Curve's founder, Michael Egorov, has introduced a market-based approach to resolve approximately $700,000 in bad debt associated with LlamaLend, the platform's lending arm. The proposed solution involves packaging the affected lender positions into a tokenized vault, enabling traders to buy and sell them through a dedicated Curve pool. This approach aims to provide trapped lenders with an exit strategy while allowing 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, the largest single-day deleveraging on record. Curve's crvUSD minting markets withstood the sell-off, but LlamaLend suffered losses due to rapid price falls and rising gas costs, leading to a scenario where some liquidations could not occur in time. Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. Egorov's plan involves creating a tokenized vault and letting traders buy and sell the affected positions, providing an option-like bet on CRV's recovery.
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 either wait for a CRV recovery or sell their vault tokens at a discount and move on. For buyers, the trade represents a long-term bet on CRV, with the potential for increased 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, focusing on building a market for distressed claims rather than relying on a coordinated bailout.
If successful, this pilot study could be applied to similar situations at Curve or other protocols.