Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. Egorov's plan involves packaging the affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while allowing outside buyers to determine the value of the distressed claims. The bad debt stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations.
Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price declines and increased gas costs, leaving lenders with deposits backed by only about 70% of their stated value. Egorov's proposal seeks to address this issue by creating a market for the distressed claims, rather than relying on a bailout. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
This would allow trapped depositors to choose between waiting for a CRV recovery or selling their vault tokens at a discount. For buyers, the trade represents a long-term bet on CRV's recovery, with the token possessing an 'interesting option-like property.' The proposal comes at a time when the DeFi industry is grappling with bad debt, following an attacker's exploitation of Kelp DAO's LayerZero bridge, resulting in Aave facing up to $230 million in bad debt.
Egorov's approach presents a different model, focusing on building a market for distressed claims rather than relying on a coordinated bailout.