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 suggests creating a tokenized vault to package affected lender positions, enabling traders to buy and sell them through a dedicated Curve pool.
This method 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, causing prices to fall rapidly and gas costs to rise, leading to a scenario where some liquidations could not occur in time.
Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. Egorov's proposal involves using Curve's Stableswap design with a 1% swap fee, allowing liquidity providers to earn fees and CRV incentives. The proposed pool would price the distressed token closer to its current backing, offering trapped depositors a choice to either wait for a CRV 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.' The proposal comes at a time when Aave is facing a significant bad debt issue, with the industry responding through a coordinated bailout effort.
Egorov's approach presents a different model, where Curve would build a market for distressed claims, allowing buyers to determine the price, rather than relying on a bailout. If successful, this pilot study could be applied to similar situations at Curve or other protocols.