Curve's founder, Michael Egorov, has put forth a market-driven approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov suggested a free-market-based recovery method with an option-like payoff, allowing anyone to participate.
The bad debt stems from LlamaLend's CRV-long market, where users borrow crvUSD against CRV, the protocol's governance token. After the October 10 crash, lenders were left with deposits backed by only about 70% of their stated value.
Egorov's proposal involves packaging affected lender positions into a tokenized vault and allowing traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims.
The tokenized vault would have an option-like property, with its value potentially increasing if CRV recovers. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow liquidity providers to earn swap fees and CRV incentives while giving trapped depositors the option to sell their vault tokens at a discount or wait for a CRV recovery.
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. Egorov's market-driven solution presents an alternative to the coordinated bailout approach, allowing the market to determine the price of distressed claims.