Curve founder Michael Egorov has proposed a market-based solution for approximately $700,000 in bad debt associated with LlamaLend, Curve’s lending platform.
“I propose a free market-based recovery method with an option-like payout, which works as an investment for anyone who wants to participate in the effort,” Egorov wrote in the board post, adding that Curve DAO is “invited but not required.”
The loss from bad debts is in the hands of LlamaLend $CRV-long market, which allows users to borrow Curve’s crvUSD stablecoin $CRVthe protocol’s governance token. The trade works like a bet $CRV will maintain or increase its value. If $CRV falls too quickly, the collateral may not be sold quickly enough to fully repay the lenders.
That’s exactly what happened after the October 10 crash, after President Donald Trump announced tariffs on all Chinese goods via a post on Truth Social.
Rather than asking Curve’s DAO to cover the shortfall, Egorov wants to package the affected lender positions into a tokenized vault and let traders buy and sell them through a special Curve pool.
The goal is to give strapped lenders a way out while third-party buyers can decide what the distressed claims are worth.
LlamaLend’s Bad Debt
The bad debts were the result of the crash, which saw more than $19 billion in debt defaults paid off within hours, the largest single-day deleveraging ever.
Curve’s crvUSD coin markets held firm during the sell-off, but LlamaLend did not completely escape the damage. Prices fell rapidly while gas costs rose, leading to a scenario where some liquidations could not take place on time.
Lenders in the $CRV-long market were left with deposits covered by around 70% of their declared value. The market is designed to reduce that risk through an automated market maker built into the LLAMMA lending system. Rather than selling a borrower’s collateral all at once as prices fall, LLAMMA converts the collateral in increments as the market moves.
“The providers of loanable liquidity in this market were exposed to losses during liquidation protection,” Egorov wrote. As a result, he said, they “cannot withdraw their positions,” which are “currently around 70% backed.”
But during the October 10 crash, the market moved too quickly. Arbitrage traders, who help keep the system in balance by buying and selling across price gaps, couldn’t keep up. Some lender positions ended up in a vault token that cannot be redeemed at full value today.
Egorov argued that the token still has value because the loss is not indefinite. The distressed positions already contain crvUSD from which they have been converted $CRVso on $CRV The declines should not increase the deficit.
If $CRV gets above about $0.96, the conversion starts to reverse and the positions start to take $CRV collateral again. Full recovery would occur around $1.24.
“Like $CRV If the price rises, bad debt positions will deliquidate,” Egorov wrote, meaning the system would convert crvUSD back into $CRV security. “If, however $CRV drops, the collateral has already been converted into crvUSD, so the vault deposits will not be less covered.”
$CRV is trading around $0.23 at the time of writing, well below both levels.
The proposed pool would use Curve’s Stableswap design, with a 1% swap fee and liquidity around 71% solvency rather than full value. That means the pool wouldn’t treat the distressed token as if it were worth one dollar for the dollar. It would bring the price of the token closer to the amount it currently supports.
For captive savers, the pool offers a choice. They can keep waiting for one $CRV restore or sell their vault tokens at a discount and move on.
To buyers, the transaction looks like a long-term bet $CRV. They buy a claim that is partially covered today and which could then become more valuable $CRV recovers.
That makes the token have what Egorov called an “interesting option-like property.” $CRV‘s recovery, but with some support already in place.
“The fair price and the price floor will increase if $CRV the price goes up, and not go down like $CRV the price falls,” he wrote,
Liquidity providers in the new pool would earn swap fees and the like $CRV incentives that Curve’s DAO chooses to allocate. Management fees would partly flow into the distressed vault token itself. Egorov has asked the DAO to hold these tokens instead of converting them, which would slowly move some of the bad debt onto Curve’s balance sheet through trading activity.
Resolving Bad Debt in DeFi
The timing gives the proposal extra weight. Earlier this month, an attacker exploited Kelp DAO’s LayerZero bridge and released 116,500 unbacked rsETH worth approximately $292 million. The attacker then deposited the unsecured rSETH in Aave as collateral and borrowed real WETH against it.
Aave now faces $230 million in debt. The industry response was a coordinated bailout through DeFi United, a recovery effort led by Aave service providers that raised about $160 million of the roughly $200 million needed so far, with contributions from Mantle, Aave DAO, EtherFi, Lido and Aave founder Stani Kulechov.
KelpDAO, one of the entities affected by the exploit, has committed 2,000 ETH to DeFi United, joining a group of major Ethereum-linked organizations. It is currently unclear whether LayerZero will participate in the initiative.
Egorov presents the Curve swimming pool as a different model. Rather than passing the hat to the industry, Curve would build a market for distressed claims and let buyers set the price.
“If this proves to be a successful pilot study,” Egorov wrote, it could be applied in “similar difficult situations” to Curve or other protocols.