In fact, for lending protocols, a stable operating history is crucial for building a security brand!
The capital capacity of lending protocols ranks first in the DeFi sector, being the largest segment for capital absorption in DeFi. Moreover, lending is a market that has already validated demand, has a healthy business model, and is relatively concentrated in market share!
Morpho's successful experience can be roughly divided into two periods, and it is through the accumulation of these two periods that the leap is realized, allowing Morpho's market share to steadily increase.
First leap: Optimizing 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 capital matching in peer-to-pool models like Aave and Compound. By introducing a peer-to-peer matching mechanism, it provides users with better interest rate options, namely 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. This imbalance brings efficiency issues: the interest of deposit users is diluted by idle funds, while borrowing users have to bear the interest cost for the entire fund pool, rather than just paying interest on the portion they actually use.
Morpho's solution lies in introducing a new workflow:
Users' deposits and collateral are allocated to Aave and Compound to ensure they receive the base interest rate. Meanwhile, Morpho prioritizes processing large orders using a peer-to-peer matching mechanism, directly allocating deposits to borrowers, thereby reducing idle funds.
In this way, deposits can be fully utilized, and 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 of traditional models:
Deposit users enjoy higher returns, borrowing users pay less interest, and the interest rates for both parties tend to align, greatly enhancing the user experience.
Morpho's operation relies on Aave and Compound, using their infrastructure as a capital buffer to keep risk levels close to those of these mature protocols.
For users, this model is significantly attractive:
1. Regardless of whether the matching is successful, users can at least obtain interest rates comparable to Aave and Compound, and when matching is successful, returns or costs will be further optimized.
2. Morpho is built on mature protocols, and its risk control model and capital management fully follow Aave and Compound, significantly reducing users' trust costs in emerging platforms.
Through innovative design, Morpho cleverly utilizes the composability of DeFi protocols, successfully attracting more user funds under low-risk conditions, and achieving more efficient interest rate optimization services.
Second leap: Shifting from applications to decentralized infrastructure, separating risks and building independent ecosystems.
As mentioned earlier, the Morpho optimizer only completed Morpho's first leap, allowing it to stand out among various lending protocols and become a platform that cannot be ignored in the market. However, in terms of product, protocol positioning, or ecological development openness, the optimizer cannot bring broader imaginative space.
Because, firstly, the growth of the optimizer is limited by the current underlying lending pool design, as it heavily relies on its DAO and trusted contractors to monitor and update hundreds of risk parameters or upgrade large smart contracts daily.
If Morpho remains stagnant, it will not be able to attract a broader range of developers and native protocols, and for the market, it can only be positioned as an ecological protocol for Aave and Compound.
Therefore, Morpho adopts a product approach similar to Uni V4, doing only one type of foundational layer for large financial services, opening up all modules above the foundational layer.
That is: product minimization, which the team calls 'primitive,' opening all lending parameters without permission to individuals and ecological protocols. After transferring the risk from the platform to third parties, Morpho's ecological value will continue to increase.
Looking back at Morpho's development history, what other lending protocols can learn might be the effort Morpho spent accumulating its reputation, starting from the initial Morpho optimizer.
Using Aave and Compound as capital buffer pools and relying on their historical security assumptions to quickly establish its own brand.
When the time is ripe, it can 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 the ecosystem in a low-cost manner to create its own native applications within its ecosystem.
Morpho clearly recognizes that for lending protocols, a stable operating history is crucial for building a security brand, and this is also the foundation of Morpho.
