Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov's proposal involves creating a tokenized vault to package the affected lender positions, which would then be made available for traders to buy and sell 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 bad debt in question stems from a crash that saw over $19 billion in leveraged liquidations within a single day, resulting in lenders in the CRV-long market being left with deposits backed by only about 70% of their stated value. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable trapped depositors to either wait for a CRV recovery or sell their vault tokens at a discount.
For buyers, the trade would represent 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, as evidenced by Aave's recent bailout. Egorov's approach presents a different model, one that relies on building a market for distressed claims rather than seeking a coordinated bailout.