Market-Based Fix Proposed for $700K Bad Debt in Curve’s Lending Platform
Curve founder Michael Egorov has proposed a market-based solution to address approximately $700,000 of bad debt tied to LlamaLend, Curve’s lending platform. This approach aims to provide a free-market based method of recovery with option-like payoff, allowing everyone to participate in the effort. The bad debt is a result of the October 10 crash, which saw over $19 billion in leveraged liquidations within hours.
The loss sits in LlamaLend’s CRV-long market, where users can borrow Curve’s crvUSD stablecoin against CRV, the protocol’s governance token. The trade works as a bet that CRV will hold its value or rise. However, if CRV falls too fast, the collateral may not be sold quickly enough to repay lenders in full. Egorov’s proposal involves packaging the affected lender positions into a tokenized vault and letting traders buy and sell them through a dedicated Curve pool.
How the Proposal Works
The goal is to give trapped lenders a way out while letting outside buyers decide what the distressed claims are worth. The proposed pool would use Curve’s Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value. This means the pool would not treat the distressed token as if it were worth one dollar on the dollar. Instead, it would price the token closer to the amount currently backing it.
For trapped depositors, the pool offers a choice: they can keep waiting for a CRV recovery or sell their vault tokens at a discount and move on. For buyers, the trade looks like a long-term bet on CRV. They buy a claim that is partly backed today and could become worth more if CRV recovers. This makes the token have an “interesting option-like property” on CRV’s recovery, but with some backing already in place.
A Different Approach to Bad Debt
Egorov’s proposal comes at a time when Aave is facing up to $230 million in bad debt due to an exploit. The industry response has been a coordinated bailout through DeFi United, a recovery effort led by Aave service providers. In contrast, Curve’s proposal presents a different model, where a market for distressed claims is built, and buyers decide the price. This approach could be a more sustainable solution for addressing bad debt in the future.
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LlamaLend’s bad debt
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Curve’s crvUSD minting markets held up during the sell-off, but LlamaLend did not fully escape the damage. Prices fell fast while gas costs rose, leading to a scenario where some liquidations could not happen in time.
Lenders in the CRV-long market were left with deposits backed by about 70% of their stated value. The market is designed to reduce that risk through an automated market maker built into the lending system LLAMMA. Instead of selling a borrower’s collateral all at once when prices fall, LLAMMA converts the collateral in steps as the market moves.
“The 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 around 70% backed.”
But during the Oct. 10 crash, the market moved too fast. Arbitrage traders, who help keep the system balanced by buying and selling across price gaps, could not keep up. Some lender positions ended up in a vault token that cannot be redeemed at full value today.
Egorov argued the token still has value because the loss is not open-ended. The distressed positions already hold crvUSD that was converted from CRV, so further CRV declines should not deepen the shortfall.
If CRV rises above roughly $0.96, the conversion starts to reverse and the positions begin taking in CRV collateral again. Full recovery would happen around $1.24.
“If CRV price grows up, positions with bad debt will deliquidate,” Egorov wrote, meaning the system would start converting crvUSD back into CRV collateral. “If, however, CRV goes down, collateral is already converted to crvUSD, so the vault deposits will not be less backed.”
CRV is at the time of writing trading near $0.23, well below both levels.
The proposed pool would use Curve’s Stableswap design, with a 1% swap fee and liquidity centered around 71% solvency rather than full value. That means the pool would not treat the distressed token as if it were worth one dollar on the dollar. It would price the token closer to the amount currently backing it.
For trapped depositors, the pool offers a choice. They can keep waiting for a CRV recovery or sell their vault tokens at a discount and move on.
For buyers, the trade looks like a long-term bet on CRV. They buy a claim that is partly backed today and could become worth more if CRV recovers.
That makes the token have what Egorov called an “interesting option-like property,” on CRV’s recovery, but with some backing already in place.
“ts fair price and price floor go up if CRV price goes up, and does not go down if CRV price goes down,” he wrote,
Liquidity providers in the new pool would earn swap fees and any CRV incentives that Curve’s DAO chooses to allocate. Admin fees would partly accrue in the distressed vault token itself. Egorov has asked the DAO to keep those tokens rather than convert them, which would slowly move some of the bad debt onto Curve’s balance sheet through trading activity.
Solving bad debt in DeFi
The timing gives the proposal added weight. Earlier in the month, an attacker exploited Kelp DAO’s LayerZero bridge and released 116,500 unbacked rsETH worth about $292 million. The attacker then deposited that unbacked rsETH into Aave as collateral and borrowed real WETH against it.
Aave now faces up to $230 million in bad debt. The industry response has been 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’s currently unclear whether LayerZero is participating in the initiative.
Egorov is presenting Curve’s pool as a different model. Rather than pass the hat across the industry, Curve would build a market for distressed claims and let buyers decide the price.
“If this proves to be a successful pilot study,” Egorov wrote, it could be applied in “similar difficult situations” at Curve or other protocols.
