Curve's founder, Michael Egorov, has introduced a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov's proposal involves creating a tokenized vault that enables trapped lenders to sell their claims to outside buyers, who can then decide the value of these distressed assets.
This approach contrasts with the recent Aave bailout, where the industry came together to raise funds to cover bad debt. Instead, Curve's solution relies on market forces to determine the worth of the affected lender positions.
The plan is designed to provide an exit strategy for lenders while allowing buyers to make a long-term bet on the potential recovery of CRV, Curve's governance token. The proposed solution utilizes Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
This means that the pool will not treat the distressed token as if it were worth its full value but will instead price it closer to its current backing. For trapped depositors, the pool offers a choice: they can either hold on to their vault tokens in anticipation of a CRV recovery or sell them at a discount and move on. Buyers, on the other hand, can purchase the claims as a long-term bet on CRV's potential recovery, with the token having an 'interesting option-like property' that increases in value if CRV's price rises.
The proposal is seen as an alternative to the recent Aave bailout, where the industry collectively raised funds to cover bad debt. Egorov believes that this market-driven approach could be applied to similar situations in the future, potentially providing a more sustainable solution for addressing bad debt in the DeFi space.