FRAX Liquidity on Moonbeam: Analysis & Recommendations

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.


What if we increased the Reserve Factor on FRAX to increase the speed with which the protocol increased its FRAX Reserves? Right now it’s only at 15% which matches the other Stables, but the other markets are at 25%.

Hi @Curly,

Thanks for your question. Currently, we don’t recommend raising the reserve factor for FRAX. Doing so would reduce the Supply APY by 3 percentage points based on current utilization, discouraging both current and future suppliers and potentially worsening the liquidity issue. Additionally, our goal to decrease bad debt accrual would already lower the borrowing interest rate curve, making a reserve factor increase less impactful on liquidity. Once the community completes objective 1, Gauntlet will be supportive of a reserve factor increase on FRAX.

Ok. I think I understand.

In general, I see the logic of the measures you suggest above, I just don’t think that substantially increasing the Supply APY right now would result in much more supply inflows. Looking at your stats dashboard we can see that FRAX is the 4th most supplied asset while it’s Supply APY is ~4.5x that of the number 1 most supplied asset (GLMR). This indicates to me that people are shifting more risk-on and don’t want to by holding/supplying stables right now.

There is a new reward adjustment proposal up now that increases the Supply APY of FRAX by about 1.82%. Could we afford to increase the Reserve Factor in such a way that it only decreases the Supply APY by about 1.5% resulting in a slight net increase in Supply APY while at the same time increasing the amount of revenue being directed to the protocol?

We could see how this goes over the next 28 days, and when it comes to the next adjustment we can coordinate a larger increase of both the Supply APY and the Reserve Factor to have a slightly higher net increase in Supply APY.

In terms of the options you gave for Objective 1, I am 100% in favor of taking the required steps to recover funds through the Nomad Recovery Fund. I am also willing to coordinate with other members of the DAO to make this happen if necessary.

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As a Frax depositor, with some stablecoins (tether and wormhole usdc) debt (that can easily be paid if i could unwind most of my frax deposits) what’s the preferred solution for me to do to help the protocol?

I could suck up Frax liquidity (51k right now) and partially pay my debt yet that would create an even bigger stress on frax, so i’ve decided against it but i wanted Gauntlet (or team members) input.



Gauntlet in its previous report dated 06/12 mentioned the phrase " mitigating the potential risk of insolvency" for the FRAX pool. At least to me, from a traditional financial point of view, the FRAX pool was already insolvent at the time as 90% of the outstanding FRAX borrowings have no prospects of being paid back (aka “bad debt” stemming from the Nomad hack). If Moonwell were a centralised lending/borrowing platform (which it is not) and kept accepting people’s FRAX deposits with the “active” knowledge of this bad debt situation, this could be construed as serious misconduct to say the least. Moonwell Artemis should not accept any more FRAX deposits rather than or in addition to, halting FRAX borrowings unless/until these FRAX bad debt get completely (or at least largely) written off/paid back first in some way, perhaps with a combination of the protocol reserves and remaining Nomad assets as proposed by Gauntlet this time. If I remember correctly, there is one particular borrower whose FRAX bad debt amounts to more than $2.0 mil FRAX (due to the Nomad hack). It is a " music chair" situation now. New suppliers, being attracted to its absurdly high APY but without being aware of what is going on with FRAX liquidity, deposit their FRAX and existing FRAX suppliers grab these FRAX and get out. Not a good situation.


Hey @nujhe! See here for the actions being taken to help avoid further strain on the FRAX liquidity pool. How you manage your position is completely up to you. Reducing utilization (increasing supply and decreasing borrow) helps rebalance the pool.


This music chair game is a serious issue. The protocol should have stopped accepting frax deposits long time before this exploded. Now we suckers deposited frax because the info wasnt there and we trusted the protocol.
Now just waiting for it being solved magically…


Completely agree. This situation is seriously unacceptable on many levels. I continued providing FRAX liquidity to the protocol and not contribute to a liquidity crunch by withdrawing

First - Why wasn’t there some kind of notification on the front end about the issues with FRAX liquidity? I just supplied FRAX last night and wouldn’t have if I knew the pool was insolvent. I hope the plan isnt just to hope people supply liquidity without letting them know there isnt any.

Anyways I’m trying to figure out a few things. All the nomad assets that are supplied - are they below liquidation thresholds? Because if they are I see no reason not to use Nomad assets. Now I’m a bit confused too regarding the use of Nomad assets. Is the proposal to use Nomad assets to inject FRAX into they supply pool? If so this seems like the best route to go. Are there any liquidity issues with using Nomad assets to get those values listed in the post. I might not know enough but seems to me the simplest solution is to use Nomad supply to bring down the utilization rate for FRAX. What are the downsides?

I don’t think there’s any reason to expect anyone to supply FRAX to an insolvent supply pool. Same reason no one is going to deposit money into an insolvent bank. Not unless you plan to have 1000% APY with GLMR and WELL tokens.

Also just to reiterate please inform people that the FRAX pool has no liquidity on the front end website.

One more thing. I think that if the utilization rate on FRAX can be brought down there should be a several month period to phase in withdrawls. I’m thinking something like at first allow people to withdraw 30% of their collateral, then a month later 50%, then 70%, up to 100% I think at least something like this could help prevent an immediate run on the pool when utilization rates are reduced. What do you all think?

edit: ok two more things. xcUSDT and USDC pools are both above 80% utilization. Are there any plans to prevent a run on those pools? If I had money in those pools and saw what’s happening with FRAX right now I would pull my funds out.

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If I understand it correctly we have the option to recover around 90% of the deposits but with a long waiting time ahead (6 months - 1 year perhaps?).
The maximum 56% collateral power of frax will slowly be deminished.
That will mean that people have to choose to pay back their loans and invest more money or accept a loss of 44% of their frax deposits.
Is it possible to make an option for Frax depositors to freely close their position with a haircut of 33% (with a maximum of 750.000 frax)?
Paid fully out the reserves this will solve 750.000 bad debt and cost us ‘only’ 500.000.
Then the depositors who are willing to wait can receive 100% back paid out the nomad capital.

Hi @Ketaru. Gauntlet is cautious about halting FRAX deposits, as this could negatively impact market liquidity and user confidence. We believe that resolving the bad debt situation is the most important factor in aiding FRAX liquidity at this time. We are working proactively to help Moonwell achieve this, offering a detailed forum post with options to use protocol reserves and outstanding Nomad collateral from bad debt, in order to repay the debt and enhance liquidity.


Hi @cryptocurious. There is 100% utilization on the front end of the dashboard, signaling a liquidity crunch within the pool. We are keeping the supply unpaused to attract more suppliers and improve liquidity within the pool. Currently, users are receiving a 17.7% APY from WELL/GLMR incentives. Furthermore, as mentioned in today’s forum post, the community has options for addressing the FRAX bad debt, which we hope to resolve soon.


We have refined the parameters for xcUSDT and USDC in the previous recommendation cycle, yet observed that the utilization rate consistently remained above 80%. We will implement further adjustments in the upcoming cycle of recommendations. Rest assured, the situation is under control. Thank you for bringing this to our attention.


I really wish you guys could address my post more thoroughly so we can all have a thoughtful discussion about best steps forward.

You asked about a plan. The research Gauntlet posted outlines a number of options for our community to recapitalize the Frax market. There is currently a snapshot vote up that I encourage you to participate in to let your preference be known.


This concern was not addressed.

Mostly unaddressed.

Not addressed.

No feedback, unaddressed.

Mostly unaddressed. Just told not to worry about it. :roll_eyes:

Hi @cryptocurious. We believe we have provided comprehensive answers to most of your questions. However, to ensure clarity and convenience, we will compile all the responses below for easy reference.

1. Notification:
There is 100% utilization on the front end of the dashboard, signaling a liquidity crunch within the pool.
We addressed it here.

2. Liquidations:
Addressed here. You commented under this reply.

3. Reason / Incentives to supply FRAX:
Addressed here. Currently, users are receiving a 17.7% APY from WELL/GLMR incentives.

4. FRAX Withdrawals:
We have noted your suggestion and thank you for that. Once the community has decided on the bad debt retrieval process, we will analyze whether it makes sense to implement withdrawal limits.

5. xcUSDT and USDC:
As highlighted in our previous discussion, we are planning to update the xcUSDT and USDC parameters during our upcoming recommendation cycle in early January. Should the Utilization Rate increase significantly and become more critical before that period, we will act accordingly and update the parameters at an earlier date.

Thanks for your reply. My original reply to your report was posted 9 days ago and since then, the situation has moved on significantly so this back & forth between us is in a way outdated and obsolete but as a matter of principle from a seasoned investment banker’s point of view, I disagree with you. And it looks like the Frax pool is still accepting liquidity which in my view, could be construed as fraudulent misconduct (if Moonwell were a centralised financial platform, which it is not). This bad debt issue should have been more seriously addressed earlier and until this bad debt gets written off (with the Nomad recovery fund or whatever) sufficiently enough, the Frax liquidity pool should not be taking any more liquidity. What you are saying is that in addition to the solutions that you have proposed, you are trying to make up for insufficient liquidity, at least in part, with new Frax liquidity to be provided by suppliers but that is the same as enticing ignorant depositors into depositing their money into an insolvent bank so that this insolvent bank could float again. Of course one could argue that those new suppliers of Frax liquidity should have known about the current liquidity crunch issue or they might be even providing liquidity with their eyes wide open about this liquidity crunch. I was one of the top 5 Frax liquidity providers (my wallet address was even mentioned in your recent Frax report) but I was monitoring very closely the liquidity situation since the first day that I provided my Frax to the pool and as soon as I found out about this 90% bad situation thanks to some old Discord post that alerted my attention to the Nomad bad debt issue at the end of November/early December, I was out. DYOR is the name of the game for DeFi or crypto in general as one of the Moonwell team members always said to me but still the insolvent liquidity pool still taking new liquidity is “disingenuous” on the Moonwell platform’s part to say the least in my humble opinion. But of course, you don’t have to agree with me and neither do I. And the situation has moved on anyway…

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Appreciate the reply.

And what is there to alert a potential supplier to the fact that if they deposit they cannot withdrawal? My concern is that the utilization rate can easily be overlooked and since the protocol is open to everbody I think there should be a notice on the front end that is a bit more obvious. Up front transparency is the key issue here, as well as not creating a bad name for the protocol and acting in a way that could be seen as tricking people. @Ketaru echoes most of my other thoughts on the issue.

Yes thank you. It was not addresses originally in the reply to my post.

Yes but why would 17.7% supply be an incentive if people cannot withdraw? This might be a moot point if and when withdrawals are restored

Thanks appreciate it. Just concerned that sentiment right now may encourage a run on the pool if withdrawals can be restored.

Thanks I’ll look forward to reading and discussing your recommendations. Mostly just concerned about current faith in the protocol, or lack of it, potentially contributing to a run on supply as utilizations become high.

Appreciate the replies. Thank you.

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