Curve's founder, Michael Egorov, has outlined a market-based approach to address approximately $700,000 in bad debt tied to LlamaLend, Curve's lending platform. In a governance post, Egorov suggested a free-market-based method of recovery with an option-like payoff, inviting Curve DAO to participate but not requiring it. The bad debt is a result of the October 10 crash, which caused a significant decline in CRV's value, leading to a shortfall in the CRV-long market where users borrow Curve's crvUSD stablecoin against CRV. To address this issue, 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 a way out while enabling outside buyers to determine the value of the distressed claims. The goal is to create a market for these claims, allowing buyers to decide their worth. The proposed pool 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: they can either wait for CRV's recovery or sell their vault tokens at a discount.
For buyers, the trade represents a long-term bet on CRV's recovery, with the token having an 'interesting option-like property' due to its partial backing. Egorov's proposal comes at a time when the DeFi industry is addressing the issue of bad debt, with Aave facing a potential $230 million shortfall following an exploit on Kelp DAO's LayerZero bridge. In contrast to Aave's coordinated bailout effort, Curve's approach focuses on creating a market for distressed claims, allowing buyers to determine their value.