Curve's founder, Michael Egorov, has introduced a market-based approach to tackle approximately $700,000 in bad debt tied to LlamaLend, Curve's lending platform. The proposed solution enables trapped lenders to sell tokenized claims on deposits, giving buyers an opportunity to make an option-like investment in CRV's potential recovery.
This approach differs from the recent Aave bailout, where the industry came together to raise funds to cover the bad debt. Instead, Curve's plan creates a market for distressed claims, allowing buyers to determine their value. The bad debt stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations, causing prices to fall rapidly while gas costs rose.
As a result, some liquidations could not occur in time, 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 and allowing traders to buy and sell them through a dedicated Curve pool. This would provide trapped lenders with a way out while enabling outside buyers to decide the value of the distressed claims. The goal is to create a market-based solution that gives lenders and buyers flexibility and options, rather than relying on a bailout.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. 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 represents a long-term bet on CRV, with the potential for the token's value to increase if CRV recovers.
The proposal has been presented as a pilot study, with the potential to be applied to similar situations at Curve or other protocols in the future.