Moonwell, a decentralized finance (DeFi) lending and borrowing protocol, finds itself embroiled in controversy due to its plan to utilize $2.3 million worth of digital assets as collateral to cover losses incurred from a hack that occurred almost two years ago in the Frax Finance (FRAX) pools.
In a referendum conducted on December 31, 2023, Moonwell sought the approval of its community to address the Frax-related debt by combining Nomad collateral and protocol reserves. The referendum, titled “Options for Enhancing Liquidity in the FRAX Market on Moonbeam,” witnessed an overwhelming consensus, with over 98% of the 25 million votes, represented by Moonwell’s WELL token, in favor of using a combination of Nomad collateral and protocol reserves to rectify the Frax debt.
However, concerns have been voiced by Moonwell users, notably Horatio Lucas, who contends that the Nomad collateral rightfully belongs to individual owners and cannot be employed to offset Moonwell’s debt without their explicit consent. Lucas alleges that Moonwell stands to gain from the proposed redirection of Nomad users’ funds, raising questions about the protocol’s integrity.
Lucas contends that Moonwell stands to benefit significantly from the proposed allocation of funds and accuses the protocol of having manipulated the Nomad asset oracle prior to the Nomad hack. He asserts that Moonwell’s intentions revolve around resolving its bad debt by inappropriately diverting resources from Nomad users.
Although the referendum achieved the necessary 10 million WELL quorum threshold, critics assert that utilizing collateral without obtaining individual owners’ consent presents moral and legal dilemmas. The ongoing controversy regarding this proposal sheds light on the complexities involved in navigating decentralized protocols, community governance, and the aftermath of security incidents within the DeFi sector.
Users like Lucas question the legitimacy of the community vote, raising concerns about the fairness and repercussions associated with such decisions.
Moonwell Community Faces Dissent Over Handling of Nomad Bridge Exploit
The Moonwell community finds itself in the midst of internal discord due to its response to the Nomad token bridge exploit, an incident that unfolded on August 2, 2022, leading to a staggering loss of $190.7 million. Moonwell had previously entered into a partnership with the Nomad token bridge, aimed at integrating Bitcoin, Ethereum, stablecoins, and altcoins onto its platform.
The aftermath of the Nomad incident has given rise to a host of unresolved issues. Notably, there is a concerning bad debt situation connected to Frax tokens on Moonwell, with the outstanding amount reaching $2.9 million. Additionally, individuals who had posted collateral for DeFi lending via Nomad found themselves adversely impacted.
In response to the crisis, Moonwell conducted a snapshot vote to gauge the community’s sentiment regarding the potential withdrawal of dormant Nomad assets from its markets. This move, however, faced dissent from some users who contended that the vote lacked legitimacy, particularly across various jurisdictions.
Moonwell has clarified that the snapshot vote was intended solely as an indicator of community sentiment and held no binding implications. A spokesperson for Moonwell emphasized that any substantive action to withdraw dormant Nomad assets would require a binding on-chain vote with a more stringent quorum requirement.
In addressing dissenting voices, the spokesperson criticized them, alleging that they were “severely misinformed and spreading false information.” Moonwell maintained that the DAO (Decentralized Autonomous Organization) has been openly deliberating on how to mitigate the fallout from the Nomad hack and has put forward a proposal consistent with the protocol’s established procedures.
Discussions regarding Moonwell’s recovery from the Nomad incident continue, with the community divided on the most appropriate course of action. While the Nomad Bridge has been relaunched, its popularity has waned since the exploit occurred.
