Curve Founder Proposes Market-Based Fix for DeFi Bad Debt Amid KelpDAO Fallout

Curve founder Michael Egorov has proposed a market-based way to deal with bad debt in decentralized finance lending markets.

The Block reported on April 27 that Egorov's plan would package distressed debt as a tradable investment product, allowing the market to price and absorb it.

The proposal comes after the KelpDAO episode intensified debate over how DeFi should handle sour loans. Discussion had focused on bailout-style measures including token distributions, emergency lending and broader ecosystem support. Egorov instead argued for a market solution.

He cited Curve's "CRV Long LlamaLend" market as a pilot case. That market has about $700,000 of bad debt, leaving some deposited assets unavailable for normal withdrawals.

Egorov said the assets should not be treated as a simple loss because they have an "option-like structure." If CRV rises, the bad debt could recover. If the token falls, the loss profile remains limited, he said, making the assets suitable to be structured as an investment product.

To do that, he set up a StableSwap pool that allows the distressed assets to trade at a discount. Investors can take part by buying the assets or by providing liquidity in return for fees.

Reaction in the market has been mixed. Some critics argue demand may be limited for assets that do not produce immediate returns. Others see a profit opportunity if CRV rebounds.

The Block said the proposal is gaining attention as an alternative in the debate over whether DeFi bad debt should be shared across participants or left to market forces.