Curve's founder, Michael Egorov, has put forth a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The plan involves packaging the affected lender positions into a tokenized vault, which can then be traded on a dedicated Curve pool. This approach allows trapped lenders to exit their positions while enabling outside buyers to determine the value of the distressed claims.
The tokenized vault would offer an option-like investment opportunity, where the value of the token is tied to the recovery of CRV, Curve's governance token. If CRV's price rises above a certain threshold, the conversion of crvUSD to CRV collateral would reverse, potentially leading to a full recovery. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
This would provide a market-driven solution to the bad debt issue, as opposed to relying on a bailout. The proposal is particularly relevant given the recent exploit of Kelp DAO's LayerZero bridge, which resulted in Aave facing up to $230 million in bad debt. The industry response to this incident has been a coordinated bailout effort, whereas Curve's approach would involve building a market for distressed claims and letting buyers determine the price.