Curve Founder Proposes Market-Driven Solution to Address $700,000 in Bad Debt

Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault for the affected lender positions, which can then be bought and sold through a dedicated Curve pool. This approach aims to provide trapped lenders with a way out while allowing outside buyers to determine the value of the distressed claims.

The bad debt stems from a crash that resulted in over $19 billion in leveraged liquidations, with LlamaLend's CRV-long market being particularly affected. The market allows users to borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token, but the crash led to a scenario where some liquidations could not occur in time, resulting in lenders being left with deposits backed by about 70% of their stated value.

Egorov's proposal seeks to address this issue by packaging the affected lender positions into a tokenized vault and letting traders buy and sell them through a dedicated Curve pool. The goal is to give trapped lenders a way out while letting outside buyers decide what the distressed claims are worth. The proposed pool would use Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value.

For trapped depositors, the pool offers a choice: they can keep waiting for a CRV recovery or sell their vault tokens at a discount and move on. For buyers, the trade looks like a long-term bet on CRV, with the token having an 'interesting option-like property' on CRV's recovery, but with some backing already in place. The proposal comes at a time when the DeFi industry is grappling with bad debt, with Aave facing up to $230 million in bad debt following an exploit.

Egorov's proposal presents a different model, one that relies on building a market for distressed claims rather than seeking a coordinated bailout. If successful, this approach could be applied to similar situations at Curve or other protocols in the future.