Curve's founder, Michael Egorov, has introduced a market-based approach to address approximately $700,000 in bad debt associated with LlamaLend, the lending platform of Curve. In a governance post, Egorov outlined a 'free-market based method of recovery with option-like payoff,' inviting Curve DAO to participate but not requiring its involvement. The bad debt stems from LlamaLend's CRV-long market, which allows users to borrow crvUSD, a stablecoin, against CRV, the governance token of the protocol.
This trade functions as a wager that CRV's value will remain stable or increase. However, if CRV's value plummets rapidly, the collateral may not be sold quickly enough to repay lenders in full, resulting in a shortfall.
Following the October 10 crash triggered by President Donald Trump's announcement of tariffs on Chinese goods, Egorov proposes packaging the affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool. The primary objective is to provide trapped lenders with an exit strategy while allowing external buyers to determine the value of the distressed claims. The bad debt resulted from the October 10 crash, which saw over $19 billion in leveraged liquidations within hours, marking the largest single-day deleveraging on record. Although Curve's crvUSD minting markets withstood the sell-off, LlamaLend was not entirely immune to the damage.
Prices dropped rapidly, and gas costs increased, 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 argued that the token still holds value since the loss is not open-ended.
If CRV's price rises above roughly $0.96, the conversion starts to reverse, and the positions begin taking in CRV collateral again, with full recovery anticipated around $1.24. The proposed pool would utilize Curve's Stableswap design, featuring a 1% swap fee and liquidity centered around 71% solvency rather than full value. 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 resembles a long-term bet on CRV, as they purchase a claim that is partly backed today and could become more valuable if CRV recovers.
This gives the token an 'interesting option-like property' regarding CRV's recovery, with some backing already in place. The proposal's timing assumes added significance in light of an attacker exploiting Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt.
In contrast to the coordinated bailout effort for Aave, Egorov presents Curve's pool as an alternative model, where the protocol builds a market for distressed claims and allows buyers to determine the price.