Curve founder Michael Egorov has put forth a market-based solution to address 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' that would enable trapped lenders to sell their tokenized claims on deposits to outside buyers.
This approach would give lenders an exit option while allowing buyers to decide the value of the distressed claims. The bad debt stems from a crash on October 10, which saw over $19 billion in leveraged liquidations and resulted in lenders being left with deposits backed by only about 70% of their stated value. Egorov's proposal involves packaging the affected lender positions into a tokenized vault and creating a dedicated Curve pool for buyers and sellers to trade these tokens. The goal is to provide a market-driven solution that allows buyers to bet on the potential recovery of CRV, Curve's governance token, while giving lenders a way to exit their positions.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This approach differs from the recent bailout of Aave, which involved a coordinated industry effort to raise funds to cover bad debt. Egorov's proposal presents a unique model that relies on market forces to determine the value of distressed claims, rather than relying on a bailout.
If successful, this approach could be applied to similar situations in the future, providing a new paradigm for addressing bad debt in the DeFi space.