Gauntlet has been working with community members to develop a roadmap, informing them about the options available for managing the assets affected by the Nomad exploit and the resulting bad debt. Currently, Moonbeam still holds Nomad assets as reserves and in collateralized positions. Concurrently, the FRAX market on Moonbeam faces outstanding bad debt due to limited on-chain liquidity. Measures can be implemented to recover the value of these exploited funds and use them to improve the liquidity environment of FRAX on Moonbeam. We present several options to help the community in repaying this debt and enhancing liquidity.
In summary, the community has four options to recover the value of the Nomad assets and address the liquidity issues stemming from the FRAX bad debt
Utilize the outstanding Nomad Collateral from Bad Debt
Utilize Protocol Reserves
Use funds from both options 1 and 2
Take no action
Nomad Collateral available for Redemption
Here are the total Nomad collateral funds and their estimated value via the recovery refund discount:
Asset
Collateral Sum
Nomad Recovery Fund Discount
Total Current Value of Nomad Collateral
WBTC.mad
41.83 BTC
27.30%
$495,573
USDC.mad
10,723,922 USDC
14.77%
$1,584,652
ETH.mad
2,201 ETH
4.59%
$219,928
Total
$2,300,154
*Prices of assets via chainlink as of 2023-12-20 21:59:00 UTC
Should the community decide to take a selection of the nomad assets to exchange them for recovery funds, a community member would undertake the following actions to recover these assets and repay FRAX liquidity:
Propose a Governance vote to transfer Nomad Collateral Funds from the deprecated Nomad liquidity pools to a Multisig wallet:
The removal of Nomad Collateral will need to be decided by the community, with options being either a reduction in reserves or the potential liquidation of bad debt positions and seizure of collateral.
Gauntlet recommends that the Multisig Wallet be controlled by multiple community stakeholders to ensure the security of the assets throughout the recovery process.
The Community Member responsible for the recovery process will need to follow the Nomad process. Linked here is a document explaining the process from the recovery fund managers’ Coinlist. Gauntlet has already reached out to Coinlist in preparation for this action to inform them of this potential request and can help the coordinate communications with the community. The responsible party will need to:
Complete KYC via the Nomad Recovery Portal. This verification can take up to 1–3 weeks for DAOs.
Transfer Nomad Assets to the Nomad Recovery Fund via a bridge to Mainnet.
Receive an NFT.
Exchange the NFT for mainnet ETH, BTC, USDC.
After receiving the recovery funds from Nomad, the responsible party will need to exchange the assets for FRAX and bridge the assets back to Moonbeam.
The Moonbeam ecosystem does not have substantial liquidity to swap these assets on their local DEXes. Gauntlet proposes considering the mainnet for asset swaps, due to its generally lower slippage.
Currently, the FRAX Ferry has 3,952,468 FRAX available to bridge over to the Moonbeam ecosystem.
The FRAX recovery assets would need to be used to resolve liquidity issues within the FRAX liquidity pool. This can be achieved through multiple avenues but must be decided by the community. The options are:
Use the add reserves function to add liquidity to the FRAX pool for suppliers to remove their position.
Disburse FRAX to impacted FRAX suppliers.
Pay down the FRAX bad debt positions.
Protocol Reserves
Here are the total Protocol reserve funds:
Asset
xcDOT
WBTC.wh
WETH.wh
WGLMR
WETH.mad
USDC.mad
WBTC.mad
xcUSDT
USDC.wh
Total
Reserve USD
$235,112.12
$16,347.56
$17,123.27
$140,475.09
$2,450.00
$9,672.28
$23,261.01
$7,633.42
$13,914.22
$465,988.98
*Prices of assets via chainlink as of 2023-12-20 21:59:00 UTC
For this option, a community member must undertake the following actions to recover these assets to repay FRAX liquidity:
Propose a Governance vote to transfer Protocol Reserve Funds from the listed liquidity pools to a Multisig Wallet for swapping the reserves for FRAX.
The liquidity of DEXes on Moonbeam is a concern. Swapping $54k of GLMR for FRAX could result in approximately 5% slippage. Therefore, it is advisable to collaborate with Market Makers to enhance FRAX liquidity within the local DEXes or to move the assets off-chain to locate more favorable liquidity sources.
The reserved FRAX assets would then be used to resolve liquidity issues within the FRAX liquidity pool. Similar to the Nomad Collateral Recovery Funds, the options are:
Utilize the add reserves function to inject liquidity into the FRAX pool, enabling suppliers to withdraw their positions.
Allocate FRAX to specific suppliers.
Reduce the FRAX bad debt positions.
What the Community Can Decide on
Which options does the community wish to pursue?
Create a snapshot for the community to decide on the presented options, summarized at the beginning:
a. Utilize the outstanding Nomad Collateral from Bad Debt
b. Utilize Protocol Reserves
c. Use funds from both options a and b
d. Take no action
Given that both the Nomad Collateral and Protocol Reserves are meaningful in size, it may be best for the community to consider using both these sources of liquidity.
What approach does the community prefer for seizing the Nomad funds and bolstering liquidity in the FRAX liquidity pool?
Create a snapshot for the community to decide on the protocol for seizing the funds, with the following options:
a. Reduce Reserves.
b. Liquidate bad debt positions and seize collateral.
How should FRAX suppliers be compensated with FRAX?
Create a snapshot for the community to decide on the method for disbursing the funds, with the following options:
a. Add FRAX recovery funds to the FRAX Reserves.
b. Disburse FRAX recovery funds to impacted FRAX suppliers.
c. Pay down bad debt positions.
Thank you for the in-depth update. Without a doubt, I would proceed with Gauntlet’s recommendation to use both sources of liquidity (1c - Nomad Capital from bad debt and Protocol Reserves).
Does Gauntlet have a recommendation for questions 2 and 3, which would ensure access to funds that frax liquidity suppliers deposited into the protocol is resumed with least delay?
Thank you for this thorough research. The Nomad asset suppliers have had over 1 year to withdraw their assets and proceed with the Nomad redemption process. I think the time is right for the community to come together and use these assets to help repay some of the bad debt, and bolster liquidity in the Frax market, specifically.
Should move forward with combination of both nomad collateral and protocol reserves … when will this be happening? Needs to happen very very soon. Community is clearly in agreement and not being able to access frax deposits for so long is a really bad look. Other poster in discord also made good suggestion to make large increase in borrow rate to encourage loan repayments
Not 100% sure but from the bit I’ve learned I think Nomad assets that are being supplied as collateral are in positions below their liquidation thresholds. But for some reason I don’t understand there’s been no reasons for people to liquidate the positions so they’ve just been sitting there.
Liquidators are rational actors and won’t liquidate a position unless it is profitable to do so. The Nomad bridge exploit led to a rapid devaluation of Nomad asset collateral, meaning that although some positions are undercollateralized and technically liquidatable, a liquidator may not choose to do so as the borrowed assets are worth more than the collateral (seized) assets. It’s important to note that Nomad has recently redeemed some of its funds, and now asset suppliers have the option to withdraw their assets and engage in the Nomad redemption process, which includes KYC procedures. We believe that the ultimate solution is still ceasing the bad debt associated with Nomad assets and recovering them, thereby mitigating further complications.
As a large FRAX supplier, and believer in Moonwell, I think for continued confidence in the project I definitely vote to utilising the outstanding nomad collateral. As mentioned the users have had over a year to claim from the nomad recovery fund and these assets being illiquid has fractured the liquidation mechanism of the platform. This is a special circumstance due to the nomad hack requiring extra action to normal course. I would also vote to utilise the protocol reserves as these unusual situations are the exact moment for them to be utilised.
I’m completely for utilizing this Nomad collateral and all reserves to restore liquidity to the markets.
I have a longer forum post in the works. For now, know that Solidity Labs is working on specifying how to make the Nomad collateral assets available to the community, restoring liquidity to the markets.
This will be a complex process and require a combination of custom code, audits, governance actions and a team of community members that will process the Nomad redemptions. Once these steps are followed, there will be a large block of liquidity added to the market as reserves plus Nomad assets total ~2.7m at current market prices.
Appreciate Gauntlet taking the time to make these recommendations over the holidays.
I am in favour of using both sources of liquidity (Option C). While I think we should use both sources of liquidity, I strongly encourage us to at least use the Nomad collateral. I agree with @Luke that the Nomad asset suppliers have sufficient time to proceed with the Nomad redemption process. Excited to begin the repayment process and bolster liquidity in Frax.
I think that we must intervene to discussion, because options 4.2 (Disburse FRAX to impacted FRAX suppliers) and 3.1.b (b. Disburse FRAX recovery funds to impacted FRAX suppliers) will affect us and our users, so users will lose their rewards and positions and also we will lose rewards of team and ZooDAO’s treasury, as ZooDAO team can’t manually withdraw from users position or the NFT Battle Arena contract.
All other options are good for us and in case of their implementation our users, team and ZooDAO’s treasury will get their funds and rewards. APY was ~100% many days, so it isn’t a small amount of funds.
There is $600 of $WELL and $2600 of GLMR unclaimed rewards only at contract of NftBattleArena:
There are also unclaimed rewards in xZoo and both jackpots, along with unclaimed rewards in FRAX.
4.2 and 3.1.b would cause a total loss of all user funds for ZooDAO.
Dear Luke and Gauntlet
I am a liquidity provider for frax, moonwell staking. I provided liquidity for moonwell from the first day of launch on moonbeam, and participated in the times when nomad was hacked, luna, xcausd was hacked. I have some questions for you:
Why at the time of the hack, I saw that you did not lend or tax the nomad assets but you did not liquidate the assets? If you don’t liquidate, will you notify the community? Why hasn’t it been 1 year after Nomad sent the tokens to you to partially restore it? but to extract frax to such a high level that it is certain that it cannot be overcome. Let’s say now that you are trying to solve it?
Gauntlet is voted by us and paid for you. Why don’t you report your debt to nomad? You have to understand, if the debt has another mortgaged asset then it’s ok, but if the debt is like a mortgaged nomad token, how can we provide frax.
Please let the community know that besides nomad, do you have other irrecoverable debts? for example xcuasd?
I agree with your solutions, but please clearly report moonwell finances so that the community has confidence to continue investing and staking moonwell. Through this case, I see that you have hidden information, and did not try to solve the problem clearly and transparently for the community.
Ps: Because I’m Vietnamese, I don’t use standard English, I have to use google translate. If Moonwell needs anything, if you ask clearly about the problem, you can ask Ad Richnd to chat in Vietnamese so it’s easier to understand.
Thank you and have a nice day
Please see this comment regarding the reasons why Nomand Assets were not liquidated.
The Nomad team should already be well aware of the impact on various protocols and ecosystems. Additionally, xcasud and Luna were never supported on Moonwell.
Moonwell is a decentralized protocol. Anyone can clearly see how much liquidity is in the smart contracts on the Moonbeam network by looking at a block explorer like Moonscan. There is no effort to hide information. Moonwell has also never supported Luna or xcAUSD.
There is currently a governance vote to poll the community on how best to move forward. I would encourage you to participate.
No, unfortunately it is not possible, because our protocol has already claimed all WELL and GLMR rewards, but our users can claim that from our protocol only with claiming of accumulated FRAX income in Moonwell FRAX lending pool (we are using function withdraw for that and now it is not possible to call it, because there is no liquidity). When we developed that logic we didn’t know about this being a possibility, so we and our users can claim GLMR and WELL rewards only with FRAX income from lending pool.
I voted to use a combination of reserves and nomad assets. I’m working on the assumption that situations like this is what reserves are intended for. However, I do think any Nomad assets left over, if there are any, should be converted into funds and added to reserves for future use.
I also want to address @JoshZooDAO concerns. As of right now I believe the best options moving forward should be:
2.1 Utilize the add reserves function to inject liquidity into the FRAX pool, enabling suppliers to withdraw their positions.
I’m a bit confused on:
What does it mean to add FFRAX recovery funds to FRAX reserves. I’m assuming that means converting Nomad assets and/or reserves to FRAX and adding them to protocol reserves. But I don’t understand how this will help the FRAX supply pool or compensate FRAX suppliers.
Does this mean directly to their wallets? Are we still talking about reviving the FRAX supply pool here?
Why should the protocol pay down bad debt positions? If assets supplied are below liquidation thresholds why not just take them, convert them to FRAX and inject them into the supply pool? Are we still talking about Nomad assets here or something else? How does this benefit FRAX suppliers.
If reserves are used to liquidate Nomad positions where do the funds go? Are these bad positions all borrowing FRAX and if so will that FRAX then return to the FRAX supply pool?
Blockquote
Voting is live on the Snapshot to determine from where to use funds to enhance liquidity in the FRAX market on Moonbeam. Snapshot link
Voting will end on December 31 at 10am EST.
