We think this is a novel and constructive recovery mechanism, and we are broadly supportive of trying it as an experiment. Our main request would be to make the required economic assumptions and possible edge cases explicit, because the mechanism depends on several actors coordinating correctly.
1. Summary of the Idea
The proposal turns the impaired CRV-long LlamaLend vault shares into a tradable recovery claim.
The technical structure can be summarized as follows:
In this structure, the impaired vault holds the affected lender claims, the LLAMMA controller manages the open borrower positions, and the proposed recovery pool creates a secondary market for the vault token. Affected lenders can sell their impaired vault shares into the recovery pool, liquidity providers can support trading depth, and speculators can buy the claim if they believe the market price is below the expected recovery value. It is very likely that there will be an overlap in roles (i.e., LP may be affected, Lenders).
The most important intended flow is the arbitrageur / liquidator loop. If vault shares trade at a sufficient discount, an arbitrageur can buy discounted shares, use crvUSD to repay or liquidate impaired positions through the controller, improve vault backing, and then redeem vault shares against the improved vault state. In the productive case, this turns external capital and liquidation incentives into actual bad-debt reduction.
The attractive feature is that the vault token has state-dependent recovery value. If CRV recovers, some open positions may become more economically recoverable or liquidatable, increasing effective vault backing. If CRV falls further, much of the impaired collateral has already been converted into crvUSD, so downside may be more limited than in a standard collateral-driven bad-debt case.
2. Concerns
2.1. Asymmetric Information of Borrowers
One concern is the interaction between discounted vault shares and open borrower positions. Borrowers hold information asymmetry in this market.
If vault shares trade at a discount, an open borrower may be able to:
- buy discounted vault shares;
- repay or partially repay their position, injecting crvUSD liquidity into the vault/controller;
- redeem vault shares against that newly available liquidity;
- capture the spread between the discounted purchase price and realized redemption value.
This is not guaranteed profit. It depends on redemption mechanics, available liquidity, execution ordering, fees, slippage, MEV, and CRV price path. It is also not limited to currently healthy borrowers. As CRV recovers, previously unhealthy or partially recoverable borrowers may become able to repay, especially if vault shares remain sufficiently discounted.
The net effect is that vault bad debt is reduced, yet it creates a dynamic that is favouring the borrower, and market participants should be aware of this.
2.2. Ecosystem Participation
The second concern is whether the required participants will actually show up.
This mechanism needs several actor types:
- affected lenders willing to sell at a discount;
- speculators willing to buy vault-token upside;
- LPs willing to provide liquidity;
- arbitrageurs able to execute the liquidation/redemption loop for potentially non-recreated experiment;
The proposal relies on sophisticated actors recognizing and executing the option-like payoff. That may happen, but it should not be assumed. For that reason, we would support a clearly time-bounded pilot with monitoring rather than an open-ended incentive commitment.
3. Suggested safeguards
We would suggest:
- monitoring discounted vault-share purchases followed by borrower repayment and redemption;
- publishing a dashboard or frontend with pool price, estimated backing, liquidation floor, bad debt cleared, and pool depth to support information discovery and participation;
- making any gauge support conditional on actual recovery progress.
Conclusion
We support the proposal as a market-based recovery experiment. It is preferable to leave the market stuck, which may reduce bad debt. Any DAO repayment should be understood as discretionary, not obligatory. v1 market creation was permissionless: anyone could deploy a market, and bad debt does not automatically imply DAO responsibility. We therefore view this as a pragmatic recovery mechanism that may apply to future bad-debt situations, but not as a precedent for unconditional DAO backstops.