Increasing governance participation (and rewarding voters) part 2

:last_quarter_moon_with_face::ballot_box::first_quarter_moon_with_face:
Hey everyone, thanks again for being a part of the Moonwell community. I continue to be incredibly proud of all that we’ve accomplished together in the last few years. As Moonwell approaches it’s 3rd anniversary, I believe it is time for us to align all the stakeholders and innovate.

Proposal

You might be aware that we recently implemented a voting requirement to claim your staking rewards on Moonwell. I appreciate all the community feedback that went into that proposal. Since those MIPs passed, governance participation on many proposals is up by 2-3x, and we see many more voters engaged. This was an incredible success story for the Moonwell community.

I want to continue to build on that with an idea I have that will likely increase voter participation even more, as well as help bolster the shortfall insurance provided by the Safety Module(s). I’d love to hear your feedback before this proposal goes up for snapshot and onchain voting.

Moonwell Revenue Generation

First, Moonwell is one of the top revenue generating protocols on every network it is deployed on. In December 2024 alone the protocol generated $386.1K in revenue and over $2.1M in fees for lenders. Until now, that protocol revenue has been largely idle, it simply gets stored in the core markets as reserves, which are basically extra liquidity that can be used to satisfy withdrawals.

New Sources of Revenue

In 2024 and 2025, Moonwell contributors have added new sources of revenue that make this likely to increase, in primarily 3 areas:

  • Moonwell’s Flagship and Frontier vaults are now generating performance fees that get captured as protocol revenue and added to the core markets as reserves.
    • The new retail borrowing demand for USDC from Coinbase Bitcoin borrowers is likely to drive vault performance fees up significantly in the next several months as that new borrowing demand comes online.
  • Solidity Labs pilot for Oracle Extracted Value just began on Optimism, and once proven successful, should also increase protocol revenue significantly as it gets more widely deployed on the Base and Optimism markets.
    • According to IntoTheBlock data, liquidators have made $2.09M profit on Base alone, with the new OEV solution 99% of that would have been recognized as protocol revenue.
  • New markets for Lombard BTC and the cbBTC Frontier vault have recently launched, which positions Moonwell as the premier venue for leveraged Bitcoin restaking, which should drive more TVL and revenue in the coming months.

You can see that in 2024 and early 2025 , we have had a relentless focus on capital efficiency, generating high fees for lenders, and protocol revenue. One thing that might not be obvious from looking at DeFi Llama is that the majority of Morpho’s TVL comes from Moonwell’s vaults, but DeFi Llama doesn’t count that TVL as ours. No worries, what is actually important is capital efficiency and revenue generation, and Moonwell is generating more revenue per $ of TVL than any other lending app on Base.

Where should all this revenue go?

This has been the million $ question since DeFi first started almost 5 years ago. All the major protocols including Moonwell have considered many options, yet many options carry excessive regulatory risk. Moonwell contributors have spent months consulting with the top legal experts in the space, and have an interesting idea that we believe aligns the incentives of all stakeholders in the Moonwell community.

Protocol Revenue Should Reward Safety Module Stakers

As a continuation of the effort to increase governance participation, we propose that excess protocol revenue be auctioned off for WELL and used to bolster the Safety Module Ecosystem Reserve. The Ecosystem Reserve is a smart contract that holds protocol reserves and is currently used to reward Safety Module stakers for their role in providing essential shortfall insurance and participating in protocol governance.

The community has previously proposed ideas to create structural demand for the WELL token, and Moonwell contributors are considering the creation of simple auction smart contracts that could be used to sell excess ETH, USDC, cbBTC, wstETH, cbETH, rETH, AERO, and other market reserves for WELL, then after the auctions complete, the WELL can be transferred to the Safety Module Ecosystem Reserve to bolster staking rewards.

Data on Safety Module Staking Rewards

How much would this bolster Safety Module staking rewards?

  • In December 2024, the automated liquidity incentives proposal allocated 4,394,963.08 WELL to Safety Module stakers on Base.
    • At today’s price of $0.039 that is ~$171,403.56 rewarded to stakers on Base and represents a 7.42% APR.
  • In December 2024, Moonwell also generated ~$352,777 in protocol revenue on Base according to Token Terminal.

Conclusion: Redirecting this protocol revenue to Safety Module stakers would result in an estimated 3.06x increase in staking rewards, or a 22.71% APR!

Note: this is just an estimate and actual amounts would be subject to changing market conditions.

How Would This Work?

It is proposed the following solution be put up for a snapshot vote in early February, and an onchain vote in mid-February.

Step-by-step Walkthrough

Here’s an explanation of the diagram above:

  1. The automated governance proposal that normally rebalances liquidity incentives would include some extra calls that withdraw excess protocol revenue back to the Governor smart contract.
    • Note I’m showing only WETH and USDC in this diagram for simplicity, but this should include all markets.
  2. The same governance proposal then transfers the WETH, USDC, and other tokens to a simple auction smart contract for each asset, and initiates a fully onchain, decentralized auction for those tokens.
    • The auction contracts would start with 100% WETH, USDC, etc, and at the end of a 2 week auction period would end up with 100% WELL.
    • The total amount of auctioned tokens would be divided into 84 equal parts and each mini-auction would last 4 hours, starting at a price above the current Chainlink price for that asset and slowly decaying over the 4 hour mini-auction duration until a market participant (typically a MEV bot) decides to swap WELL for that asset.
    • By splitting the auction into 84 mini-auctions and letting any onchain market participant swap WELL for the other assets the Moonwell protocol should benefit from best price execution and a time-weighted average price over 2 weeks, and void paying any swap fees or gas.
  3. Approximately 4 weeks later (2 weeks after the auctions end), the next automated liquidity incentive proposal transfers the WELL from the auction contracts into the Safety Module Ecosystem Reserve, and sets the staking rate to the appropriate speed (to enable the higher staking reward APR).
  4. At any point in time Safety Module Stakers can claim these rewards, just as they currently do.
    • I am not proposing any changes to the Safety Module architecture at this time. The Safety Module Ecosystem Reserve was designed for this purpose.

Open Questions

I have some questions for the community and would love to hear your feedback?

  • For Gauntlet, BlockAnalitica, B. Protocol, and other risk-focused contributors: what should we keep in each market as a healthy level of reserves?
    • Some markets like AERO have generated 7 figures of protocol revenue, but a safe reserve percentage is likely different for each market.
  • Should we fully distribute all the WELL obtained through the auctions to Safety Module stakers every 4 weeks, or should the staking APR be capped at some lower level, such as 20%?
    • Some contributors have proposed capping the staking APR at 20%, which would allow some WELL to stay in the Safety Module Ecosystem Reserve, which would be beneficial to keep the staking APR high during bear markets, or to further bolster the shortfall insurance.
  • What challenges or issues do you see with this proposal?

Feedback

I’d love to hear your thoughts and feedback. Is this a good idea? A bad idea? Do you love it or hate it? How can we make it better together? Ultimately any proposal like this must be voted on by the community of WELL holders in order for it to succeed, but I do believe this will make us the first decentralized lending protocol to create a mechanism for Safety Module stakers to benefit from protocol revenue in return for their efforts in securing the markets from shortfall events and securing protocol governance from activist investors.

Thank you for your comments and feedback. With your feedback and broad approval, I’d like to move forward for a temperature check vote next week sometime, and an onchain vote in mid-February.
:last_quarter_moon_with_face::ballot_box::first_quarter_moon_with_face:

14 Likes

My first thought is that this proposal is incomplete, since it does not specify how “excess protocol revenue” is determined. Have the Moonwell contributors who formulated the proposal discussed ideas on this score? It seems to me that the proposal should only come to a vote after this is specified and incorporated.

Great suggestion

I suppose that distributing the excess of assets directly to well stakers isn’t possible right now legally, this is why the auction process was designed.

I’m in favor for every step that could increase the value of the platform and the token, so yeah i support this idea, but if one day legally it’s possible to distribute directly excess assets to well stakers i think it would be a better incentive so the proposal shouldn’t be immutable imo.

Also the auction process will bring a buyback of the well token generated through revenues so it’s great for liquidity and value, auctioner also may win some discounts with this process.

2 Likes

Thank you for your feedback, and welcome to our governance forums. This discussion is just the first step and this proposal is just in the ideation phase, it isn’t yet up for an onchain vote. I’m specifically requesting risk management contributors like Gauntlet help us decide what a safe level of reserves might be, so that we don’t introduce excess risk to the protocol.

That being said, at some point all the markets will have excess reserves. It might take more time for newer markets to build up enough reserves, but all things being equal, at some point in the future that threshold will be reached and additional reserves could be used in this way, if token holders agree of course.

2 Likes

Thanks for your feedback. I think you’re right, distributing the assets directly to token holders or stakers might introduce more regulatory risk.

There is hope that with a new government in the US there might be regulatory clarity, but this seems relatively low risk as long as it is done in a decentralized manner. I know Aave is working on a new Safety Module called Umbrella that does exactly this, so perhaps when it’s ready we can consider forking the code and adopting the Umbrella approach too.

1 Like

Got it. I guess my question is really a meta-question about the role of risk managers, as you see it. Are you asking eg. Gauntlet to give feedback now on how “excess protocol revenue” should be determined in general; or are you suggesting that eg. Gauntlet or other approved risk managers be delegated the task of actively determining this on a market-to-market basis, as part of the way the protocol ordinary operates?

This will be pretty incredible to have WELL tokens being purchased with the market reserves!

Would be great to hear feedback from the community on what safe amounts of reserves to withdraw from each markets should be. Hopefully Gauntlet can provide guidance on this in the next week to setup the automation.

Here are my thoughts on how this could be implemented in smart contracts:

There will be an onchain auction contract that will allow WELL tokens to be used to get reserve assets. Over the lifecycle of an auction, the contract will have multiple mini-auctions that sell the reserve assets. This will have the effect of selling the reserve assets over time and averaging out the sale price they are sold over, emulating a TWAP for the DAO.

This auction contract will have a linear decay function that first applies a premium and then a discount over time to the current price fetched from chainlink. Once the first amount of tokens in a period have been purchased, the prices of the reserve asset and WELL are cached in the contract for that period. Once the next period starts, the prices fall back to chainlink until the first purchase, etc.

Proceeds of sales will be sent to the WELL Holding contract, and WELL in this contract can be used to fund the Safety Module through reward automation governance proposals.

I know this is a lot of technical details, so would be curious to hear how the community feels about this level of complexity and system design.

3 Likes

I would think that Gauntlet would provide safe thresholds in terms of what percentage of the market reserves need to be kept. If market conditions drastically change, they would likely indicate this to us on the forums and then the reward speed proposals would be updated to reflect these changed values.

2 Likes

Again, just ideating right now, but I would imagine there is some safe percentage of reserves for each market. It might be different for ETH vs. USDC, for example, or cbBTC vs. wstETH. The amount could be a fixed quantity per market or it might be a percentage of the TVL in that market. Or it might be a percentage of the borrowed assets in that market.

I’m not a risk management expert, but I’d love to hear from others that are about what they think would be a safe level.

Just to give you a ridiculous example: If we left $0 reserves in the USDC market, that would definitely be too little, but if we left $1B reserves in the USDC market (we don’t have that much, to be clear), that would be too much. We’re going for something in the middle, and that could be adjusted up or down in each governance proposal.

1 Like

GM

Finalllllllyyyy :heart_eyes:

great proposal and many in the community will like it…thnx to everyone involved :smiling_face_with_three_hearts:

I can only add something to 20% cap…

This can fluctuate a lot and one can also see from the perspective that at this exact moment the $well token is very undervalued compared to the revenue…This can look completely different in a few days, the price is more volatile than the revenue…so I think high apr% are more likely to be achieved in a bear market :thinking: and not in current and hopefully upcoming market conditions

I would start without a cap, let the market regulate itself…high % Well undervalued :call_me_hand:

1 Like

So the picture I am gleaning from what you have said, and what @elliot has said, is that the proposal would be for risk managers such as Gauntlet to make market-specific proposals for excess protocol revenue through the usual governance mechanisms. That sounds good to me, and seems to be a natural thing to add to the week-to-week responsibilities of the risk managers for Moonwell markets. If the proposal passes, perhaps it would be good to start with a conservative model of excess protocol revenue.

I’ve taken some more time to think about the proposal overall, and I think it is good—both because of the effect it should have on the WELL token, and the effect it should have on the overall economic security of the protocol. Looking forward to hearing what Gauntlet thinks about the idea.

2 Likes

Great proposal. What about a 50/50 split of redirected revenue to staking module and Aero/Velo LP. Just having a consistent 10% staking would be attractive in bull or bear. Adding to Aero/Velo LP could help stabilize liquidity if larger players withdrew. As far as gov participation, we could put greater focus on existing stakers. Marmoriko could help here, as well as, transaction notifications.?

1 Like

Thanks for your feedback on the staking rate. We could indeed leave it uncapped if people think that’s better. I appreciate your kinds words of support too!

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The fees have been so high in the Aerodrome pool in recent weeks that we haven’t needed to incentivize the pool directly, but I think volume has been declining so this is a good idea. The normal liquidity incentive automation proposals do include a % that goes to Aerodrome/Velodrome. On Velodrome it is still being incentivized. Those incentives typically come out of the 15% of total supply that is distributed linearly over 4 years (until June 2026) which is what incentivizes the vaults and markets as well. One challenge to consider is that the goal of this is to drive greater governance participation and encourage staking to increase the shortfall insurance, and while DEX liquidity is healthy for the protocol, it doesn’t directly help because LPs can’t vote.

I like the idea of Mamoriko posting when new proposals go live, we should definitely do that! Thanks!

1 Like

thnx Luke :vulcan_salute:

it’s nice to see how quickly moonwell has adapted to the new crypto circumstances :raised_hands:

I think a safety module $well reserve is a good idea but I think that we will rarely have more than 20% apr and then the reserve will not really be filled, a fixed proportion that goes into the reserve could be a solution :thinking:

Summary

Gauntlet supports using excess reserves on each market to be auctioned for WELL, in order to bolster the Safety Module Ecosystem Reserve. Gauntlet recommends minimum reserves for each assets as follows based on current market parameters:

Asset Minimum Required Reserves

Asset Minimum Required Reserves ($)
WETH $25.25M
USDC $17.69M
cbBTC $12.35M
AERO $5.65M
cbETH $4.45M
wstETH $4.39M
EURC $1.99M
LBTC $782K
weETH $746K
tBTC $371K
rETH $383K
WELL $422K
wrsETH $321K
USDS $66K
DAI $26K

The above figures serve as a conservative baseline for minimum required reserves. Gauntlet will continue to refine these levels as market conditions evolve. Given the above, deprecated assets such as DAI and USDbC can begin auctioning their reserves.

Rationale

The fundamental risk to a lending protocol stems primarily from collateralized positions that might default. To properly assess this risk, we should focus on an asset’s actual borrowing capacity rather than its Total Value Locked (TVL). This borrowing capacity is determined by multiplying the asset’s supply cap by its Collateral Factor (CF), which establishes the maximum amount that can be borrowed against that asset.

For example, if an asset has a supply cap of 1 million units and a Collateral Factor of 0.75, the maximum protocol exposure would be 750,000 units worth of borrowing capacity, regardless of how much of that asset is actually supplied to the protocol. This calculation provides a more accurate measure of potential risk exposure than TVL, as it represents the true maximum amount the protocol could lose in a worst-case scenario where all borrowers default simultaneously.

We define the Minimum Required Reserves as follows:

This represents the maximum risk the protocol faces or the highest potential debt collateralized by an asset, assuming all suppliers default on their obligations.

The above depicts the annualized growth of reserves if the borrow APR is at kink. The Annual Reserve Growth provides an additional buffer by allowing reserves to rebuild naturally over time. It ensures that reserves are only sold after accumulating for at least an year, preventing premature depletion.

Therefore, the Minimum Required Reserves can be estimated as:

Where,

Since not all borrowers default at once and liquidations are not entirely unsuccessful, and given that the collateral factor already serves as a buffer, we recommend setting the shortfall percentage based to be 10% market-wide as a conservative proxy for the maximum risk that is actually realized.

Then,

Any reserves above this can be considered excess.

For example:

  • Borrowing Power = $10M (Supply cap x Collateral Factor)
  • Shortfall Percentage = 10%
    This represents the base protection against maximum protocol risk. The 10% means we’re keeping enough reserves to cover a complete failure of 10% of all possible borrowing power.
  • Reserve Growth Rate = $100K/yr
    This represents one year’s worth of natural reserve accumulation. By adding this, we ensure that even if we auction excess reserves, we maintain enough buffer.
  • Minimum Required Reserves = $1.1M = $1M + $100K

This above suggest sufficient reserves to both:

  1. Handle a major market event affecting 10% of maximum borrowing
  2. Continue normal operations with expected reserve growth

If Current Reserves = $1.5M, then Excess = $400K could be auctioned.

5 Likes

Gauntlet would like to highlight that the above level of reserves are not static and a very conservative assumption of the worst-case scenario. Additionally, our simulation models have not projected a VaR exceeding $1M for the Moonwell Base instance in the past 6 months. This shortfall estimate is 30x (10% shortfall = $32.8M) higher than our modeled VaR values, which account for a blended scenario of a 20% market downturn and a 5% depeg in WETH-correlated assets. However, we think it’s prudent to set these levels at a conservative level to kickstart this and then adjust this multiple lower based on market conditions in our following monthly recommendations.

3 Likes

Just wanted to confirm based on this post that Gauntlet will be able to provide a recommendation this month to use reserves from the USDbC and DAI markets in a reserve automation auction on Base.

If there are any other tokens you could provide a recommendation on Base for, comms around that would be appreciated as Solidity Labs will be preparing a PR to deploy Reserve Automation contracts for the new markets.

2 Likes

Hi Luke, thanks for this proposal. Candidly, I’ve supported it at both phases, and I would like to see this move forward, though I’m curious to know both your thoughts and other contributors for the following.

If I’m following correctly, the idea here is to sell excess core lending assets and beyond a certain threshold this get rerouted to stakers. Yes – it might be best to cap the APR for the Safety module such that the DAO can possibly use this for future initiatives or mechanisms. The DAO should have the option to redistribute some of thiss excess either back to the staking module, for emergencies, or for other opportunities.

From my point of view, while Moonwell has been wildly successful, there are still other lanes for growth. This proposal is suggesting to direct protocol revenue directly back to stakers, but what if we want to leverage some of this revenue for additional paths for growth or take on some sort of risk/make more complicated revenue interactions with stakers (this is likely impossible right now even with the change in regulatory landscape, though worth noting)?

Moonwell is diving into some interesting territory here, in other DAOs like Uniswap, we’ve discussed making interesting new incentives. Current treasury dynamics exist where the token is just a proxy for USDC/USD and is treated as such (instantly converted for service providers, contributors, etc). In a new paradigm with buybacks/excess purchases, there are new incentives that can be enforced. Also, as @surfdingdegen noted, buy and LP is another decent path. This allows us to increase market liquidity and reap the trading fees associated. We could hypothetically cap at X%, and put the remainder into a buy and LP strategy alongside using for possible contributors or more complicated incentive mechanisms. Any thoughts?

1 Like