Curve founder Michael Egorov has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov's proposal involves creating a tokenized vault for affected lender positions and establishing a dedicated Curve pool where traders can buy and sell these tokens. This approach aims to provide trapped lenders with an exit option while enabling outside buyers to determine the value of the distressed claims. The bad debt in question stems from a crash that occurred on October 10, resulting in significant leveraged liquidations and a substantial loss for lenders in the CRV-long market.
According to Egorov, packaging the affected lender positions into a tokenized vault and allowing traders to buy and sell them would give lenders a way out and let the market decide the value 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 would enable liquidity providers to earn swap fees and any CRV incentives allocated by Curve's DAO.
Egorov's proposal presents a different approach to addressing bad debt in DeFi, one that relies on market forces rather than a coordinated bailout. By creating a market for distressed claims, Curve can provide a more sustainable solution for handling similar situations in the future.