Michael Egorov, the founder of Curve, has proposed a market-driven solution for approximately $700,000 in bad debt stemming from LlamaLend, Curve’s lending platform. In a governance post, he suggested an investment approach with option-like returns that anyone interested could participate in, although involvement by Curve DAO is optional.
The debt arose within the CRV-long market of LlamaLend, where users borrow crvUSD stablecoin against Curve’s governance token, CRV. This system bets on the value stability or appreciation of CRV. When CRV plummeted rapidly following a crash triggered by President Donald Trump’s tariff announcement via Truth Social on October 10, collateral liquidation couldn’t keep pace to repay lenders fully.
Instead of seeking DAO intervention to cover losses, Egorov plans to consolidate affected lender positions into a tokenized vault for trading through a specific Curve pool. This aims to provide exit strategies for lenders and allow market participants to determine the value of distressed claims.
The crash led to over $19 billion in leveraged liquidations within hours, marking the most significant single-day deleveraging ever recorded. Although Curve’s crvUSD markets remained stable, LlamaLend couldn’t avoid some impacts due to rapid price drops and surging gas fees, causing delayed liquidations.
As a result, lenders were left with deposits worth about 70% of their original value. The CRV-long market uses an automated system called LLAMMA to gradually adjust collateral as prices change, rather than immediate sell-offs. However, during the crash, arbitrage traders couldn’t keep up, resulting in some lender positions being stuck in a vault token that can’t be redeemed at full value.
Egorov emphasized that these tokens still hold potential value since losses aren’t indefinite; they already contain crvUSD from converted CRV. If CRV climbs above roughly $0.96, the conversion reverses and positions regain CRV collateral. Full recovery is anticipated around $1.24.
Currently trading near $0.23, CRV remains significantly below these thresholds. The proposed pool would employ Curve’s Stableswap design with a 1% swap fee and liquidity centered on 71% solvency rather than full value, pricing the token closer to its current backing.
For depositors trapped in this situation, the pool offers an option: await CRV recovery or sell vault tokens at a discount. Buyers would be betting long-term on CRV’s potential rebound, acquiring claims partly backed today but possibly more valuable if CRV recovers.
Egorov described this as having “an interesting option-like property” tied to CRV’s recovery with some existing backing. Liquidity providers in the new pool would earn swap fees and potentially any CRV incentives from Curve’s DAO, while admin fees would accrue within the distressed vault token itself. Egorov has requested that these tokens remain unconverted, gradually integrating bad debt into Curve’s balance sheet via trading.
This proposal gains significance amidst recent events where an attacker exploited Kelp DAO’s LayerZero bridge, leading to a $292 million release of unbacked rsETH and subsequent bad debt at Aave. The industry responded with a coordinated bailout through DeFi United, which raised about $160 million out of the roughly $200 million required. KelpDAO contributed 2,000 ETH to this effort, though LayerZero’s involvement remains uncertain.
Egorov positions Curve’s pool as an alternative model: building a market for distressed claims rather than relying on industry-wide financial support. If successful, this method could be applied in other challenging scenarios within Curve or different protocols.