Curve's founder, Michael Egorov, has introduced a market-based approach to tackle approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposed solution involves packaging affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool.
This method aims to provide trapped lenders with an exit strategy while allowing outside buyers to determine the value of the distressed claims. The bad debt stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations, the largest single-day deleveraging on record. The crash led to a scenario where some liquidations could not occur in time, leaving lenders in the CRV-long market with deposits backed by only about 70% of their stated value.
Egorov's plan is designed to give these lenders a way out while permitting buyers to decide the worth of the distressed claims. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This approach would allow trapped depositors to either wait for a CRV recovery or sell their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV's recovery, with the potential for increased value if CRV's price rises.
The proposal comes at a time when the DeFi industry is addressing bad debt, with Aave facing up to $230 million in bad debt following an exploit. In contrast to Aave's coordinated bailout effort, Egorov's plan presents a market-driven solution, where buyers determine the price of distressed claims. If successful, this approach could serve as a model for addressing similar situations in the future.