Curve's founder, Michael Egorov, has put forth a market-driven approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' inviting but not requiring Curve DAO to participate. The bad debt is tied to LlamaLend's CRV-long market, which allows users to borrow crvUSD against CRV, the protocol's governance token.
However, when CRV's value plummeted following the October 10 crash, lenders were left with deposits backed by only about 70% of their stated value. Egorov's proposal involves packaging the affected lender positions into a tokenized vault and allowing traders to buy and sell them through a dedicated Curve pool. This approach would provide trapped lenders with an exit strategy while enabling outside buyers 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. For trapped depositors, the pool offers a choice: they can either wait for a CRV recovery or sell their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV's recovery, with the token possessing an 'interesting option-like property.' The proposal comes at a time when the DeFi industry is grappling with bad debt, particularly in the wake of Aave's recent exploit, which resulted in up to $230 million in bad debt. Egorov's approach presents a distinct model, one that relies on market forces rather than a coordinated bailout effort.
If successful, this pilot study could be applied to similar situations at Curve or other protocols.