Curve's founder, Michael Egorov, has put forth a market-based solution to tackle 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 function as an investment opportunity for those who wish to participate. The proposed plan involves packaging 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 bad debt in question stems from a crash that occurred on October 10, resulting in over $19 billion in leveraged liquidations. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered damage, with lenders in the CRV-long market left with deposits backed by only about 70% of their stated value.
Egorov's proposal seeks to address this issue by creating a market for distressed claims, rather than relying on a bailout. The plan would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow trapped depositors to sell their vault tokens at a discount or wait for a potential CRV recovery. For buyers, the trade would represent a long-term bet on CRV, with the token having an 'interesting option-like property' tied to CRV's recovery.
The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attack on Kelp DAO's LayerZero bridge that resulted in Aave facing up to $230 million in bad debt. Egorov's plan presents a different approach, one that relies on market forces to resolve the issue rather than a coordinated bailout effort.