Curve's founder, Michael Egorov, has put forth a market-based solution to address approximately $700,000 in bad debt associated with 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 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 requesting Curve's DAO to cover the shortfall, instead relying on market forces to resolve the issue. The bad debt stems from a crash on October 10, which resulted in over $19 billion in leveraged liquidations.
Curve's crvUSD minting markets withstood the sell-off, but LlamaLend was not entirely unaffected. The automated market maker, LLAMMA, designed to reduce risk, was unable to prevent losses during liquidation protection. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value.
Egorov argues that the token still holds value, as the loss is not open-ended, and the distressed positions already hold crvUSD converted from CRV. If CRV rises above a certain threshold, the conversion starts to reverse, and the positions begin taking in CRV collateral again. The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. For trapped depositors, the pool offers a choice: they can wait for a CRV recovery or sell their vault tokens at a discount.
For buyers, the trade resembles a long-term bet on CRV, with the token having an 'interesting option-like property' on CRV's recovery. The proposal comes as Aave faces up to $230 million in bad debt following an exploit, with the industry responding through a coordinated bailout effort. Egorov's plan presents a different model, relying on market forces to resolve the issue rather than seeking a bailout.