Moonwell Faces Backlash Over Proposal to Use Collateral to Offset Bad Debt
Decentralized Finance (DeFi) protocol Moonwell is at the center of a controversy involving a proposal to use $2.3 million in digital asset collateral to offset bad debt from Frax Finance (FRAX) pools. The debt originates from a hack that occurred nearly two years ago. Despite an overwhelming majority of Moonwell’s community voting in favor of the proposal on December 31, 2023, the drama underscores the intricacies of community governance and the resolution of security incidents in the DeFi sector.
Frax Bad Debt and Plebiscite Decision
A plebiscite held by Moonwell revealed that more than 98% of votes cast supported using Nomad collateral and protocol reserves to address the bad debt from Frax. The decision met the 10 million WELL quorum. However, not all community members were on board with the decision.
Community Divisions and Accusations
Horatio Lucas, a user of the protocol, and others, have raised concerns about the use of individual owners’ Nomad collateral without their explicit consent. According to Lucas, such a move is not only unethical but could also be potentially illegal. He has further accused Moonwell of misconfiguring the Nomad asset oracle initially, which he believes led to the hack and resulting bad debt.
Origins of the Controversy
The internal conflict within the Moonwell community can be traced back to August 2, 2022, when an exploit on the Nomad token bridge led to losses amounting to $190.7 million. This incident left unresolved Frax-related bad debt on Moonwell. After the incident, Moonwell organized a non-binding snapshot vote to ascertain the community’s stance on managing dormant Nomad assets. However, some users objected to this over concerns about the vote’s legitimacy.
In response to the criticism, a Moonwell spokesperson defended the process, stating that a binding on-chain vote with a higher quorum would be necessary before executing any actions related to the assets. The spokesperson further lambasted dissenting users for spreading misinformation. As it stands, the ongoing debate signifies the challenges of aligning community decisions with the interests of individual asset owners after a significant DeFi protocol exploit.