Curve founder Michael Egorov has proposed a market-based solution for about $700,000 of bad debt tied to LlamaLend, Curve’s lending platform.
“I propose a free market-based recovery method with options-like benefits, functioning as an investment for everyone who wants to participate in the effort,” Egorov wrote in the governance post, adding that Curve DAO is “invited but not required.”
The bad debt loss is found on LlamaLend’s CRV long market, which allows users to borrow Curve’s crvUSD stablecoin against CRV, the protocol’s governance token. The trade works as a bet that CRV will maintain its value or increase. If the CRV falls too quickly, the collateral may not sell quickly enough to pay lenders in full.
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.
Instead of asking Curve’s DAO to cover the shortfall, Egorov wants to package the affected lenders’ positions into a tokenized vault and allow traders to buy and sell them through an exclusive Curve pool.
The goal is to give trapped lenders a way out while allowing third-party buyers to decide the value of distressed claims.
LlamaLend’s Bad Debt
The bad debt was a result of the crisis, which triggered more than $19 billion in leveraged liquidations in a matter of hours, the largest single-day deleveraging on record.
Curve’s crvUSD minting markets held firm during the sell-off, but LlamaLend did not completely escape damage. Prices fell rapidly while gas costs rose, leading to a scenario where some settlements could not be made on 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 that risk through an automated market maker built into the LLAMMA lending system. Instead of selling a borrower’s collateral all at once when prices fall, LLAMMA converts collateral into steps as the market moves.
“Providers of lendable liquidity in this market were exposed to losses during liquidation protection,” Egorov wrote. As a result, he said, “they cannot withdraw their positions,” which “currently have around 70% support.”
But during the October 10 crisis, 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 for its full value today.
Egorov argued that the token still has value because the loss is not unlimited. Distressed positions already contain crvUSD that was converted from CRV, so further drops in CRV should not deepen the deficit.
If CRV rises above about $0.96, the conversion begins to reverse and positions begin accepting CRV collateral again. The full recovery would occur around $1.24.
“If the price of CRV increases, positions with bad debts will be liquidated,” Egorov wrote, meaning that the system would start converting crvUSD back into CRV collateral. “However, if CRV goes down, the collateral has already been converted to crvUSD, so the vault deposits will be no less supported.”
At the time of writing, CRV is 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 on 71% solvency rather than full value. That means the group would not treat the distressed token as if it were worth dollar for dollar. The price of the token would move closer to the amount that currently supports it.
For trapped depositors, pooling offers an option. They can continue to wait for a CRV rally or sell their vault tokens at a discount and move on.
To buyers, the deal looks like a long-term bet on CRV. They buy a claim that is partially supported today and could be worth more if CRV recovers.
That makes the token have what Egorov called an “interesting option-like property” on the CRV recovery, but with some backing already.
“Its fair price and minimum price increase if the CRV price rises, and No go down if the price of the CRV goes down,” he wrote,
Liquidity providers in the new pool would earn exchange fees and any CRV incentives that Curve’s DAO decides to allocate. Administrative fees would be partly accrued into the distressed vault’s token itself. Egorov has asked the DAO to hold those tokens instead of converting them, which would slowly shift some of the bad debt onto Curve’s balance sheet through trading activity.
Resolve bad debt in DeFi
The timing gives the proposal added 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 that unbacked rsETH into Aave as collateral and borrowed real WETH against it.
Aave now faces up to $230 million in bad debts. 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 organizations linked to Ethereum. It is currently unclear if LayerZero is involved in the initiative.
Egorov presents the Curve pool as a different model. Instead of passing the hat to the entire industry, Curve would create a market for distressed claims and let buyers decide the price.
“If it turns out to be a successful pilot study,” Egorov wrote, it could be applied in “similar difficult situations” in Curve or other protocols.
