Curve founder Michael Egorov has proposed a market-driven solution to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov suggests a free-market-based method of recovery with an option-like payoff, allowing participants to invest in the recovery effort. The bad debt is tied to LlamaLend's CRV-long market, which allows users to borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token.
The loss occurred after the October 10 crash, which saw over $19 billion in leveraged liquidations. Egorov proposes packaging the affected lender positions into a tokenized vault and allowing traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with a way out while enabling outside buyers to determine the value of the distressed claims.
The tokenized vault would have an option-like property, with its value potentially increasing if CRV recovers. Liquidity providers in the new pool would earn swap fees and CRV incentives. The proposal presents a different model for addressing bad debt in DeFi, focusing on building a market for distressed claims rather than relying on a coordinated bailout.