Curve founder Michael Egorov has a new potential answer to one of DeFi’s toughest questions: what happens after a hole from bad debt appears?

Egorov laid out a proposal to recover bad debt in lending protocols by turning distressed positions into a tradable investment product, starting with Curve’s own CRV-long LlamaLend market as a test case.

The pitch lands at a moment when DeFi is embroiled in public debate about recovery math, bailout optics, and who should pay for failures that spill across protocols.

The Kelp DAO exploit, and the bad-debt risks it created for Aave, have triggered a flurry of rescue ideas, from token allocations to emergency loans and contributions from ecosystem players including Mantle, Lido, and Aave itself.

Egorov’s version tries to move the conversation in a different direction.

"I proposed a recovery mechanism of bad debt, which is not a donation but an investment vehicle for everyone who participates," he wrote in the proposal. "If this proves to be a successful pilot study, apply it in similar difficult situations for either Curve or other protocols."

Egorov’s pitch

The immediate problem he is trying to solve is older and smaller than the Kelp issue, but newly relevant because of it.

Curve’s CRV-long LlamaLend market took on bad debt in October 2025, leaving the vault around $700,000 underbacked and trapping lenders who can no longer fully withdraw.

While the amount pales in comparison to some $292 million assets exploited in the KelpDAO incident, and billions in Aave outflows in the aftermath, Egorov argues that those impaired vault tokens are not dead assets.

In his telling, they carry an unusual payoff profile.

If CRV rises, the debt can recover as collateral converts back and eventually liquidates cleanly. Conversely, if CRV falls, the backing does not deteriorate in the same way a traditional bad-debt position would.

This gives the vault token an "option-like" structure, Egorov argues, with upside if the collateral rebounds and a floor if it does not. To make that tradeable, Egorov said he has already set up a Curve stableswap pool centered around roughly 71% solvency, where distressed vault tokens can be exchanged.

Liquidity providers in the pool could earn swap fees and potentially CRV incentives if governance approves them, while the DAO itself could accumulate the impaired tokens through admin fees without a direct bailout vote.

That is the core appeal of the design. It tries to replace a socialized rescue with a market. Instead of asking a DAO treasury or neighboring protocol to plug a hole, the model asks whether distressed debt can clear if it is packaged with enough upside.

Traders can buy the vault token at a discount. Liquidators can arbitrage it if pricing gets cheap enough. Liquidity providers can earn fees while waiting for recovery. Curve DAO can participate, but Egorov says it does not have to.

The timing is not accidental.

Since the Kelp exploit, DeFi has been forced into a messy real-time exercise in triage. Protocols like Lido and Mantle have pledged support. Aave has also debated direct contributions and the release of frozen ETH on Arbitrum.

All of it has sharpened a larger question: should bad debt be mutualized, ring-fenced, refinanced, or simply left to the market?

Egorov is clearly voting for the last option — or at least for a market wrapper around it.

The flipside

The early reaction suggests that it is easier to sketch the idea than to sell it.

One commenter cut to a major obvious concern, saying that "the reality is that no one will buy the affected positions, because they generate no yield."

Another user pushed back, arguing the yield is there if CRV eventually recovers and that the instrument behaves more like a discounted perpetual option with limited downside than a dead claim.

The same commenter laid out the trade in plain English: do nothing and hope CRV recovers above the threshold that clears the debt, sell now at a discount, or become a liquidity provider in the new recovery pool and earn fees while waiting.

A more skeptical reply questioned whether sophisticated capital would bother. If the payoff can be synthetically approximated elsewhere more cheaply, the pool may struggle to attract real buyers without heavy subsidies.

Egorov responded that traders may prefer the Curve stableswap LP itself, not just the vault token, and argued its payout profile is different and potentially more attractive.