Curve Founder Michael Egorov Proposes Tokenizing Bad Debts Instead of DAO Bailouts

Turning Bad Debts Into Tradable Assets

Curve Finance founder Michael Egorov has put forward a novel approach to handling bad debts in DeFi: tokenizing deficit positions and transforming them into tradable investment instruments that market participants can freely buy and sell.

The pilot project for this mechanism will be the LlamaLend lending market, where a $700,000 bad debt formed in October 2024. This unresolved debt has prevented some users from fully withdrawing their funds.

Why This Matters

Bad debt remains one of the most persistent vulnerabilities in DeFi lending. Protocols typically address it through emergency treasury injections or direct compensation to affected users. Egorov's proposal charts a fundamentally different course — handing the problem over to free market dynamics.

Under this model, there is no need for a DAO treasury bailout. Instead, the balance sheet gap gets filled by market forces: traders buy debt at a discount, arbitrageurs seek profit from price discrepancies, and liquidity providers earn rewards through trading fees.

How the Mechanism Works

According to Egorov, the distressed assets in the LlamaLend pool are not worthless. Their actual value depends on the CRV token price — if the token appreciates, the debt can be repaid through liquidations. The developer compared these positions to options with limited downside risk.

To put the concept into practice, Egorov has already seeded liquidity in a Curve Stableswap pool. Users can now exchange their stuck tokens at a discount or become liquidity providers to earn fees while waiting for a market recovery.

Context: Kelp DAO Hack and Market Response

Egorov's initiative comes amid ongoing discussions about the fallout from the Kelp DAO hack, which created significant risks for the Aave protocol. While other projects are considering emergency loans and direct compensations, the Curve founder advocates for market-based solutions.

In April, protocols affected by the Kelp attack formed a support fund that attracted over 102,000 ETH. The amount nearly covered the total damage caused by the exploit, estimated at approximately $290 million.

Community Pushback

Community reception has been mixed. Several users pointed out that finding buyers for such assets would be challenging given the lack of immediate yield. Critics also questioned whether professional investors would show interest in the instrument without additional subsidies from the Curve DAO.

Nevertheless, the concept of a market-driven approach to resolving bad debts offers a distinct alternative to the established practice of direct bailouts. If the LlamaLend pilot proves viable, it could set a precedent for the broader DeFi industry in handling similar situations going forward.