Curve founder Michael Egorov has introduced a market-driven approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov outlined a free-market-based recovery method with an option-like payoff, inviting Curve DAO to participate but not requiring its involvement.
The bad debt is tied to LlamaLend's CRV-long market, where users borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token. This trade functions as a bet that CRV will maintain or increase its value.
If CRV declines rapidly, the collateral may not be sold quickly enough to fully repay lenders. Following the October 10 crash, which saw over $19 billion in leveraged liquidations, LlamaLend suffered losses despite Curve's crvUSD minting markets holding up during the sell-off. Lenders in the CRV-long market were left with deposits backed by approximately 70% of their stated value. Egorov proposes packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool.
The goal is to provide trapped lenders with an exit option while enabling outside buyers to determine the value of the distressed claims. The tokenized vault would utilize Curve's Stableswap design, featuring a 1% swap fee and liquidity centered around 71% solvency. This approach would price the token closer to its current backing rather than its full value. For trapped depositors, the pool offers a choice between waiting for a CRV recovery or selling their vault tokens at a discount.
For buyers, the trade represents a long-term bet on CRV, with the token having an 'interesting option-like property' tied to CRV's recovery. Liquidity providers in the new pool would earn swap fees and potential CRV incentives allocated by Curve's DAO. Admin fees would partly accrue in the distressed vault token itself, which Egorov has suggested the DAO retain rather than convert, gradually transferring 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 bad debt, with Aave facing up to $230 million in bad debt following an exploit.
In contrast to Aave's coordinated bailout effort, Egorov presents Curve's pool as a market-driven alternative, allowing buyers to determine the price of distressed claims.