Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt tied to LlamaLend, the platform's lending arm. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' inviting Curve DAO to participate but not requiring its involvement. The bad debt is a result of the October 10 crash, which led to a significant decline in CRV's value, causing lenders in the CRV-long market to be 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 aims to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims.
The tokenized vault would have an 'interesting option-like property' on CRV's recovery, with its value potentially increasing if CRV's price rises but not decreasing if CRV's price falls. 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 between waiting for a CRV recovery or selling their vault tokens at a discount. Buyers, on the other hand, would be making a long-term bet on CRV's recovery, purchasing a claim that is partly backed and could increase in value if CRV's price rises.
Egorov's proposal comes at a time when the DeFi industry is grappling with bad debt, as seen in the recent Aave bailout. The Curve founder is presenting this market-driven solution as an alternative to the coordinated bailout efforts, allowing buyers to decide the price of distressed claims rather than relying on industry-wide contributions.