Curve founder Michael Egorov has unveiled a market-driven approach to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov suggested a free-market based method of recovery, allowing participants to invest in the effort. The proposed plan involves packaging affected lender positions into a tokenized vault, which would then be made available for purchase and sale through a dedicated Curve pool. This approach aims to provide an exit strategy for trapped lenders while allowing external buyers to determine the value of the distressed claims.
The bad debt in question stems from the October 10 crash, which resulted in over $19 billion in leveraged liquidations. Egorov's proposal offers an alternative to requesting Curve's DAO to cover the shortfall, instead opting for a market-based solution that would enable the trading of tokenized vault tokens. The goal is to give lenders a way out while letting the market decide the value of the distressed claims. If CRV's price rises above a certain threshold, the conversion of crvUSD back into CRV collateral would begin, potentially leading to full recovery.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow liquidity providers to earn swap fees and CRV incentives, while also providing a potential long-term bet on CRV's recovery for buyers. The proposal comes at a time when the DeFi industry is grappling with the issue of bad debt, following a recent exploit that left Aave facing up to $230 million in bad debt. Egorov's plan presents a different model for addressing such issues, one that relies on market forces rather than a coordinated bailout effort.