyers to determine the price of distressed claims.