Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt related 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 stems from LlamaLend's CRV-long market, where users borrow crvUSD stablecoins against CRV, the protocol's governance token.
Following the October 10 crash, triggered by President Donald Trump's announcement of tariffs on Chinese goods, lenders were left with deposits backed by about 70% of their stated value. Egorov proposes packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit option while enabling outside buyers to determine the value of the distressed claims. The plan is distinct from the recent Aave bailout, where the industry collectively raised funds to address bad debt.
Instead, Curve's solution relies on market forces to price the distressed tokens, offering buyers a potential long-term bet on CRV's recovery. 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: wait for a CRV recovery or sell their vault tokens at a discount. Buyers, on the other hand, can purchase claims that are partly backed today and may increase in value if CRV recovers.
Egorov believes this approach has an 'interesting option-like property' on CRV's recovery, with some backing already in place. The proposal's success could pave the way for similar solutions in the future, providing an alternative to industry-wide bailouts.