Curve Founder Egorov Proposes Market-Based Bad Debt Recovery Model for DeFi Lending

Gate News message, April 27 — Curve founder Michael Egorov has proposed a market-based mechanism to recover bad debt in DeFi lending protocols, positioning it as an alternative to traditional bailout models. The proposal centers on converting distressed positions into tradable investment products, starting with Curve’s CRV-long LlamaLend market as a pilot case.

Curve’s LlamaLend market accumulated approximately $700,000 in bad debt in October 2025, leaving the vault underbacked and trapping lenders unable to fully withdraw. Rather than seeking a direct bailout, Egorov argues that the impaired vault tokens possess an “option-like” payoff structure: if CRV rises, the collateral can recover and liquidate cleanly; if CRV falls, the backing does not deteriorate in the same way traditional bad debt would. To enable trading, Egorov has established a Curve stableswap pool centered around 71% solvency, allowing distressed vault tokens to be exchanged. Liquidity providers can earn swap fees and potentially CRV incentives, while the DAO can accumulate impaired tokens through admin fees without a direct bailout vote.

The proposal arrives amid heated DeFi debate over bad debt recovery following the KelpDAO exploit, which exposed $292 million in assets and triggered Aave to face significant outflows. Competing recovery frameworks have emerged from Lido, Mantle, and Aave itself, ranging from token allocations to emergency loans and ETH contributions. Early community reaction is mixed: some commenters argue that distressed positions generate insufficient yield to attract buyers without heavy subsidies, while others contend that the option-like payoff and discounted entry point create viable trading opportunities if CRV eventually recovers.