Options for Enhancing Liquidity in the FRAX Market on Moonbeam

Summary

This proposal is part of the Roadmap for the Moonwell Community on Nomad Incident Recovery recommended by Gauntlet.

The community has four options to choose from in order the address the liquidity concerns in the FRAX market on Moonbeam:

a. Use the remaining Nomad Collateral from Bad Debt b. Use Protocol Reserves c. Use funds from both options a/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.

Background

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. Gauntlet presented several options to help the community in repaying this debt and enhancing liquidity.

Nomad Collateral available for Redemption

Here are the total Nomad collateral funds and their estimated value via the recovery refund discount:

*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. The responsible party will need to:

• Complete KYC via the Nomad Recovery Portal 1. 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:

a. Use the add reserves function 1 to add liquidity to the FRAX pool for suppliers to remove their position. b. Disburse FRAX to impacted FRAX suppliers. c. Pay down the FRAX bad debt positions.

Protocol Reserves

Here are the total Protocol reserve funds:

*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:

1. 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.

2. 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: a. Utilize the add reserves function to inject liquidity into the FRAX pool, enabling suppliers to withdraw their positions. b. Allocate FRAX to specific suppliers. c. Reduce the FRAX bad debt positions.

Please note: This is an initial Snapshot vote to determine which funds (Nomad collateral, protocol reserves), if any, should be used to address FRAX liquidity concerns. If options A, B, or C are chosen, additional governance proposals will be required to determine which community member(s) will handle Nomad asset redemption and swapping, transfer Nomad collateral and/or protocol reserves to multisig, distribution of newly swapped for FRAX, etc.