By Karen, Foresight News

 

On the first day of August, the lending protocol Morpho Labs announced the completion of a $50 million financing round, led by Ribbit Capital, and also received participation from industry-leading venture capital firms such as a16z crypto. It is worth mentioning that this is the second investment by a16z in Morpho.

So, what kind of lending protocol is Morpho? What unique advantages does it have? How did it win the favor of such a large amount of funds?

What is Morpho?

Morpho was first launched two years ago with the core product Morpho Optimizer. As an optimization layer on top of Aave and Compound, Morpho Optimizer improves users’ borrowing and lending rates through a peer-to-peer matching algorithm.

Today, Morpho has evolved into an independent financial infrastructure with its lending layer, Morpho Blue, independent of Morpho Optimizers, allowing for the creation of efficient lending markets in a permissionless manner.

It is worth mentioning that Morpho Blue also supports the construction of additional modular layers on its basis. These modular layers can provide users with diversified risk configurations and more professional lending services, while still relying on the basic layer of Morpho Blue.

In terms of project background, Morpho Labs has four co-founders, namely Merlin Egalite, Paul Frambot (CEO), Mathis Gontier Delaunay (protocol leader), and Julien Thomas. According to Forbes, Morpho Labs CEO Paul Frambot received seed round financing in his last year as a four-year engineering student. Merlin Egalite has worked as a smart contract white hat at Kleros, a blockchain dispute resolution layer, and has also worked as a software development engineer at Commons Stack.

Later in mid-2022, Morpho completed US$18 million in financing, led by a16z and Variant, with participation from 80 institutions and individual investors including Nascent, Semantic Ventures, Cherry Ventures, Mechanism Capital, Spark Capital, Standard Crypto, and Coinbase Ventures.

In the $50 million financing completed by Morpho Labs earlier this month, Ribbit Capital led the investment, and participating investors included a16z crypto, Coinbase Ventures, Variant, Pantera, Brevan Howard, BlockTower, Kraken Ventures, Hack VC, IOSG, Rockaway, L1D, Semantic, Mirana, Cherry, Fenbushi, LeadBlock Bitpanda Ventures, Robot Ventures and more than 40 other companies.

How does Morpho work?

The Morpho Blue platform is designed to be flexible and allows the creation of independent markets without permission. Specifically, independent loan markets can be deployed by specifying a collateral asset, a loan asset, a liquidation loan value (LLTV), an interest rate model (IRM), and an oracle to connect to. All parameters are fixed once set and cannot be modified.

In this way, projects can more effectively formulate incentive strategies for specific application scenarios. This is mainly based on the Universal Reward Distributor (URD) ​​mechanism, which can simultaneously meet the needs of external project incentives and MORPHO token rewards, solving the complexity associated with DeFi reward distribution.

To obtain price information, Morpho Blue uses external oracles to keep it simple, and the platform is compatible with multiple oracle services such as Chainlink, Redstone, and Uniswap.

In the liquidation phase, Morpho Blue adopts an intuitive operation method. When the user's loan value ratio (LTV) in a specific market exceeds the market liquidation loan value ratio (LLTV), the account position will face the risk of liquidation. Anyone can perform liquidation by repaying the account debt in exchange for the equivalent market collateral assets and incentives.

In addition, Morpho Blue adopts a different strategy from conventional lending protocols in dealing with bad debts. Specifically, if an account still has unpaid debts after liquidation and there is no collateral to make up for it, this part of the loss will be shared by all lenders in a predetermined proportion. Although the design of LP bearing the risk of bad debts has caused confusion in the community, in the words of Morpho CEO Paul Frambot, Morpho will not go bankrupt because of this, and even if there are bad debts, it will only affect specific independent markets.

It is worth noting that Morpho Blue’s asset representation is different from protocols such as Aave or Compound, which use aToken or cToken. Instead, it uses a smart contract-level mapping mechanism to track user positions. Under this mechanism, users’ assets are managed in the form of “shares”, thereby achieving high-precision tracking of asset allocation within the Morpho Blue protocol. This not only ensures the accurate calculation of asset and liability values, but also makes the display of supply and loan balances more accurate, while effectively preventing potential manipulation of share prices.

To improve lending efficiency and simplify user experience, Morpho Blue focuses only on lending business, while MetaMorpho built on it enables permissionless market creation and permissionless risk management.

MetaMorpho is a lending vault protocol built on the Morpho Blue protocol, corresponding to the Earn section in Morpho. As shown in the figure below, DAOs, protocols, individuals, hedge funds, etc. can create vaults in MetaMorpho without permission. Each vault contains a loan asset, and the risk exposure can be customized to allocate the deposits in it to one or more Morpho Blue markets.

During this process, the vault earns income by providing financial services to borrowers, while borrowers are required to deposit collateral to access the liquidity of the underlying assets and pay corresponding interest to the vault.

The MetaMorpho Vault’s yield structure includes native annualized yield (APY), bonus annualized rate (APR), and MORPHO token rewards.

What’s so special about Morpho?

The first highlight of Morpho Blue is its permissionless nature. This design allows the autonomous deployment of isolated loan markets by setting diverse parameters, without relying on external governance to list assets or manage parameters, giving loan market creators a high degree of autonomy, allowing them to independently manage the risks and returns of the lending pool based on their personal assessments, thereby meeting the diverse risk preferences and use case requirements in the market.

Through its design, the MetaMorpho vault effectively simplifies the lending process, improves user experience and aggregates market liquidity. It not only provides users with the opportunity to enter independent markets and participate in lending pools, but also allows users to provide liquidity in a convenient way and earn interest passively.

Another highlight of MetaMorpho vaults is their customizable risk strategies and performance fee parameters. Each vault can be configured with different risk exposure and performance fee parameters according to specific needs. For example, a vault focusing on LST assets will only hold LST-related risk exposure, while another RWA vault may focus on RWA assets. This flexibility allows users to accurately select and invest in vaults that are suitable for them based on their risk preferences and investment goals.

Morpho Blue also embeds a fee switch mechanism into the protocol, which provides the possibility of dynamically adjusting the fee structure through community governance decisions in the future. This mechanism allows borrowers to be charged fees ranging from 0% to 25% of the total interest in a specific market, and all fees collected will be directly injected into Morpho DAO. It should be clear that, of course, Morpho DAO cannot charge fees on MetaMorpho, and the MetaMorpho Treasury earns performance management fees from users. This design maintains a balance of interests between the Treasury and users.

How are Morpho tokens distributed?

MORPHO, as the core governance token of the Morpho protocol, has been officially issued but is currently in a non-circulating state. Its core value lies in giving holders the right to participate in major decisions of the protocol. Whether it is the deployment strategy of the Morpho smart contract, ownership, or the activation and adjustment of the fee switch, or even the financial management of the governance DAO, MORPHO holders can express their opinions through voting and jointly shape the future direction of the protocol.

The maximum total supply of MORPHO is 1 billion, of which 27.6% is allocated to investors, 15.2% to the founding team, 4.8% to early contributors such as contributors, independent researchers and consultants, 6% to Morpho Labs reserves, 6.6% to Morpho Association reserves, 35.7% to Morpho DAO, and 4.2% to users (the amount may increase).

How does Morpho Blue perform?

Since Morpho Blue was launched on the Ethereum mainnet earlier this year, it has attracted a total deposit of $1.35 billion and a total loan of $510 million at the time of writing. In particular, Morpho Blue has quickly emerged since its launch on Base in mid-June, achieving a growth of $110 million in deposits and $36.84 million in loans. Meanwhile, Morpho Optimizer has also performed relatively well, with a total deposit of $910 million.

Morpho Blue currently has 43 and 32 MetaMorpho vaults deployed on the Ethereum mainnet and Base chain respectively, providing users with a variety of lending and asset management options to meet the needs of user groups with different risk preferences and investment needs.

According to the latest data from DefiLlama, Morpho TVL ranks fifth in the DeFi lending field, behind Aave, JustLend, Spark and Morpho.