Curve founder Michael Egorov has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' which would function as an investment opportunity for those willing to participate in the recovery efforts.
The proposal involves packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims.
The bad debt stems from the October 10 crash, which saw over $19 billion in leveraged liquidations within hours, resulting in the largest single-day deleveraging on record. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price declines and rising gas costs, leading to a scenario where some liquidations could not occur in time. Lenders in the CRV-long market were left with deposits backed by approximately 70% of their stated value.
Egorov's proposal argues that the tokenized claims still hold value, as the loss is not open-ended, and the distressed positions already hold crvUSD converted from CRV. If CRV's price rises above a certain threshold, the conversion starts to reverse, and the positions begin taking in CRV collateral again.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value. This would allow trapped depositors to choose 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's recovery, with the token possessing an 'interesting option-like property.' 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. Egorov's approach presents a different model, where Curve would build a market for distressed claims and let buyers determine the price, rather than relying on a coordinated bailout.