Curve founder Michael Egorov proposed a marketplace-based solution for approximately $700,000 in bad debt related to LlamaLend, Curve’s lending platform.
“I propose a free market-based recovery method with an option-like payment, functioning as an investment for anyone who wants to participate in the effort,” Egorov wrote in the governance post, adding that Curve DAO is “invited but not required.”
The loss due to the bad debt is in that of LlamaLend $CRV-long market, which allows users to borrow Curve’s crvUSD stablecoin against $CRVthe protocol governance token. Trading works like a bet that $CRV will retain its value or increase. If $CRV falls too quickly, the collateral may not be sold quickly enough to fully repay the lenders.
This is exactly what happened after the October 10 crash, after President Donald Trump announced tariffs on all Chinese goods via an article on Truth Social.
Rather than asking Curve’s DAO to fill the gap, Egorov wants to pool affected lender positions into a tokenized vault and allow traders to buy and sell them through a dedicated Curve pool.
The goal is to give trapped lenders a way out while letting outside buyers decide the value of distressed debt.
Bad debts of LlamaLend
The bad debts are the result of the crash, which led to debt liquidations of more than $19 billion in a matter of hours, the largest deleveraging ever recorded in a single day.
Curve’s crvUSD minting markets held up during the sell-off, but LlamaLend did not completely escape the damage. Prices fell rapidly while gas costs rose, leading to a scenario in which some liquidations could not occur on time.
Lenders in the $CRV-the long market ended up with deposits guaranteed by around 70% of their declared value. The market is designed to reduce this risk through an automated market maker integrated into the LLAMMA lending system. Instead of selling a borrower’s collateral all at once when prices fall, LLAMMA converts the collateral in stages as the market changes.
“Providers of borrowable 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 supported at around 70%.”
But during the October 10 crash, the market moved too quickly. Arbitrage traders, who help keep the system in balance by buying and selling on price gaps, have been unable to keep up. Some lender positions ended up in a vault token that cannot be redeemed at its full value today.
Egorov argued that the token still has value because the loss is not unlimited. Distressed positions already contain crvUSD which has been converted from $CRVso further $CRV The cuts are not expected to worsen the deficit.
If $CRV exceeds approximately $0.96, the conversion begins to reverse and positions begin to take $CRV once again the guarantee. Full recovery would occur around $1.24.
“If $CRV the price increases, positions with bad debts will unliquidate,” Egorov wrote, meaning the system would start converting crvUSD back into $CRV collateral. “If however $CRV drop, the collateral is already converted to crvUSD, so vault deposits will not be less collateralized.
$CRV At the time of writing, the stock was trading near $0.23, well below both levels.
The proposed pool would use Curve’s stableswap design, with 1% swap fees and liquidity centered on 71% solvency rather than total value. This means that the pool will not treat the distressed token as if it were worth a dollar for dollar. The price of the token would be closer to the amount currently supporting it.
For trapped depositors, the pool offers a choice. They can continue to wait for a $CRV collect or sell their vault tokens at a discount and move on.
For buyers, the trade looks like a long-term bet on $CRV. They are buying a debt that is partially secured today and could be worth more if $CRV recovers.
This gives the token what Egorov called an “interesting option-like property.” $CRVbut with some support already in place.
“The fair price and the floor price increase if $CRV the price increases, and don’t do go down if $CRV the price is falling,” he wrote,
Liquidity providers in the new pool would earn swap fees and all $CRV the incentives that Curve’s DAO chooses to award. The administration fees would accumulate partly in the distressed vault token itself. Egorov asked the DAO to hold these tokens rather than convert them, which would slowly move some of the bad debt onto Curve’s balance sheet through trading activity.
Resolving Bad Debts in DeFi
The timing gives the proposal additional 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 this uncollateralized rsETH into Aave as collateral and borrowed real WETH against it.
Aave now faces bad debts of up to $230 million. The industry’s response has been a bailout package coordinated through DeFi United, a turnaround effort led by service providers Aave that has 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, committed 2,000 ETH to DeFi United, joining a group of large Ethereum-related organizations. It is currently clear whether LayerZero is participating in the initiative.
Egorov presents the Curve pool as a different model. Rather than passing the buck to the entire industry, Curve would create a market for distressed debt and let buyers decide the price.
“If this proves to be a successful pilot study,” Egorov wrote, it could be applied in “difficult situations similar” to Curve or other protocols.