Curve's founder, Michael Egorov, has introduced a market-based approach to address approximately $700,000 in bad debt tied to 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 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 originated from a market crash, resulting in leveraged liquidations exceeding $19 billion, with LlamaLend's CRV-long market being particularly affected. The market's automated market maker, LLAMMA, is designed to mitigate risks by converting collateral in steps as market prices move. However, during the October 10 crash, the market moved too quickly, and some lender positions became trapped in a vault token that cannot be redeemed at full value.
Egorov's plan offers a token with an 'interesting option-like property' that allows buyers to 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 approach differs from the recent Aave bailout, where the industry responded with a coordinated recovery effort. Instead, Curve's solution relies on building a market for distressed claims, allowing buyers to determine the price.
If successful, this pilot study could be applied to similar situations in the future.