Curve founder Michael Egorov has put forth a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov's proposal involves creating a tokenized vault to package the affected lender positions, allowing traders to buy and sell them through a dedicated Curve pool. 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 stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations within hours, the largest single-day deleveraging on record. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price declines and rising gas costs, leading to a scenario where some liquidations could not occur in time. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
The proposed pool would utilize Curve's Stableswap design, featuring a 1% swap fee and liquidity centered around 71% solvency. For trapped depositors, the pool offers a choice between waiting for a CRV recovery or selling their vault tokens at a discount. Buyers, on the other hand, can purchase a claim that is partly backed and may increase in value if CRV recovers, essentially making it a long-term bet on CRV.
The proposal comes at a time when Aave is facing up to $230 million in bad debt following an exploit, with the industry responding through a coordinated bailout effort. Egorov's plan presents a different model, where Curve would create a market for distressed claims and allow buyers to determine the price, rather than relying on a bailout.