Michael Egorov, the founder of Curve, has put forth a proposal to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The plan involves creating a tokenized vault for the affected lender positions, which can then be bought and sold through a dedicated Curve pool. This approach would enable trapped lenders to exit their positions while allowing outside buyers to determine the value of the distressed claims.
The goal is to provide a market-based solution, rather than relying on a bailout. The bad debt stems from a crash on October 10, which resulted in significant losses for lenders in the CRV-long market.
Egorov's proposal aims to give lenders a way out while allowing buyers to make a bet on CRV's potential recovery. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable buyers to purchase claims that are partly backed, with the potential to increase in value if CRV recovers.
The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attack on Kelp DAO's LayerZero bridge, which resulted in Aave facing up to $230 million in bad debt. Egorov's proposal presents a different approach, focusing on creating a market for distressed claims rather than relying on a coordinated bailout. If successful, this model could be applied to similar situations in the future.