Curve founder Michael Egorov has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, the platform's lending service. The proposed solution involves packaging affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool. This method aims to provide trapped lenders with an exit strategy while allowing outside buyers to determine the value of the distressed claims.
The bad debt originated from a crash that resulted in over $19 billion in leveraged liquidations, causing prices to plummet and gas costs to rise, 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. Egorov's plan is designed to give these lenders a way out while enabling buyers to speculate on CRV's potential recovery. 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. For buyers, the trade represents a long-term bet on CRV, with the potential for increased value if CRV recovers. The token has an 'interesting option-like property,' with its fair price and price floor increasing if CRV's price rises, but not decreasing if CRV's price falls.
Liquidity providers in the new pool would earn swap fees and any CRV incentives allocated by Curve's DAO. The proposal comes at a time when Aave is facing up to $230 million in bad debt following an exploit, with the industry responding through a coordinated bailout effort. Egorov's plan presents a different model, focusing on building a market for distressed claims rather than relying on a bailout.
If successful, this approach could be applied to similar situations at Curve or other protocols.