Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt connected to LlamaLend, the platform's lending arm. Egorov's proposal involves creating a tokenized vault for affected lender positions, which can then be bought and sold through a dedicated Curve pool. This method would provide trapped lenders with an exit strategy while enabling 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.
Curve's crvUSD minting markets remained stable during the sell-off, but LlamaLend suffered losses due to rapid price declines and rising gas costs. As a result, lenders in the CRV-long market were left with deposits backed by only about 70% of their stated value. Egorov's plan aims to give these lenders a way out while allowing buyers to bet on the potential recovery of CRV. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency.
This would enable trapped depositors to sell their vault tokens at a discount or wait for a potential CRV recovery. 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 the DeFi industry is addressing bad debt, with Aave facing up to $230 million in bad debt following an exploit on Kelp DAO's LayerZero bridge.
Egorov's approach presents a different model, focusing on building a market for distressed claims rather than relying on a coordinated bailout.