Curve's founder, Michael Egorov, has introduced a market-based solution to address approximately $700,000 in bad debt associated with LlamaLend, Curve's lending platform. The proposed plan enables trapped lenders to sell tokenized claims on deposits, offering buyers an option-like bet on CRV's potential recovery. This approach invites Curve DAO to participate but does not require it.
The bad debt is a result of the October 10 crash, which led to a significant decline in CRV's value, causing lenders in the CRV-long market to be left with deposits backed by only about 70% of their stated value. Egorov's plan involves packaging the affected lender positions into a tokenized vault, allowing traders to buy and sell them through a dedicated Curve pool.
The goal is to provide trapped lenders with an exit option while letting outside buyers determine the value of the distressed claims. The tokenized vault would use Curve's Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency. This would allow liquidity providers to earn swap fees and CRV incentives, while admin fees would partly accrue in the distressed vault token.
Egorov has asked the DAO to keep these tokens, which would slowly move some of the bad debt onto Curve's balance sheet through trading activity. This proposal comes at a time when the DeFi industry is addressing bad debt, with Aave facing up to $230 million in bad debt due to an exploit.
The industry response has been a coordinated bailout, whereas Curve's proposal presents a market-driven solution, allowing buyers to determine the price of distressed claims.