Curve's founder, Michael Egorov, has introduced a market-based solution to address approximately $700,000 in bad debt tied to LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault for affected lender positions, which can then be bought and sold through a dedicated Curve pool. This approach enables trapped lenders to exit their positions while allowing outside buyers to determine the value of the distressed claims.
The bad debt stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations and saw CRV's value plummet. LlamaLend's CRV-long market, which allows users to borrow crvUSD against CRV, was particularly affected, with lenders left with deposits backed by only about 70% of their stated value.
Egorov's proposal aims to provide a way out for these lenders while allowing the market to decide 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 buyers to purchase the distressed token at a discount, effectively making a long-term bet on CRV's potential recovery. The proposal comes as the DeFi industry grapples with the issue of bad debt, with Aave currently facing up to $230 million in bad debt following an exploit on Kelp DAO's LayerZero bridge.
Egorov's market-driven approach presents a different model for addressing bad debt, one that relies on market forces rather than a coordinated bailout effort.