Curve founder Michael Egorov has proposed a market-based solution to about $700,000 in bad debt tied to LlamaLend, Curve’s lending platform.
“I propose a free-market method of recovery with option-like dividends that act as an investment for anyone who wants to participate in the effort,” Egorov wrote in the government filing, adding that the Curve DAO is “invited but not required.”
The loss from the bad debt lies in LlamaLend’s CRV long market, which lets users borrow Curve’s crvUSD stablecoin against CRV, the protocol’s governing token. The trade acts as a bet that CRV will maintain its value or increase. If the CRV falls too quickly, the security may not sell quickly enough to repay lenders in full.
That’s exactly what happened after the Oct. 10 crash after President Donald Trump announced tariffs on all Chinese goods via a post on Truth Social.
Instead of asking Curve’s DAO to cover the shortfall, Egorov wants to package the affected lender positions into a tokenized box and let traders buy and sell them through a dedicated Curve pool.
The goal is to give captive lenders a way out while letting outside buyers decide what the distressed claims are worth.
LlamaLend’s Bad Debt
The bad debt was a result of the crash, which led to more than $19 billion in leveraged liquidations within hours, the largest single-day leverage on record.
Curve’s crvUSD coin markets held up during the selloff, but LlamaLend didn’t fully escape the damage. Prices fell rapidly while gas costs rose, leading to a scenario where some liquidations could not be completed in time.
Lenders in the long CRV market were left with deposits backed by about 70% of their stated value. The market is designed to reduce this risk through an automated market maker built into the loan system LLAMMA. Instead of selling a borrower’s security all at once when prices fall, LLAMMA converts the security in stages as the market moves.
“The providers of loanable liquidity in this market were exposed to losses under liquidation protection,” Egorov wrote. As a result, he said, they “cannot withdraw their positions,” which “are currently about 70% supported.”
But during the October 10 crash, the market moved too fast. Arbitrage traders, who help keep the system balanced by buying and selling across price differences, 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 open. The distressed positions already have crvUSD that were converted from CRV, so further CRV declines should not exacerbate the shortage.
If CRV rises above approx. $0.96, the conversion starts to reverse and the positions start to take CRV security again. Full recovery would be around $1.24.
“If the CRV price grows, bad debt positions will liquidate,” Egorov wrote, meaning the system will start converting crvUSD back into CRV security. “However, if CRV falls, the collateral is already converted to crvUSD, so the box’s deposit will not be less supported.”
CRV is currently 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. This means that the pool will not treat the distressed token as if it were worth a dollar on the dollar. That would price the token closer to the amount that currently supports it.
For captive 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 the CRV. They are buying a claim that is partially 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 increase if the CRV price increases, and don’t do go down if CRV price goes down,” he wrote,
Liquidity providers in the new pool will earn swap fees and any CRV incentives Curves DAO chooses to award. Admin fees would accrue partially in the distressed vault token itself. Egorov has asked the DAO to keep these tokens instead of converting 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 extra weight. Earlier this month, an attacker exploited Kelp DAO’s LayerZero bridge and released 116,500 unbacked rsETH worth about $292 million. The attacker then deposited the unbacked rsETH in Aave as collateral and borrowed real WETH against it.
Aave now faces upwards of $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-related organizations. It is currently unclear whether LayerZero will participate in the initiative.
Egorov presents the Curves pool as a different model. Instead of passing 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 used in “similarly difficult situations” by Curve or other protocols.
