Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The plan involves packaging affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This approach gives trapped lenders an exit option while enabling outside buyers to determine the value of the distressed claims. The bad debt stems from a crash that resulted in over $19 billion in leveraged liquidations, with LlamaLend's lenders left with deposits backed by about 70% of their stated value.
Egorov's proposal aims to provide a market-driven solution, contrasting with the bailout approach taken by Aave. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow trapped depositors to sell their vault tokens at a discount or wait for a CRV recovery, while buyers would be making a long-term bet on CRV's potential rebound.
The proposal presents an alternative model for addressing bad debt in DeFi, focusing on creating a market for distressed claims rather than relying on industry-wide bailouts.