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The protocol responsible for NFT-backed loans, which suffered a loss of almost $12 million in cryptocurrency due to the recent Curve exploit (and subsequently offered a $1 million reward to recover the majority of the funds), is now faced with the task of determining how to address this deficit.

JPEG'd is an application for crypto lending backed by NFT collateral. It offers customers a form of ETH derivative known as pETH, which is linked to their loan positions. With a keen interest in earning additional yield, a significant number of these customers have staked their pETH within a liquidity pool endorsed by the protocol on Curve, a widely used trading platform on the Ethereum blockchain.

Their investment took a turn for the worse in early August as an attacker siphoned funds from that particular pool as well as others. However, JPEG'd made a decision to offer the attacker a 611 ETH reward in exchange for the return of 5,495 ETH (90%). This strategic move rescued the protocol from facing financial instability and prevented their customers from suffering total losses on their investments.

However, the responsibility of consuming the absent 611 ETH falls on someone. In an ongoing vote until Saturday, stakeholders overseeing the JPEG'd DAO confront a decision among six suggestions, each attributing that responsibility to a slightly distinct entity. The most dominant option at the moment distributes the impact between unpaid users of JPEG'd and the DAO's own resources.

Referred to as option D, it entails a scenario in which speculators of pETH price and yield farmers who haven't utilized Curve's proprietary service called Citadel for their deposits would receive a substantial portion of their invested funds back, though not the entirety. This stands in sharp contrast to the situation of premium customers: pETH minters who incurred a nominal fee to participate in a Curve pool via Citadel in order to earn interest; they would be fully compensated for any losses incurred.

The proposed strategy will lead The DAO to experience a net deficit of 484 ETH (equivalent to approximately $802,000) and 861 million JPEG tokens (valued at around $450,000). Furthermore, a transition from pETH to a novel derivative token is on the agenda, and this new token will be distributed via airdrop to all holders, regardless of the chosen option.

An anonymous user experience (UX) developer at JPEG'd, using the alias 0xtutti, described option D as a middle-ground approach to addressing the challenging issue. However, regardless of the chosen option, “everyone gets a share of the recovered assets,” according to the developer.

“Generally the community cared about protecting paying customers as much as possible,” 0xtutti said.