Curve founder Michael Egorov has unveiled 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 allow Curve DAO to participate but not obligate it. The bad debt stems from LlamaLend's CRV-long market, where users can borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token.
The trade functions as a bet that CRV will maintain or increase its value. However, if CRV's value drops rapidly, the collateral may not be sold quickly enough to repay lenders in full, resulting in a shortfall. This scenario occurred after the October 10 crash, triggered by President Donald Trump's announcement of tariffs on Chinese goods via a post on Truth Social.
Instead of requesting Curve's DAO to cover the shortfall, Egorov proposes packaging the affected lender positions into a tokenized vault and allowing traders to buy and sell them through a dedicated Curve pool. The objective is to provide trapped lenders with an exit strategy while enabling outside buyers to determine the value of the distressed claims.
LlamaLend's bad debt resulted from the crash, which saw over $19 billion in leveraged liquidations within hours, the largest single-day deleveraging on record. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend did not fully escape the damage. Prices plummeted, while gas costs rose, 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 because the loss is not open-ended.
The distressed positions already hold crvUSD converted from CRV, so further CRV declines should not deepen the shortfall. If CRV rises above roughly $0.96, the conversion starts to reverse, and the positions begin taking in CRV collateral again. Full recovery would occur around $1.24. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value.
For trapped depositors, the pool offers a choice: they can 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 worth more if CRV recovers. The token has an 'interesting option-like property' on CRV's recovery, with some backing already in place.
The proposal's timing has added significance, 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 has been a coordinated bailout through DeFi United, a recovery effort led by Aave service providers. Egorov's proposal presents a different model, where Curve would build a market for distressed claims and let buyers determine the price. If successful, this approach could be applied to similar situations at Curve or other protocols.