Curve founder Michael Egorov has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. 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 approach enables trapped lenders to exit their positions while allowing outside buyers to determine the value of the distressed claims. The plan is an alternative to seeking a bailout from Curve's DAO.
The bad debt resulted from a crash on October 10, which caused over $19 billion in leveraged liquidations. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price declines and rising gas costs. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
Egorov's proposal aims to provide a way out for these lenders 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 buyers to purchase claims that are partly backed, with the potential to increase in value if CRV recovers. 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, where a market for distressed claims is created, and buyers determine the price.