Moonwell bad debt recovery plebiscite draws user controversy

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Decentralized finance (DeFi) borrowing and lending protocol Moonwell wants to use its $2.3 million worth of digital asset collateral to offset bad debt from its Frax Finance (FRAX) pools from a hack almost two years prior, but not all users are happy.

In a plebiscite dated Dec. 31, 2023, titled “Options for Enhancing Liquidity in the FRAX Market on Moonbeam [on which Moonwell is built],” 25 million votes, denominated in the protocol’s WELL token, were in favor of using a combination of Nomad collateral and protocol reserves to address its Frax bad debt. Moonwell’s protocol reserves currently amount to $466,000, which is insufficient to cover the balance of its Frax liabilities alone.

The plebiscite was over 98% in favor and passed its 10 million WELL quorum threshold. That said, only 57 individuals or entities voted. Developers wrote:

“Should the community decide to take a selection of the nomad assets to exchange them for recovery funds, a community member would undertake the following actions to recover these assets and repay FRAX liquidity.”

Results of the “Options for Enhancing Liquidity in the FRAX Market on Moonbeam” plebiscite. Source: Moonwell

However, according to one user, Horatio Lucas, the Nomad collateral in question belongs to their individual owners and cannot be used to offset Moonwell’s Frax bad debt without their consent. 

“Moonwell is indeed the party who will benefit from the funds expected to be misappropriated and will be used to refinance Moonwell’s own bad debt to have misconfigured the Nomad asset oracle before the Nomad hack,” Lucas alleged in a statement to Cointelegraph. “In fact, anyone can vote if the Nomad users’ funds will be seized, even if they do not hold the Nomad assets. It makes no sense at all,” he continued.

None of the allegations have been proven in a court of law. A class-action lawsuit filed against Nomad provided by Lucas does not list Moonwell or Frax as defendants.

In 2022, Moonwell partnered with the Nomad token bridge for the integration of Bitcoin and Ethereum, as well as various stablecoins and altcoins on its platforms. However, on Aug. 2, 2022, the Nomad bridge was exploited for $190.7 million, which also affected Frax Finance. At the time of publication, bad debt relating to Frax tokens on Moonwell amounts to $2.9 million. The exploit also affected users who posted collateral on Moonwell for DeFi lending that was bridged via Nomad. 

Nearly two years later, the aftermath of the Nomad incident remains unresolved, giving rise to the Moonwell proposal. “The result of this vote does not have any legitimacy across all jurisdictions across the world,” Lukas commented.

Moonwell disagrees.

In a statement to Cointelegraph, a Moonwell spokesperson said that the snapshot vote was “non-binding” and “was just a signal vote” to gauge the sentiment of how the Moonwell community wants to proceed on this matter:

“In order to actually withdraw dormant Nomad assets from the Moonwell markets, a binding on-chain vote is required with a much higher quorum.”

The spokesperson claimed dissenting users were “severely misinformed and providing false information” about the Moonwell vote. “The DAO has been openly discussing how to mitigate the fallout from the Nomad hack and has put forth a proposal consistent with how the protocol operates. The deliberation on this proposal is an open process, and anyone with good ideas is welcome to participate,” they said.

Currently, discussions surrounding Moonwell’s recovery from the Nomad incident remain ongoing. While many attackers participated in the exploit with bad intentions, some joined in with the intent to return the tokens. The Nomad bridge has since relaunched, although with much-diminished popularity. 

The aftermath of the Nomad bridge exploit. Source: DeFiLlama

Cointelegraph reached out to Frax Finance for comment but did not receive a response by publication time.

Related: Hacker returns stolen funds to Tender.fi, gets $97K bounty reward