Moonwell

Simple Summary

Following the successful implementation of MIP-O12, this proposal represents Phase 1 of a two-phase expansion of Solidity Labs’ Oracle Extracted Value (OEV) solution across eligible Moonwell markets on OP Mainnet and Base. This initial phase will enable OEV capture in non-composite oracle markets, ensuring a smooth and controlled rollout before expanding to more complex composite oracle markets in a future proposal. By extending OEV beyond the initial ETH Core Market on OP Mainnet, this upgrade will increase protocol revenue, attract greater MEV searcher (bot) participation, and create a more efficient liquidation system.

Key Terms

• Liquidations: The process of resolving underwater loans to maintain the health and stability of the Moonwell protocol.
• Chainlink Price Oracles: Trusted price feeds used for secure and accurate liquidation triggers.
• Non-Composite Oracle: An oracle that provides direct price feeds without aggregating multiple sources or performing complex calculations. These are simpler to integrate and are prioritized in the first phase of the rollout.
• Composite Oracle: An oracle that aggregates multiple data sources or applies additional logic before producing a final price feed. These require additional considerations and will be activated in the second phase of the rollout.
• Oracle Extracted Value (OEV): The value or revenue captured when price updates from oracles trigger liquidations of undercollateralized loans.
• Mempool: A temporary storage area where pending transactions are held before being included in a blockchain block. It acts as a queue, allowing nodes to validate and broadcast transactions across the network. Miners or validators select transactions from the mempool, often prioritizing those with higher fees, for inclusion in the next block.
• MEV Relay: A service that captures and redistributes Maximum Extractable Value (MEV) by enabling searchers and validators to prioritize transactions in a block via off-chain auctions. These relays maximize value from opportunities like arbitrage, liquidation, or front-running, while often sharing a portion of the captured value with users or protocols.
• MEV Tax: A protocol-level fee charged to participants seeking to capture MEV, such as liquidators. This tax ensures that a portion of the MEV generated by prioritized transactions, like liquidations, is captured directly by the Moonwell protocol, rather than being retained by third parties or off-chain systems.

How It Works

1. Liquidators bid for priority access to execute liquidations by attaching a priority fee to their transactions.
2. The system charges a MEV tax based on the priority fee, ensuring the highest bidder’s transaction succeeds.
3. If no bids are placed, liquidations revert to the default liquidation mechanism after 10 seconds, using updated Chainlink price feeds.

Security Measures

• Chainlink Integration: The system wraps Chainlink’s price feeds, ensuring no change to oracle trust assumptions.
• Fallback Mechanism: If no priority fee is bid, traditional liquidations can occur after a 10-second delay.
• Audited Contracts: Contracts have undergone a comprehensive security audit by Halborn Security.

Background and Success of MIP-O12

MIP-O12 introduced a MEV tax mechanism that allows for the Moonwell protocol to capture additional revenue from liquidation events. The initial rollout on the ETH Core Market on OP Mainnet demonstrated promising results, as evidenced by the following successful liquidation transactions:

• OEV Example 1
• OEV Example 2

This groundbreaking solution has also garnered significant attention within the Optimism Superchain ecosystem. The official Optimism X account recently highlighted Moonwell’s success in implementing the first onchain OEV auction on the network, and by doing so recapturing value that was previously lost to external actors. Read the full thread here.

While these initial results are very promising, overall participation was limited due to the lack of full MEV searcher integration. This expanded rollout is expected to drive exponentially higher MEV searcher participation, increasing competition and further optimizing liquidation processes.

Motivation for Expanded Rollout

Following the successful test run initiated with the passage of MIP-O12, the next logical step is to extend OEV capture across all supported markets. A broader implementation will:

• Encourage MEV bot adoption: With only one active market, MEV searchers had limited incentive to integrate. An expanded rollout creates higher-value opportunities, attracting a more diverse selection of participants.
• Increase protocol revenue: As competition for liquidations grows, more revenue will be captured by Moonwell’s protocol reserves.
• Improve overall efficiency: A wider implementation ensures more markets benefit from enhanced liquidation execution and fair value capture.
• Phased rollout strategy: By first targeting markets with non-composite oracles, we reduce complexity before expanding to markets utilizing composite oracles.

Implementation Plan

Phase 1: Expansion to Non-Composite Oracle Markets

The first phase will focus on enabling OEV capture on markets using non-composite oracles, which are simpler to integrate. This approaches minimizes protocol changes and reduces complexity.

Phase 2: Expansion to Composite Oracle Markets

Upon successful execution and monitoring of Phase 1, Moonwell DAO may choose to proceed with enabling OEV on composite oracle markets, enabling protocol-wide integration.

Supported Markets for OEV Activation (Phase 1)

OP Mainnet Markets:

• WETH
• USDC
• DAI
• USDT
• OP
• VELO
• weETH
• wstETH

Base Markets:

• WETH
• cbBTC
• EURC
• WELL
• USDS
• TBTC
• VIRTUAL

Next Steps

1. Phase 1 Expansion: Integrate OEV solution on non-composite oracle markets on Base and OP Mainnet.
2. Community and MEV Engagement: Solidity Labs will distribute educational materials and establish direct lines with MEV searcher operators to increase participation.
3. Performance Review & Adjustments: Measure key metrics and iterate based on results.
4. Phase 2 Expansion: Extend to composite oracle markets on Base and OP Mainnet following review and passage of an additional Moonwell Improvement Proposal.

Voting Options

• Yay: Approve the expanded rollout of Solidity Labs OEV solution across non-composite oracle markets on Base and OP Mainnet.
• Nay: Reject the proposal.
• Abstain: Decline to vote on the proposal.