Curve's founder, Michael Egorov, has put forth a market-based solution to tackle approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. Egorov's proposal involves creating a tokenized vault to package affected lender positions, which would then be tradable through a dedicated Curve pool. This approach aims to provide trapped lenders with a means to exit their positions while allowing outside buyers to determine the value of the distressed claims.
The proposed solution comes as an alternative to seeking a bailout from Curve's DAO. The bad debt in question stems from a crash on October 10, which resulted in significant losses for lenders in the CRV-long market. Egorov's plan is designed to give lenders a way out while enabling buyers to make a long-term bet on CRV's recovery. The tokenized claims would have an 'option-like property,' with their value potentially increasing if CRV's price rises.
The proposal uses Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. For trapped depositors, the pool offers a choice between waiting for CRV's recovery or selling their vault tokens at a discount. Buyers, on the other hand, can purchase claims that are partly backed, with the potential to increase in value if CRV recovers. Egorov has asked the DAO to retain admin fees in the distressed vault token, which would gradually transfer some of the bad debt to Curve's balance sheet through trading activity.
The proposal comes at a time when the DeFi industry is addressing bad debt, with Aave facing a significant shortfall following an exploit. Egorov's approach presents a different model, one that relies on market forces to determine the value of distressed claims rather than seeking a coordinated bailout.