Curve's founder, Michael Egorov, has put forth a market-driven 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, characterizing it as an investment opportunity for those willing to participate.
The bad debt stems from LlamaLend's CRV-long market, where users can borrow Curve's crvUSD stablecoin against CRV, the protocol's governance token, essentially betting on CRV's value stability or increase. However, when CRV's value plummeted following a market crash, lenders were 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, allowing traders to buy and sell them through a dedicated Curve pool.
The goal is to provide trapped lenders with an exit while enabling outside buyers to determine the worth of the distressed claims. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
For stuck depositors, the pool offers a choice: wait for CRV's recovery or sell vault tokens at a discount. Buyers, on the other hand, would be making a long-term bet on CRV's potential recovery. Egorov's proposal comes at a time when the DeFi industry is grappling with bad debt, particularly in the wake of Aave's recent exploit, which resulted in up to $230 million in bad debt. While Aave's solution involves a coordinated bailout, Egorov's proposal presents a different approach, one that relies on market forces to resolve the issue.