Curve founder Michael Egorov has put forth a market-based solution to tackle approximately $700,000 in bad debt linked to LlamaLend, Curve's lending platform. The proposed plan involves packaging affected lender positions into a tokenized vault, 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 a means of exit 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 hours, resulting in lenders in the CRV-long market being left with deposits backed by about 70% of their stated value. Egorov's plan is designed to give these lenders a way out while enabling buyers to make a long-term 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 allow the pool to price the distressed token closer to its current backing rather than its full value. For trapped depositors, the pool offers a choice between waiting for a CRV recovery or selling their vault tokens at a discount.
For buyers, the trade represents a long-term bet on CRV, with the token having an 'interesting option-like property' on CRV's recovery. The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attacker's exploitation of Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt. Egorov's plan presents a different model, where instead of relying on a coordinated bailout, Curve would create a market for distressed claims and let buyers determine the price. If successful, this pilot study could be applied to similar situations at Curve or other protocols.