Remediation of Bad Debt From 10/10 Using Reserves
Summary
This proposal seeks to use protocol reserves on Base to cover approximately $1.7M in bad debt resulting from the October 10th flash-crash event caused by extreme market dislocation and oracle mispricing.
The goal is to restore full solvency and maintain the overall health of the protocol.
Background
On October 10th, extreme cross-venue price dislocations allowed an attacker to:
- Flash-loan cbBTC/USDC
- Use these as collateral
- Borrow VIRTUAL, MORPHO, and AERO at depressed oracle valuations
- Sell those borrowed assets into deeper liquidity at higher prices
- Repay loans and withdraw collateral
Because oracle pricing diverged sharply from DEX pricing, liquidators could not unwind these positions profitably. The result was residual bad debt across several markets, including VIRTUAL, MORPHO, and AERO on Base. While this proposal addresses the October 10th bad debt, a separate ~$3.7 million shortfall remains from the later wrsETH oracle mispricing event on November 4th. Based on available reserves, this proposal may also seek to reduce bad debt in the cbXRP market, which was the most targeted market on November 4th.
Moonwell currently holds approximately $1.7 million in USDC and Ethereum reserves on Base. These funds are sufficient to cover the October 10th bad debt, but not both the October 10th and wrsETH incidents in full. As a result, this proposal prioritizes repayment in markets with the highest user interest and activity, including VIRTUAL and cbXRP. The long-term goal is to repay all remaining bad debt through ongoing protocol revenue over time. Below is a list of assets and their incurred bad debt from both the 10/10 incident and the wrsETH price feed exploitation.
Bad Debt from 10/10 and the wrsETH Exploit on 11/4
| Asset | Bad Debt (USD) | Reserves Available |
|---|---|---|
| VIRTUAL | ~1.3M | $13K |
| MORPHO | $202K | $23K |
| AERO | $191K | $252K |
| cbXRP | $3M | 66K |
| Total Bad Debt | ~$5M | $1.7M |
AERO reserves can directly cover AERO debt; VIRTUAL and MORPHO require stable reserve usage across markets. cbXRP may also be partially remediated depending on the remaining reserve balance, and what is of highest priority due to market interest rates.
Proposal
Use protocol reserves on Base to repay and close non-performing positions created by the October 10th event and reduce debt in other high-interest markets where possible (for example, VIRTUAL and cbXRP).
Rationale
- Restore protocol solvency
- Makes whole non-performing and operationally expensive markets for users
- Improves transparency and reserve reporting
- Aligns Moonwell with industry-standard remediation actions taken by other lending protocols in similar insolvency scenarios
Leaving the bad debt unresolved reduces protocol credibility and suppresses reserve growth efficiency
Future Market Stability Improvements
Moonwell contributors are evaluating updated oracle configurations for volatile and long-tail assets, including “exchange-rate style” price feeds that reference both CEX and DEX liquidity, with the goal of reducing exposure to single-venue price dislocations and improving liquidation efficiency. This proposal does not define a specific oracle architecture. The DAO remains open to suggestions from the community, and external oracle providers.
Voting Options
- YES: Use protocol reserves on Base to remediate bad debt to pay off high interest markets continuously
- NO: Do not use reserves; leave bad debt unresolved.
- ABSTAIN: No opinion / count toward quorum only.
