Moonwell, a decentralized finance (DeFi) borrowing and lending protocol, is facing controversy over its proposal to use $2.3 million worth of digital asset collateral to offset bad debt from Frax Finance (FRAX) pools due to a hack nearly two years ago. In a plebiscite held on December 31, 2023, Moonwell sought community approval to use a combination of Nomad collateral and protocol reserves to address its Frax bad debt.
The plebiscite titled “Options for Enhancing Liquidity in the FRAX Market on Moonbeam” saw over 98% of the 25 million votes, denominated in Moonwell’s WELL token, in favor of using a combination of Nomad collateral and protocol reserves to address the Frax bad debt. However, concerns have been raised by users, including Horatio Lucas, who argues that the Nomad collateral belongs to individual owners and cannot be used to offset Moonwell’s bad debt without their consent.
Lucas alleges that Moonwell is benefiting from the proposed misappropriation of Nomad users’ funds. Lucas alleges that Moonwell is the party benefiting from the proposed use of funds and accuses Moonwell of misconfiguring the Nomad asset oracle before the Nomad hack.
He claims that Moonwell intends to refinance its bad debt through the misappropriation of Nomad users’ funds. While the referendum passed its 10 million WELL quorum threshold, critics argue that the use of collateral without the consent of individual owners raises ethical and legal concerns.
The controversy surrounding the proposal highlights challenges in navigating issues related to decentralized protocols, community governance, and the aftermath of security incidents in the DeFi space. Users like Lucas argue against the legitimacy of the community vote, raising questions
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