Curve founder Michael Egorov has introduced a market-driven solution to address approximately $700,000 in troubled debt tied to LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a free-market-based method of recovery, which would allow participants to invest in the effort, with Curve DAO invited but not required to participate. The bad debt is currently sitting in LlamaLend's CRV-long market, where users can borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token.
The trade operates as a bet that CRV will hold its value or rise; however, if CRV falls too quickly, the collateral may not be sold rapidly enough to repay lenders in full. Following the October 10 crash, which saw over $19 billion in leveraged liquidations within hours, LlamaLend's bad debt resulted from the crash. Curve's crvUSD minting markets held up during the sell-off, but LlamaLend did not fully escape the damage, with prices falling rapidly while gas costs rose, leading to a scenario where some liquidations could not occur in time. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
The market is designed to reduce this risk through an automated market maker built into the lending system LLAMMA. Instead of selling a borrower's collateral all at once when prices fall, LLAMMA converts the collateral in steps as the market moves.
Egorov argued that the providers of borrowable liquidity in this market were exposed to losses during liquidation protection and cannot withdraw their positions, which are currently around 70% backed. The proposed solution involves 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 allowing outside buyers to decide the value of the distressed claims. The plan would use Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value.
This means the pool would not treat the distressed token as if it were worth one dollar on the dollar; instead, it would price the token closer to the amount currently backing it. For trapped depositors, the pool offers a choice: they can either wait for a CRV recovery or sell their vault tokens at a discount and move on. For buyers, the trade resembles a long-term bet on CRV, as they purchase a claim that is partly backed today and could become worth more if CRV recovers. Liquidity providers in the new pool would earn swap fees and any CRV incentives that Curve's DAO chooses to allocate.
Admin fees would partly accrue in the distressed vault token itself. Egorov has asked the DAO to keep those tokens rather than convert them, which would slowly move some of the bad debt onto Curve's balance sheet through trading activity. The proposal comes at a time when the DeFi industry is addressing its own bad debt issues.
Earlier in the month, an attacker exploited Kelp DAO's LayerZero bridge, releasing 116,500 unbacked rsETH worth about $292 million. The attacker then deposited that unbacked rsETH into Aave as collateral and borrowed real WETH against it. Aave now faces up to $230 million in bad debt.
The industry response has been a coordinated bailout through DeFi United, a recovery effort led by Aave service providers that raised about $160 million of the roughly $200 million needed so far, with contributions from Mantle, Aave DAO, EtherFi, Lido, and Aave founder Stani Kulechov. Egorov is presenting Curve's pool as an alternative model, where instead of passing the hat across the industry, Curve would build a market for distressed claims and let buyers decide the price. If the proposal proves to be a successful pilot study, it could be applied in similar difficult situations at Curve or other protocols.