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 about the fairness and consequences of such decisions.

Moonwell Community Faces Dissent Over Handling of Nomad Bridge Exploit

The Moonwell community is facing internal dissent over the handling of the Nomad token bridge exploit, which occurred on August 2, 2022, resulting in a loss of $190.7 million. Moonwell had partnered with the Nomad token bridge for the integration of Bitcoin, Ethereum, stablecoins, and altcoins on its platform.

The aftermath of the Nomad incident has led to unresolved issues, with bad debt related to Frax tokens on Moonwell amounting to $2.9 million. Users who posted collateral for DeFi lending through Nomad were also affected.In response to the incident, Moonwell conducted a snapshot vote to gauge community sentiment on withdrawing dormant Nomad assets from its markets. Some users expressed dissent, claiming the vote lacked legitimacy across jurisdictions.

However, Moonwell claims that the snapshot vote was non-binding and merely a signal vote to understand community sentiment. A Moonwell spokesperson emphasized that a binding on-chain vote with a higher quorum would be required to actually withdraw dormant Nomad assets.

The spokesperson criticized dissenting users, stating they were “severely misinformed and providing false information.” Moonwell asserted that the DAO has been openly discussing how to mitigate the fallout from the Nomad hack and has put forth a proposal consistent with the protocol’s operations.

Discussions on Moonwell’s recovery from the Nomad incident are ongoing, with the community divided on the appropriate course of action. The Nomad Bridge has been relaunched but has diminished in popularity since the exploit.

The post Moonwell’s Bold $2.3M Plan to Counter Frax Hack Debt Sparks Controversy appeared first on Cryptonews.