Around October 10, 2025, the cryptocurrency market experienced severe fluctuations, and the prices of core assets such as CRV saw significant declines. According to various news reports, Curve Finance's lending market Llamalend was significantly impacted during this storm, especially the CRV-long liquidity pool, which faced bad debts due to the double pressure of severe price fluctuations and a sudden decrease in liquidity. Preliminary statistics from the community indicate that the scale of these bad debts amounts to approximately $700,000, leading to restrictions on asset withdrawals for some deposit users and substantial losses. In the subsequent months, this gap was not resolved through traditional protocol treasury transfers or one-time governance compensation, leaving affected users in a long-term state of asset freeze or having to bear uncertain discounts, becoming a risk sword hanging over the Curve ecosystem.

Entering 2026, Curve attempted to resolve this legacy issue through a more "DeFi-native" market-oriented approach. On April 26, 2026, founder Michael Egorov officially submitted a proposal to Curve DAO, and on May 1, introduced an "recovery path" based on an on-chain market. The core of the plan is to convert the impaired debt claims into tradable debt certificates called cvcrvUSD and establish a crvUSD/cvcrvUSD trading pool. Affected users thus gained three options: directly sell the debt on the secondary market to exit with instant liquidation, continue holding and wait for the asset to recover with CRV prices (the plan set a recovery range of $0.957 to $1.242), or earn fees and protocol incentives as liquidity providers (LP). This marked the beginning of Curve's attempt to use market pricing mechanisms rather than administrative distribution to address protocol bad debts, serving not only as an experiment in lending risk management but also redefining the risk pricing logic of CRV assets within the Curve ecosystem.

From Plunge to Bad Debt: The CRV-long Liquidity Pool's Footage

Looking back at the starting point of this storm, one must return to the severe fluctuations in the cryptocurrency market around October 10, 2025. Reports indicate that mainstream assets collectively dived, and the price of CRV, deeply tied to the Curve ecosystem, faced a cliff-like drop. In the lending protocol Llamalend under Curve, the CRV-long liquidity pool, designed specifically for CRV leveraged positions, became the eye of the storm. Since the pool's liquidation logic heavily relied on real-time liquidity, when the CRV price plummeted below multiple key support levels in a short time and on-chain liquidity quickly contracted due to panic, the protocol's soft liquidation mechanism (LLAMMA) failed to timely liquidate collateral to cover debts. This dual impact caused by severe price fluctuations combined with liquidity contraction directly led to an asset gap in Llamalend that could not be closed through conventional liquidation paths, ultimately evolving into protocol-level bad debt.

The creation of this gap marked a shift from individual leveraged traders' liquidations to systematic damage at the protocol's core. In Llamalend's design framework, deposit users were originally supposed to be protected as liquidity providers under the liquidation mechanism, but in extreme fluctuations, bad debts directly eroded the principal of the liquidity pool. Preliminary statistics from the community indicate that the related bad debts amount to approximately $700,000. Although on-chain data remains transparent, the path leading to bad debts is clearly visible, the intuitive experience for affected deposit users is "asset withdrawals are restricted." This liquidity exhaustion caused by bad debts made user experiences facing asset loss indistinguishable from those of CeFi platforms suddenly freezing assets, further revealing the structural damage a single asset's price plunge can inflict on decentralized lending protocols in the absence of extreme liquidity buffers.

Turning Bad Debt into Chips: How CRV Claims Are Traded On-Chain

To break the withdrawal stalemate caused by bad debts, Curve founder Michael Egorov submitted a key proposal to Curve DAO on April 26, 2026, aimed at reshaping the repayment logic of Llamalend's bad debts through market-oriented means. The core of the scheme lies in tokenizing the impaired positions, which were "locked" due to liquidity contraction, into a debt certificate called cvcrvUSD (impaired vault claims). According to further details of the "recovery path" disclosed by Curve on May 1, 2026, affected users would no longer passively wait for direct compensation from the protocol but gained three differentiated strategic choices: directly sell the debt certificate on the secondary market for immediate liquidation, continue holding in anticipation of potential recovery from rising CRV prices, or provide liquidity in the newly designed trading pool to earn transaction fees and additional protocol incentives.

The technical backbone of this plan is the newly established crvUSD / cvcrvUSD trading pool. By introducing this on-chain market, Curve effectively returned the pricing power of bad debts to market dynamics. The parameters of the recovery model released by the project team set a clear price anchor: when the CRV price rises to approximately $0.957, the protocol will initiate recovery processes; if the CRV price can further climb to about $1.242, nominal "full recovery" would be possible. This design allows the market price of cvcrvUSD to fluctuate around the spot price of CRV and the expected recovery rate through dynamic gaming. For risk-tolerant arbitrageurs, they can buy in at significant discounts when the debt is heavily undervalued, capitalizing on the excess payment space brought by a rebound in CRV prices; whereas for liquidity-constrained users seeking a way out, the pooling allows for the redemption of crvUSD at market pricing discount rates, thus clearing their positions.

This shift from "protocol rigid liability" to "market pricing supported by infrastructure" signifies a new phase in handling DeFi bad debts through asset securitization. The protocol no longer unilaterally sets compensation ratios, but instead offers transparent pricing infrastructure via the crvUSD / cvcrvUSD trading pool. In the context of a bad debt volume of approximately $700,000, this self-help mechanism based on on-chain liquidity not only seeks to alleviate the runs on the Llamalend liquidity pool but also, through the price discovery function, allows participants with varying risk preferences to jointly bear and digest the historical issues left by the October 2025 plunge.

Who’s Picking Up the Pieces? The Life-and-Death Gambit of Three Types of Participants

In this recovery path based on an on-chain market, Curve has effectively constructed a secondary market concerning risk and liquidity, disassembling the originally rigid bad debt gap into a game among three core participants. First are the original depositors eager to limit their losses and exit. Since the market crash in October 2025, this portion of funds has remained in a "locked" state with restricted withdrawals. According to AiCoin data, the scale of bad debts in Llamalend is approximately $700,000, and the new scheme introduces cvcrvUSD debt certificates, transforming long-term locked uncertainties into "discounted chips" that can be sold at any time in the secondary market. For these users, exchanging in the crvUSD / cvcrvUSD pool means gaining immediate liquidity, but the choice to sell also means officially confirming and locking in real losses.

In contrast, there are those willing to buy debt at a discount and liquidity providers (LP) earning profits. Discount buyers are essentially betting on the long-term recovery potential of the Curve ecosystem and CRV prices. According to parameters disclosed by Grok, the recovery model anchors the performance of CRV prices between approximately $0.957 and $1.242, and if the market warms and the prices enter the recovery range, these participants will earn the spread from debt returning to par value. Meanwhile, liquidity providers (LP) serve as the "grease" for market clearing while earning transaction fees and protocol incentives; they must also bear the risks associated with fluctuations in cvcrvUSD prices and recovery progress not meeting expectations.

The core logic of this design is that it breaks away from the static payout model purely reliant on protocol treasury provisions or long governance votes after gaps in DeFi protocols emerge. Curve did not directly decide losses through administrative measures but returned the choices of "how to distribute losses" and "who shall gain potential profits" to market trading behavior. The exchange price between cvcrvUSD and crvUSD will dynamically generate based on on-chain supply and demand, truly reflecting the market's expectations of future bad debt repayment levels. This means that those ultimately bearing the bad debts are the hedgers choosing to exit at a discount, while those reaping recovery dividends will be the risk-tolerant participants who provide liquidity and take on risks amid uncertainties.

Kelp Hackers and RedStone: DeFi Self-Rescue Samples

While Curve attempts to digest bad debts through market-oriented debt pools, other core protocols in the DeFi ecosystem are also facing similar risk tests, evolving entirely different self-rescue logics. On April 29, 2026, ether.fi CEO Mike Silagadze announced a commitment of 5,000 ETH to the Kelp hacker incident recovery fund. This move was not merely charitable but rather based on extreme concerns over systemic collapse under DeFi's high interconnectedness. According to Mike Silagadze's warning, if Kelp ultimately goes bankrupt, the $1.5 billion rsETH asset might face long-term freezing, which would not only directly lead approximately $30 billion Aave lending market to a standstill but might also trigger a chain reaction between DeFi and CeFi. In his view, the potential damage from a single point collapse creating a liquidity black hole could even render the previous FTX crisis negligible.

This proactive fundraising mode, where core protocols step in to "fill the holes," sharply contrasts with Curve's reliance on market-based discounted clearing. The former leans toward forcibly stopping risk transmission through injections of funds from large accounts or related protocols, while the latter relies more on the endogenous evolution of gaming mechanisms. Meanwhile, the oracle service provider RedStone also launched the settlement layer product RedStone Settle around the same time, attempting to solve another type of structural mismatch: the contradiction between the immediate liquidation demand in DeFi lending and the 60 to 180 days redemption period of tokenized RWA (like US Treasuries and private credit). By introducing an on-chain auction mechanism, RedStone Settle allows liquidity providers to immediately take on positions when liquidating and bear the redemption period risks, aiming to activate over $30 billion of idle RWA assets in DeFi.

Whether it's ether.fi's funding commitments or RedStone's attempts at the settlement layer, they fundamentally point to the same industry proposition: how to construct an effective buffer and shock absorption mechanism in a decentralized world lacking a centralized last resort lender. Curve's debt trading pool, Kelp's recovery fund, and RedStone's liquidation auctions collectively form a multi-dimensional self-rescue sample for DeFi after risk exposure. These attempts are not only aimed at repairing the current asset gap but also at preventing any single protocol's localized bad debts from evolving into a domino effect that topples the entire cryptocurrency financial system.

Bad Debts No Longer Buried: How Far Can This Approach Go?

Curve's handling of Llamalend's bad debts is essentially an attempt to convert a one-time systemic shock into an ongoing risk asset continuously priced by the market. By introducing the crvUSD/cvcrvUSD trading pool, the protocol not only provides affected users with an immediate liquidity exit channel but also creates opportunities for more risk-tolerant participants to engage in gaming mechanisms. According to AiCoin data and public proposals, Curve founder Michael Egorov submitted this recovery plan to Curve DAO on April 26, 2026, which is currently in a crucial stage of governance voting and implementation. Moving forward, the market needs to closely monitor the voting rhythm of Curve DAO, the trading activity of the new pool, and whether the price trends of cvcrvUSD and crvUSD can truly point to effective recovery of asset values.

This practice offers profound insights for ordinary DeFi users: the underlying risks of high-yield protocols are not only price volatility risks but also include the institutional risk of "how the protocol handles extreme drawdowns." From ether.fi's investment of 5,000 ETH to rescue Kelp to RedStone Settle's attempt to resolve RWA liquidation mismatches through auction mechanisms, DeFi is shifting from "hoping for external rescue" to "internal risk assumption." If Curve's pathway of debt entitlement and market-based clearing is validated as effective, more lending protocols may embed similar risk clearing loops in their designs from the outset. Shifting bad debts from opaque governance negotiations to transparent on-chain pricing transactions may very well be a necessary path for DeFi to mature and truly achieve a closed-loop risk management."

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