Curve's 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,' inviting Curve DAO to participate but not requiring its involvement. The bad debt is currently situated in LlamaLend's CRV-long market, which enables users to borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token. This trade functions as a bet that CRV will maintain or increase its value.
However, if CRV's value drops too rapidly, the collateral may not be sold quickly enough to repay lenders in full, resulting in a shortfall. Following the October 10 crash, which saw over $19 billion in leveraged liquidations, LlamaLend's lenders were left with deposits backed by roughly 70% of their stated value. Egorov proposes 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 option while enabling outside buyers to determine the value of the distressed claims. The tokenized vault 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 between waiting for CRV's recovery or selling their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV, with the potential for increased value if CRV recovers.
Egorov's proposal presents an alternative to the coordinated bailout approach taken by Aave, which faces up to $230 million in bad debt following an exploit. Instead of relying on industry-wide contributions, Curve's pool would create a market for distressed claims, allowing buyers to determine the price. If successful, this pilot study could be applied to similar situations at Curve or other protocols.