Curve's founder, Michael Egorov, has put forth a proposal to tackle the issue of approximately $700,000 in bad debt stemming from LlamaLend, the platform's lending arm. The plan involves packaging the affected lender positions into a tokenized vault, which would then be made available for traders to buy and sell 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 tokenized vault would have an 'option-like' quality, with its value tied to the potential recovery of CRV. If CRV's price rises, the token's value would increase, but if CRV's price falls, the token's value would not decrease further due to the existing backing.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would enable liquidity providers to earn fees and potentially receive CRV incentives.
The proposal comes at a time when the DeFi industry is grappling with the issue of bad debt, with Aave facing a significant shortfall following an exploit. Egorov's plan presents a market-driven alternative to the coordinated bailout approach being taken by Aave, and its success could potentially serve as a model for addressing similar issues in the future.