Hi Moonwell Community
Gauntlet is reaching out to present our analysis of the FRAX liquidity pool on Moonbeam, highlighting the presence of 2.95 million FRAX tokens classified as bad debt. Alongside this analysis, we will share our recommendations for mitigating the high utilization of assets within the pool and further insolvency risk to the protocol.
FRAX Utilization + Borrow & Supply Balances
Since mid-November, Moonbeam’s FRAX liquidity pool has seen a significant decrease in supply and borrow balances, resulting in high sustained utilization levels. Undercollateralized positions represent 90% of outstanding borrow positions. The high utilization shift to the FRAX liquidity pool has led to an average daily interest accrual of around $2.2k on the outstanding bad debt.
Gauntlet Recommended Full Utilization Mitigation and Risk-Off Actions
It is crucial to concentrate on diminishing bad debt and implementing risk-off measures for the FRAX liquidity pool. Gauntlet provides three objectives in which we recommend to the community in order to mitigate full utilization of the FRAX liquidity pool and further insolvencies:
Objective 1: Reduce Bad Debt
To settle outstanding bad debt within the FRAX liquidity market, we have identified two potential resolution paths. The first option entails utilizing the reserves from the Moonbeam market, while the second option involves liquidating all Nomad collateral to cover the undercollateralized FRAX positions. All measures are community decisions that require a governance vote.
Reserves within Moonbeam Market
As reserves exist to treat conditions like this, the community can vote to reduce the FRAX bad debt with protocol reserves. The total current reserves available to reduce bad debt are ~$493k.
| Asset | DOT | GLMR | WBTC.mad | ETH.wh | WBTC.wh | USDC.wh | USDC.mad | xcUSDT | ETH.mad |
|---|---|---|---|---|---|---|---|---|---|
| Reserve USD Value | $248,763 | $159,544 | $21,862 | $19,933 | $16,320 | $12,943 | $9,670 | $6,824 | $2,437 |
*Mad assets will need to go through the Nomad Recovery Fund.
Nomad Collateral
Additionally, the Nomad collateral originating from the bad debt continues to hold value through the Nomad recovery fund. To facilitate the redemption process, it will be necessary to engage a third party to access and utilize Nomad’s recovery mechanism. Here is the estimated value of the Nomad collateral:
| Nomad Assets | Collateral | Current Value |
|---|---|---|
| USDC Nomad | 10,723,922 | $1,584,352 |
| WBTC Nomad | 42 | $467,681 |
| ETH Nomad | 2,207 | $219,405 |
| Total | $2,271,439 |
If the community chooses to proceed with utilizing the Nomad collateral for clearing FRAX bad debt, Moonwell must undertake governance measures to transfer the Nomad Collateral from the Bad Debt accounts. Afterwards, the community can initiate the process of reclaiming the recovered funds through Coinlist. A designated party will need to assume the Nomad assets to submit the request to Coinlist and navigate the recovery process as detailed in this blog.
Objective 2: Reduce Collateral Risk
In Gauntlet’s last recommendation, we took steps to disable new borrowing of FRAX tokens, to reduce the likelihood of high utilization events. However, existing positions still pose a risk so far as FRAX users can use their collateral.
Gauntlet recommends a strategy of gradually decreasing FRAX’s collateral factor, all while closely monitoring utilization and user positions. This approach serves to de-risk the Moonbeam market by diminishing FRAX borrowing power capacity, thereby reducing exposure to high utilization events. Gauntlet will exercise prudence, considering FRAX liquidity and FRAX positions before proposing any additional community actions.
Objective 3: Reduce Accrual of Bad Debt and High Utilization
High pool utilization drives up interest rates, causing interest to accrue faster on the bad debt positions. Since utilization is a function of supply and demand, incentivizing additional FRAX supply will bring down utilization and thereby interest rates.
Gauntlet recommends increasing WELL and GLMR incentives for users to supply more FRAX to the pool. Note that the current APR of ~30% is currently an attractive rate of return on FRAX, so this action may not increase the inflow of supply, and incentives can be readjusted based on user elasticity over the coming weeks
With respect to borrow interest rates, the community could consider lowering IR curves to reduce interest accrual against the bad debt, since MIP-M11 has paused FRAX borrowing. However, Gauntlet advises against lowering the FRAX IR curves unless there is a concurrent increase in WELL and GLMR incentives to sustain a high supply Annual Percentage Yield (APY) for FRAX. Gauntlet will work with the community to collaborate on the appropriate adjustments of rewards to treat bad debt.
Outstanding Nomad Bad Debt - wGLMR, xcDOT, FRAX
Gauntlet wants to acknowledge that the WGLMR and xcDOT pools likewise have bad debt positions, which is an area of concern, but they do not represent as significant a risk to the protocol as FRAX since there is still substantial liquidity within these WGLMR and xcDOT liquidity pools.
Next Steps
Gauntlet will be proposing risk parameter adjustments and will be working with the community to provide further solutions for the resolution of nomad assets. We will follow up this week.
