Curve's founder, Michael Egorov, has introduced a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposal involves packaging the affected lender positions into a tokenized vault, which can then be bought and sold by traders through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while allowing outside buyers to determine the value of the distressed claims. The bad debt resulted from a crash on October 10, which led to significant losses in the CRV-long market.
Egorov's plan offers an alternative to a traditional bailout, instead relying on market forces to resolve the issue. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable trapped depositors to sell their vault tokens at a discount or wait for a potential CRV recovery. For buyers, the trade represents a long-term bet on CRV's recovery, with the token having an 'interesting option-like property.' The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attack on Kelp DAO's LayerZero bridge that resulted in Aave facing up to $230 million in bad debt.
Egorov's approach presents a different model for addressing such issues, one that relies on market mechanisms rather than a coordinated bailout effort.