Michael Egorov, founder of Curve, has proposed a market-based mechanism to resolve $700,000 in bad debt on LlamaLend by creating a tokenized claims pool rather than requesting a coordinated industry bailout. The proposal, published as a governance post on April 27, represents a fundamentally different approach to DeFi insolvency than the one Aave deployed to address $230 million in bad debt following the Kelp DAO LayerZero exploit earlier this month.
How LlamaLend’s Debt Crisis Emerged
LlamaLend’s CRV-long market allows users to borrow crvUSD stablecoin against CRV collateral. On October 10, a Trump tariff announcement triggered a market crash that liquidated $19 billion in leveraged positions across DeFi. Prices fell faster than LlamaLend’s LLAMMA automated market maker could liquidate positions in incremental steps. Gas costs and execution speed prevented arbitrage traders from maintaining system balance, leaving lenders with positions backed only 70 percent by collateral. Affected lenders cannot withdraw their positions, creating trapped capital of roughly $700,000 in bad debt.
Egorov’s Tokenized Claims Pool Design
Instead of requesting DAO funds, Egorov proposes converting bad debt positions into a secondary market for distressed claims. “I propose a free-market based method of recovery with option-like payoff, working as an investment for everyone who wants to participate,” Egorov wrote. The structure functions as follows: participants purchase claims on the bad debt pool at a 1 percent swap fee. If CRV price rises to $0.96, affected positions deliquidate automatically. At $1.24, full recovery occurs. CRV currently trades at $0.23. The mechanism has an “interesting option-like property,” Egorov noted. If CRV declines further, collateral converts to crvUSD, protecting deposit backing. Curve DAO participation is “invited but not required.”
Contrasting Aave’s Coordinated Bailout Model
Aave’s response to its $230 million bad debt problem took an opposite path. The Kelp DAO LayerZero bridge exploit released 116,500 unbacked rsETH tokens valued at $292 million, creating systemic risk across Aave. DeFi United, a coordinated recovery effort, launched to raise $200 million through contributions from Mantle, EtherFi, Lido, and others. The effort has raised $160 million so far, with Kelp DAO committing 2,000 ETH to the pool. This represents industry-wide intervention to prevent cascading defaults. Egorov’s model inverts this logic: instead of collective responsibility, recovery depends on market participants betting on CRV price recovery.
Market-Based Recovery as DeFi Precedent
Egorov framed the proposal as a potential template. “If this proves to be a successful pilot study, it could be applied in similar difficult situations,” he stated. The approach avoids drawing on Curve DAO treasury or requesting external bailouts. Success hinges entirely on CRV price movement and investor appetite for distressed claims. No official Curve DAO vote or implementation timeline has been announced. The contrast with Aave’s coordinated bailout underscores a growing debate in DeFi: whether bad debt crises should trigger collective industry action or market-driven recovery mechanisms.
