Curve founder Michael Egorov has unveiled a market-based approach to resolve 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, allowing traders to buy and sell them through a dedicated Curve pool. This method provides an option-like bet on CRV's recovery, giving trapped lenders an exit strategy while enabling outside buyers to determine the value of distressed claims.
The bad debt stems from a crash that saw over $19 billion in leveraged liquidations, resulting in lenders holding deposits backed by about 70% of their stated value. Egorov's plan aims to create a market for these distressed claims, allowing buyers to decide their worth and potentially providing a recovery pathway for CRV. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This approach offers a choice for trapped depositors, who can either wait for CRV's recovery or sell their vault tokens at a discount.
For buyers, the trade represents a long-term bet on CRV's potential recovery, with the token possessing an 'interesting option-like property.' The proposal comes as the DeFi industry grapples with bad debt, including Aave's recent $230 million shortfall. Egorov's market-driven solution presents an alternative to the coordinated bailout approach, instead allowing the market to determine the value of distressed claims.