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 creating a tokenized vault for affected lender positions, which can then be bought and sold through a dedicated Curve pool. This method would enable 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 stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations. Despite Curve's crvUSD minting markets holding up, LlamaLend suffered losses due to rapid price declines and high gas costs, leaving lenders with deposits backed by only about 70% of their stated value.
Egorov's proposal involves packaging the affected lender positions into a tokenized vault, which would be traded on a Curve pool with a 1% swap fee. The pool would price the token closer to its current backing, around 71% solvency, rather than its full value. This approach would give trapped lenders the option to sell their vault tokens at a discount or wait for a potential CRV recovery. 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 as the DeFi industry is dealing with a separate issue, an attacker exploiting Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt.
The industry response has been a coordinated bailout effort, whereas Curve's approach focuses on creating a market for distressed claims, allowing buyers to determine the price.