In fact, for lending protocols, a stable operational history is crucial for building a safety brand!
The capital capacity of lending protocols ranks first in the DeFi track, being the segment with the largest capital absorption in DeFi. Moreover, lending is a market that has already validated demand, has a healthy business model, and has a relatively concentrated market share!
Morpho's success can largely be divided into two periods, and it is through the accumulation of these two periods that the leap was achieved, allowing Morpho's market share to steadily rise.
First leap: Optimize Aave and Compound for rapid growth.
Morpho's initial business model focuses on improving the capital utilization efficiency of lending protocols, especially addressing the issue of incomplete matching of funds in peer-to-pool models like Aave and Compound. By introducing a peer-to-peer matching mechanism, it offers users better interest rate options, with higher deposit rates and lower borrowing rates.
The core limitation of the peer-to-pool model is that the total deposit amount in the fund pool often far exceeds the total borrowing amount, leading to efficiency issues: the interest of deposit users is diluted by idle funds, while borrowing users must bear the interest cost for the entire fund pool, rather than just paying interest on the actual portion they use.
Morpho's solution lies in introducing a new workflow:
Users' deposits and collateral are allocated to Aave and Compound to ensure they obtain the base interest rate. Meanwhile, Morpho uses a peer-to-peer matching mechanism to prioritize large orders, directly allocating deposits to borrowers, thereby reducing idle funds.
In this way, deposits can be fully utilized, while borrowers only pay interest on the funds they need, achieving interest rate optimization.
The biggest advantage of this matching mechanism is that it eliminates the efficiency bottleneck found in traditional models:
Deposit users enjoy higher returns, while borrowing users pay less interest, and the interest rates for both parties tend to align, greatly enhancing the user experience.
Morpho operates based on Aave and Compound, utilizing their infrastructure as a capital buffer, thus controlling risks at a level comparable to these mature protocols.
For users, this model is significantly appealing:
1. Regardless of whether the matching is successful, users can at least obtain interest rates comparable to those of Aave and Compound, while successful matching further optimizes returns or costs.
2. Morpho is built on mature protocols, with its risk control model and capital management completely following Aave and Compound, significantly reducing users' trust costs for emerging platforms.
Through innovative design, Morpho cleverly utilizes the composability of DeFi protocols, successfully attracting more user funds under low-risk conditions, achieving a more efficient interest rate optimization service.
Second leap: Shift from applications to decentralized infrastructure, separating risks and building an independent ecosystem.
Previously mentioned, the Morpho optimizer only completed Morpho's first leap, allowing it to stand out among various lending protocols, becoming a platform that cannot be ignored in the market. However, in terms of product, protocol positioning, or ecosystem development openness, the optimizer cannot bring a broader imagination space.
Because first, the growth of the optimizer is limited by the current underlying lending pool design, heavily relying on its DAO and trusted contractors to monitor and update hundreds of risk parameters or upgrade large smart contracts daily.
If it remains stagnant, Morpho will be unable to attract a broader range of developers and native protocols, and can only be positioned in the market as an ecosystem protocol of Aave and Compound.
Therefore, Morpho adopts a product approach similar to Uni V4, focusing on being the foundational layer of large financial services and opening up all modules above the foundational layer.
That is: product minimization, which the team refers to as 'primitive', opening all lending parameters to individuals and ecosystem protocols without permission. By transferring risk from the platform to third parties, Morpho's ecological value will continue to rise.
Looking back at Morpho's development history, one worthwhile lesson for other lending protocols may be the effort Morpho has invested in building its reputation, starting from the initial Morpho optimizer.
Utilizing Aave and Compound as capital buffer pools, and relying on their historical safety assumptions, quickly establishes its own brand.
When the time is right to develop its own ecosystem and become an independent protocol, Morpho significantly reduces the risks it may face by opening the lending dimension to third parties, and develops its ecosystem in a cost-effective manner, creating native applications within its ecosystem.
Morpho clearly recognizes that for lending protocols, a stable operational history is crucial for building a safety brand, and this is also the foundation of Morpho's existence.
