Curve's founder, Michael Egorov, has put forth a market-driven approach to address 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 would provide an exit strategy for trapped lenders 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 stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations.
Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price declines and rising gas costs, leading to a scenario where some liquidations could not occur in time. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
Egorov's proposal aims to give these lenders a way out while allowing the market to determine the value of the distressed claims. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable trapped depositors to sell their vault tokens at a discount or hold on to them in anticipation of a CRV recovery. For buyers, the trade represents a long-term bet on CRV's recovery, with the token having an 'interesting option-like property.' The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attack on Kelp DAO's LayerZero bridge that resulted in Aave facing up to $230 million in bad debt.
Egorov's approach is being presented as a different model, one that relies on market forces rather than a coordinated bailout effort.