The Safety Module is a fundamental component of Moonwell, designed to backstop the protocol against potential "Shortfall Events". Implemented as a smart contract, it enables users to stake their WELL or MFAM and receive stkWELL or stkMFAM tokenized positions in return, on a 1-to-1 basis. These stkWELL and stkMFAM tokens serve as proof of ownership and can be utilized in Moonwell Governance.
What is a Shortfall Event?
A Shortfall Event refers to an incident that unexpectedly results in a loss of capital. Despite Moonwell's robust security measures and software development practices, there is still a non-zero risk of events or exploits leading to fund losses. The Safety Module acts as a final defense line to mitigate the impact of such occurrences.
Here are three examples of potential shortfall events:
Smart contract exploit: This involves a smart contract bug or hack that leads to capital loss.
Halborn Security conducts thorough audits on all Moonwell smart contracts. In addition, Moonwell maintains an ongoing service agreement with Halborn Security who provides continuous monitoring and vulnerability scanning services to maintain security over time.
Liquidation failure: This can occur when an asset used as collateral lacks liquidity or when there are inefficiencies in the liquidation process.
To combat this potentiality, Moonwell has ratified the "Asset List Framework".
According to this framework, assets can only be used as collateral once there is enough liquidity throughout the deployment chain. Markets are carefully assessed for the security of asset contracts and their economic viability. As a general requirement, a market must have a Total Value Locked (TVL) that is capable of liquidating the largest position held on the protocol.
Oracle failure: This occurs when the oracle network fails to update prices accurately during extreme market conditions or network congestion, resulting in improper liquidations based on inaccurate price data.
In order to protect the protocol from this threat, Moonwell employs Chainlink Price Oracles. These oracles are highly regarded in the blockchain industry for their resilience and security.
While participating in the Safety Module offers users incentives and tokenized positions, it is important to acknowledge the inherent risk involved in staking the original WELL or MFAM assets. In the event of a Shortfall Event, the value of the staked assets may be impacted, possibly leading to a loss for the user. Up to 30% of the staked assets in the Safety Module may be sold to cover the resulting deficit. Although Shortfall Events are not a daily occurrence, it remains crucial to comprehend and consider the potential risks before engaging in staking.