Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault for the affected lender positions, which can then be bought and sold through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while allowing outside buyers to determine the value of the distressed claims.
The plan is in contrast to 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 resolve the issue, potentially providing a more sustainable and efficient way to address similar problems in the future. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow buyers to purchase the distressed token at a discount, effectively making a long-term bet on CRV's recovery.
The token would have an 'option-like property,' with its value potentially increasing if CRV recovers, but without further decline if CRV's price drops. Egorov believes this approach could serve as a model for addressing similar challenges at Curve or other protocols, promoting a more market-driven approach to resolving bad debt in the DeFi space.