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:
- 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.
- 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.
- 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).
- 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.