Michael Egorov, the founder of Curve, has put forth a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a plan that enables trapped lenders to sell tokenized claims on deposits, giving buyers the opportunity to make an option-like bet on the potential recovery of CRV.
The bad debt is currently situated in LlamaLend's CRV-long market, where users can borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token. The trade functions as a bet that CRV will maintain its value or increase. However, if CRV falls rapidly, the collateral may not be sold quickly enough to repay lenders in full. This scenario occurred after the October 10 crash, which was triggered by President Donald Trump's announcement of tariffs on all Chinese goods via a post on Truth Social.
Rather than relying on Curve's DAO to cover the shortfall, Egorov proposes packaging the affected lender positions into a tokenized vault and allowing traders to buy and sell them through a dedicated Curve pool. The goal is to provide trapped lenders with a means of exit while enabling outside buyers to determine the value of the distressed claims. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value. This approach would allow trapped depositors to choose between waiting for a CRV recovery or selling their vault tokens at a discount and moving on.
For buyers, the trade would function as a long-term bet on CRV, with the potential for increased value if CRV recovers. The token would possess an 'interesting option-like property' on CRV's recovery, with some backing already in place. Liquidity providers in the new pool would earn swap fees and any CRV incentives allocated by Curve's DAO. 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 on Kelp DAO's LayerZero bridge.
Egorov's proposal presents a different model, one that relies on building a market for distressed claims and allowing buyers to determine the price, rather than seeking a coordinated bailout.