Curve's founder, Michael Egorov, has introduced a market-based approach to tackle approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposed solution involves packaging affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool. This method aims to provide trapped lenders with an exit strategy while allowing outside buyers to determine the value of 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.
Egorov's plan offers an alternative to requesting a bailout from Curve's DAO, instead relying on market forces to resolve the issue. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee, and liquidity centered around 71% solvency. This approach would allow buyers to purchase claims that are partly backed, with the potential for increased value if CRV recovers. The plan also provides an opportunity for liquidity providers to earn swap fees and CRV incentives.
Egorov has asked the DAO to retain admin fees in the distressed vault token, which would gradually transfer some of the bad debt to Curve's balance sheet through trading activity. The proposal comes at a time when the DeFi industry is addressing similar issues, with Aave facing up to $230 million in bad debt following an exploit. Egorov's market-driven solution presents a different model, one that relies on market forces rather than a coordinated bailout effort.