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. Egorov's proposal involves creating a tokenized vault to package the affected lender positions, allowing traders to buy and sell them through a dedicated Curve pool. The goal is to provide trapped lenders with an exit option while enabling outside buyers to determine the value of the distressed claims.
The bad debt resulted from a crash on October 10, which led to over $19 billion in leveraged liquidations and caused prices to fall rapidly while gas costs rose. As a result, some liquidations could not occur in time, leaving lenders in the CRV-long market with deposits backed by about 70% of their stated value. Egorov's plan aims to give lenders a way out while allowing buyers to decide the value of the distressed claims.
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 token having an 'interesting option-like property' on CRV's recovery. The timing of the proposal is significant, given the recent exploit of Kelp DAO's LayerZero bridge, which resulted in Aave facing up to $230 million in bad debt.
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.