Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. In a governance post, Egorov outlined a plan to package the affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool. This strategy aims to provide trapped lenders with an exit option while allowing outside buyers to determine the value of the distressed claims.
The bad debt resulted from a crash that saw over $19 billion in leveraged liquidations, with LlamaLend's CRV-long market being particularly affected. The market, which allows users to borrow Curve's crvUSD stablecoin against CRV, experienced a significant decline in value, resulting in lenders being left with deposits backed by only about 70% of their stated value.
Egorov's proposal involves creating a tokenized vault and a dedicated Curve pool, where traders can buy and sell the distressed claims. The goal is to give lenders a way out while allowing buyers to decide the value of the claims. The plan is seen as an alternative to a bailout, with Egorov arguing that the tokenized claims still hold value due to the limited nature of the loss. If CRV's price rises above a certain threshold, the conversion of crvUSD back into CRV collateral will start, potentially leading to a full recovery.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This approach offers trapped depositors a choice: they can 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's recovery, with the token having an 'interesting option-like property.' The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attacker's exploitation of Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt. Egorov's plan is being presented as a market-driven solution, where buyers determine the price of distressed claims, rather than relying on a coordinated bailout effort.