Curve 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. Egorov's proposal involves creating a tokenized vault for affected lender positions, which can then be bought and sold through a dedicated Curve pool.
This approach enables trapped lenders to exit their positions while allowing outside buyers to determine the value of the distressed claims. The plan is an alternative to seeking a bailout from Curve's DAO. The bad debt resulted from a crash on October 10, which caused significant leveraged liquidations and led to prices falling rapidly while gas costs rose, resulting in some liquidations being unable to occur in time. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
Egorov's proposal aims to provide a market-driven solution, where the tokenized claims can be traded, and buyers can decide their value. The proposed pool 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 to either wait for a CRV recovery or sell their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV, with the potential for increased value if CRV recovers.
The proposal comes at a time when the DeFi industry is addressing bad debt, with Aave facing up to $230 million in bad debt following an exploit. Egorov's approach presents a different model, where a market for distressed claims is created, and buyers determine the price, rather than relying on a coordinated bailout.