Curve's founder, Michael Egorov, has put forth a market-based approach to resolve 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 method would enable trapped lenders to exit their positions while allowing outside buyers to determine the value of the distressed claims. The bad debt stems from a crash on October 10, which led to significant leveraged liquidations and a substantial decline in CRV's value.
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 provide a way out for these lenders while introducing a market-driven solution to the problem.
The proposed pool would utilize Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow the pool to price the distressed token closer to its current backing. For trapped depositors, the pool offers a choice: they can either hold on to their vault tokens in anticipation of a CRV recovery or sell them at a discount. Buyers, on the other hand, would be making a long-term bet on CRV's potential recovery, with the token having an 'interesting option-like property.' The proposal comes at a time when the DeFi industry is grappling with the issue of bad debt, as seen in the recent Aave exploit, which resulted in a significant amount of bad debt.
Egorov's approach presents a different model, one that relies on market forces to resolve the issue rather than a coordinated bailout effort.