Curve's founder, Michael Egorov, has put forth a market-driven approach to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' inviting Curve DAO to participate but not requiring its involvement. The bad debt stems from LlamaLend's CRV-long market, where users borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token. When CRV's value plummeted following the October 10 crash, lenders were left with deposits backed by only about 70% of their stated value.
Egorov's proposal involves packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims.
The tokenized vault would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. For trapped depositors, the pool offers a choice: they can either wait for CRV's recovery or sell their vault tokens at a discount.
Buyers, on the other hand, would be making a long-term bet on CRV's potential recovery, purchasing a claim that is partly backed and could increase in value if CRV recovers. Egorov's proposal comes at a time when the DeFi industry is grappling with bad debt, particularly in the wake of an attacker exploiting Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt. The industry response has been a coordinated bailout effort, whereas Egorov's proposal presents a market-driven alternative, allowing buyers to determine the price of distressed claims.