The market crash in October 2025 pushed the DeFi giant Curve Finance into the limelight. At that time, due to the dual pressure of sharp price fluctuations and a drastic contraction in liquidity, significant bad debts emerged in its lending market, especially the CRV-long Llamalend liquidity pool, which suffered heavy losses, leading some deposit users to face restricted asset withdrawals and substantial losses. After a period of silence lasting six months, Curve officially introduced an on-chain market-based "recovery path" around May 2026, attempting to address this historically accumulated bad debt through market-oriented means. According to AiCoin data, this plan allows affected CRV debt holders to sell their claims on-chain directly for an exit or to choose to continue holding or even providing liquidity for subsequent rewards. This attempt to transform debt into tradable assets marks a shift in how DeFi protocols handle systemic risks, transitioning from passive pressure to transparent asset recovery.

However, Curve's self-rescue is merely a microcosm of the ongoing re-pricing of risks in the current crypto market. While seeking repairs at the protocol level, macro liquidity and regulatory environments are conveying more complex signals. In April 2026, the total amount of financing in the crypto space dropped 74% month-on-month to $659 million, hitting a near two-year low, indicating extreme caution in the primary market regarding risk exposure. Meanwhile, traditional asset management giants have begun to strategically contract, with Bitwise announcing it would close and liquidate its two crypto ETFs, BTOP and BWEB, with unexecuted shares forced to be redeemed in cash at NAV. From Curve's on-chain debt restructuring to the "frozen" financing data and liquidation of compliant products, multiple facts point to one core logic: the risk premium in the crypto market is being comprehensively reassessed. Whether the on-chain handling of DeFi bad debts is the end of risk or the starting point of larger-scale liquidation remains to be carefully observed.

Aftermath of the Crash: CRV-long Bad Debts Emerge

According to AiCoin data, the crypto market experienced a wave of intense price fluctuations in October 2025, with a deep correction of mainstream assets rapidly transmitting to the lending layers of DeFi protocols. During this period, some lending markets under Curve Finance triggered large-scale liquidations due to the sharp decline in collateral value, but because market liquidity dried up in a very short time, the liquidation mechanism could not fully cover the position gaps, leading the protocol to incur bad debts. Among these, the CRV-long associated Llamalend liquidity pool became the most severely affected "disaster area." The sharp price fluctuations and liquidity shrinkage created a negative feedback loop that directly impacted the pool's repayment ability.

The outbreak of this on-chain risk not only manifested as paper losses but also directly affected the normal operation of the protocol. After the crash in October 2025, some deposit users providing liquidity to the Llamalend liquidity pool faced difficulties due to restrictions on withdrawals, ultimately bearing actual asset losses. Due to the contradiction between the scale of bad debts and liquidation efficiency, it was challenging to reconcile this through conventional methods at the time, leaving the historical debts in a state of uncertainty for six long months. This long-term credit impairment set the stage for Curve's attempt to introduce a market-oriented "recovery path" and became a typical example to observe the self-recovery ability of DeFi protocols under extreme pressure.

Bad Debts Brought on-chain: Curve Offers Three Exit Paths to Users

To address the debt issues left over from the October 2025 crash, Curve Finance recently announced the introduction of an on-chain market mechanism for a "recovery path." The key of this plan is to break the inherent model of traditional DeFi bad debt treatment of "waiting for liquidation" or "protocol backing," instead using technical means to transform bad debts into tradable, priceable claim positions, primarily targeting the severely affected CRV-long Llamalend liquidity pool. According to official information collected by AiCoin, this mechanism pushes the originally closed debt write-off process to the open market, granting affected deposit users the right to choose their risk-bearing methods autonomously.

Under this recovery path design, affected users face three differentiated exit strategies. First is "directly selling claims for exit," allowing users to transfer their damaged claims as assets to other participants willing to take on the risk in the secondary market, thus achieving immediate liquidity realization. Second, for users confident in the long-term recovery of the protocol, there is the option to "continue holding claims," waiting for potential subsequent recovery outcomes or compensation from protocol revenues. The third choice is the advanced "providing liquidity" model, allowing users to act as liquidity providers in the relevant claims trading market, earning transaction fees and extra protocol incentives through market-making activities, thereby hedging their losses in dynamic gaming.

This initiative marks a transformation in how DeFi protocols respond to extreme liquidity crises, shifting from a single system-enforced liquidation to a more complex "debt assetization." By bringing bad debts on-chain and making them marketable, Curve not only alleviates the impasse of asset withdrawals from within the liquidity pool but also allows funds with different risk preferences to reprice these "bad assets" through games. This attempt to turn historical burdens into tradable on-chain targets provides a valuable experimental window for observing how decentralized governance can absorb systemic risks.

Freely Trading Claims: Risks Passed Rather Than Disappeared

The core of the "recovery path" introduced by Curve lies in converting damaged claims into tradable on-chain assets, thereby achieving secondary pricing and risk transfer. According to the plan released by Curve, claim holders are no longer passively awaiting the prolonged recovery of the protocol, but can opt for immediate exit through discounted sales of claims. In this mechanism, previously affected users lock in existing losses by relinquishing part of their potential claims, thus avoiding uncertainties arising from subsequent price fluctuations of CRV and the progress of protocol recovery; while the acquirers undertake the risk of price fluctuations, hoping for premium gains from future debt repayments or protocol restarts. This loss distribution based on price games signifies a substantial shift in DeFi risk management from "protocol rigid commitments" to "market-based pricing."

Compared to the common practices in prior DeFi protocols such as "treasury backing," "issuance of tokens as compensation," or "forced distribution of losses through governance voting," Curve's new plan relies more on voluntary choices from users. Participants providing liquidity essentially exchange their time-based risk exposure for compensation through earnings from fees and protocol incentives, transforming the process of dissolving bad debts from collective administrative decisions to individual profit-driven behaviors. According to AiCoin data, this model returns decision-making power to the market through on-chain trading but also implies that risks have not disappeared but have been "passed" from the original depositors to speculators and liquidity providers with higher risk appetites.

However, the actual effectiveness of this market-oriented attempt still needs careful assessment. Currently, there is a lack of key quantitative data on the scale of claims trading, specific discount levels, and liquidity pool depth on-chain. In the absence of sufficient liquidity support, the price discovery function of the claims market may be limited, causing affected users to face excessively high exit discounts. Moreover, the ultimate outcome of bad debt resolution still heavily relies on the price performance of CRV and the subsequent recovery efficiency of the Llamalend pool. Within this time window of May 2026, whether this plan successfully resolves the systemic risks left by the October 2025 crash or merely completes a transfer of risk ownership on-chain remains to be closely monitored with regard to the funding flows and participation levels of related addresses.

Licensing and Profitability: Centralized Institutions Reassess Risks

While DeFi protocols are attempting to digest bad debts through on-chain market mechanisms, centralized institutions are building more robust risk resilience systems by securing regulatory licenses and strengthening capital reserves. According to AiCoin data, the Olympus division under Gemini has officially obtained a Derivatives Clearing Organization (DCO) license issued by the U.S. Commodity Futures Trading Commission (CFTC). This means that Gemini is further enabled to engage in self-clearing, settlement, and risk management in futures, options, perpetual contracts, and prediction markets based on its existing designated contract market (DCM) license. As it accelerates its application for a Futures Commission Merchant (FCM) license, a compliance risk framework encompassing clearing and collateral management is taking shape, aimed at fundamentally avoiding liquidity shocks similar to those in extreme market conditions from October 2025.

The acceleration of the compliance process is also reflected in the deep integration of legislation and infrastructure. Coinbase recently stated that it has reached a compromise with banks on related yield terms, a breakthrough seen as an important signal for advancing the U.S. Senate's crypto bill. Meanwhile, Anchorage Digital has submitted comments on the GENIUS Act and plans to cooperate with Western Union to issue a USD-pegged token codenamed UDSPT, aiming to establish a more stable credit endorsement in the payments field. In addition, Bakkt has acquired the payment infrastructure firm Distributed Technologies Research (DTR) by issuing over 11.3 million shares, aiming to create a 24/7 digital settlement layer connecting traditional finance. The public support of top venture capital firm a16z for unified regulatory oversight by the CFTC also reflects major investment institutions' efforts to address systemic risks stemming from liquidity fragmentation through promoting centralized regulation.

In terms of financial performance in risk hedging, centralized issuers have demonstrated strong defensiveness. Tether's Q1 2024 financial report revealed a quarterly profit of $1.04 billion, with excess reserves reaching an all-time high of $8.23 billion. This level of capital redundancy provides a key risk buffer for the entire dollar-pegged token system. Compared to the pressures Curve faces in resolving bad debts in the Llamalend pool, such hundreds of billions in reserves offer macro-level stability to the market. The convergence of traditional financial forces and crypto-native institutions in the areas of clearing, payments, and compliance signifies that the market is undertaking a comprehensive institutional repricing of risk exposures following the collapse in 2025.

Product Closures and Financing Plummeting: Risk Appetite Tightens

This institutional repricing is reflected not only in the games surrounding compliance licenses but also directly in the contraction of capital flows and product lifecycles. According to AiCoin data, the total financing in the crypto space in April 2026 was only $659 million, down 74% month-on-month, marking the lowest level in nearly two years. The cliff-like decline in primary market financing reflects a significant retreat in venture capital's preference for crypto assets. Simultaneously, there have been contraction signals in the secondary market as asset management company Bitwise announced it would close and liquidate its two crypto ETFs, BTOP (Trend Rotation Strategy) and BWEB (Web3 Theme). Although the specific reasons for the closures have not yet been disclosed, the exit of such themed products suggests that during periods of tightened liquidity, the commercial feasibility of some complex strategies or specific thematic products is facing serious challenges.

Against the backdrop of overall cooling, the allocation of existing funds shows strong selectivity. Payment infrastructure company Fun recently completed a $72 million Series A financing led by Multicoin Capital and SignalFire, while Bakkt also completed the acquisition of stablecoin infrastructure company DTR through equity issuance. This "ice and fire" situation indicates that capital is concentrating on payment and settlement infrastructure with high certainty, while showing indifference towards narratives lacking underlying support.

Connecting this to Curve's ongoing practice of bad debt recovery, this tightening of risk appetite actually raises the demand for higher transparency from DeFi protocols. In an environment where both financing and liquidity are contracting, if a protocol cannot clearly delineate, price, and provide market-driven exit paths for bad debts through clear on-chain mechanisms, it will be extremely difficult to regain long-term funding trust. Bitwise's arrangement for redeeming ETF shares—where unexecuted shares after May 21, 2026, will be automatically redeemed at net asset value—is essentially a forced risk clearance, while Curve's attempt to transfer claims to traders willing to bear risks through the "recovery path" seeks to reshape the risk pricing power on-chain. This shift from "passive explosion" to "active disposal" will be key for DeFi protocols to achieve a soft landing in a stagnant market environment.

From Bad Debt Self-Rescue to Strengthened Regulation: Where to Look Next for DeFi

The "recovery path" launched by Curve in May 2026 marks a new stage in how DeFi protocols address extreme risks. By marketizing the bad debt claims left over from the October 2025 crash, affected users received three choices: selling claims, continuing to hold while waiting for recovery, or providing liquidity to earn incentives. The essence of this practice is no longer mechanically erasing losses, but rather making risks explicit and providing liquidity, allowing them to be repriced and transferred. According to AiCoin data, the total financing in the crypto space in April 2026 was only $659 million, down 74%, indicating a significant drop in risk appetite in the primary market. Against this backdrop, the actual trading activity and discount levels of Curve's bad debt market will become important indicators for observing whether DeFi lending protocols can achieve credit repair on-chain.

At the same time, the redefinition of risk is extending from on-chain to compliance levels. Following Olympus obtaining the DCO license issued by the CFTC, it is further progressing towards an FCM license to establish a full-stack compliance business encompassing contract clearing and brokerage; meanwhile, Anchorage Digital's positive feedback on the GENIUS Act and Coinbase's compromise on fiat-linked asset yield terms indicate that the U.S. Senate's crypto bill has entered a critical period for implementation. Even as Tether revealed a profit of $1.04 billion and excess reserves of $8.23 billion in its Q1 2024 report, market discussions regarding systemic risks have turned towards more transparent quantitative models. In the future, whether participating in DeFi derivatives or observing the demonstration effect post-Bitwise ETF liquidation, investors should prioritize attention on whether the bad debt handling pathways and risk allocation rules of protocols have been sufficiently made public on-chain.

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