Curve founder Michael Egorov has put forth a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov suggested a free-market approach with an option-like payoff in a governance post, stating that Curve DAO is invited but not required to participate. The bad debt stems from LlamaLend's CRV-long market, where users borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token.
The goal is to package 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 plan is in contrast to the recent Aave bailout, where the industry came together to raise funds to cover bad debt.
Egorov's proposal presents a different model, relying on market forces to resolve the issue rather than seeking a coordinated bailout. If successful, this pilot study could be applied to similar situations at Curve or other protocols.