Morpho, which just closed $50 million, is an innovative DeFi lending protocol.
According to DeFiLlama data, Morpho's total locked value (TVL) has reached US$1.4 billion, the borrowed volume (Borrowed) is more than US$880 million, and the total financing has reached US$68 million.
So, what kind of project is Morpho that has made such achievements in the DeFi field? Let Chain Tea House take you to find out.
To explain Morpho clearly, we must first understand the entire DeFi lending track.
Morpho's high financing is enough to prove that the decentralized lending market has become an important part of the DeFi field. The capital capacity of decentralized lending has always been among the best. At present, TVL (total locked volume) has surpassed DEX (decentralized exchange) and has become the track with the largest capital capacity in the DeFi field.
In terms of its business model, the decentralized lending market has achieved PMF (product-market fit), that is, it has found a sustainable business model in a decentralized environment. Although the early market relied on high token incentives, the market is now gradually moving towards a healthier model, relying on organic demand rather than subsidies to maintain operations.
But in general, the market concentration of the lending track is high, and the head protocols occupy most of the market share. Major players such as Aave and Compound have formed a clear moat by relying on their strong brand power and long-term security records.
In addition, lending protocols need to find a balance between liquidity and security. Although the peer-to-pool model provides high liquidity, it is less capital efficient; while the peer-to-peer model is capital efficient but lacks liquidity.
Morpho provides a new solution by combining two models:
As a peer-to-peer (P2P) layer built on lending pools such as Compound and Aave, Morpho introduces its unique interest rate mechanism: combining P2P and peer-to-pool (P2Pool) matching, users can borrow at a better interest rate, solving the problem of high borrowing interest rates and low supply interest rates caused by low utilization of lending pools, and improving capital efficiency. At the same time, Morpho also maintains the same liquidity and liquidation guarantees as the underlying protocol, and users can obtain the annual yield (APY) of the underlying pool or better P2P APY.
Simply put, traditional lending pool protocols (such as Compound and Aave) have the problem of high borrowing interest rates and low deposit interest rates due to low capital pool utilization. Morpho achieves capital efficiency by directly matching borrowers and lenders, providing higher deposit returns and lower borrowing costs.
For example, Xiaoming applies to borrow 1 ETH provided by Xiaohong to Morpho, and they get an improved interest rate through P2P matching. The whole process is automatically handled by Morpho, and users do not need to make additional transactions.
Morphoâs matching engine ensures 100% utilization, maximizes economic efficiency and minimizes gas costs by sorting users and matching borrowers and lenders.
More specifically, when suppliers and borrowers are matched peer-to-peer, Morphoâs optimizer is free to choose the P2P interest rate, but must choose within the spread of the underlying protocol (between Lending APY and Borrowing APY) to ensure it is beneficial to both parties.
For example, when Xiaohong becomes the first supplier of the Morpho optimizer, her funds are deposited into the base liquidity pool. When Xiaoming enters as a borrower, the Morpho optimizer will automatically take Xiaohong's funds out of the pool and match them directly to Xiaoming, so that both parties can get a better interest rate.
Therefore, whether users use Morpho directly or deposit cTokens obtained by depositing assets into Compound into Morpho, they can obtain the lender APY normally. Similarly, when matched with a borrower, both will receive an improved P2P APY, which is higher than the lender APY and lower than the borrower APY, which is a better incentive for both parties.
In terms of matching mechanism, Morpho optimizer uses priority queue data structure to match users according to the amount they want to borrow or lend. New suppliers' liquidity is matched with the largest borrower first, and so on, until all the supplied liquidity is matched or there are no more borrowers. Similarly, new borrowers' demand will be matched with the largest supplier first, and so on, until all borrowing demand is met or there are no more suppliers.
If the match fails, Morpho will use the liquidity pool of the base protocol as a fallback mechanism to ensure that both the supplier and borrower's needs are met. Morpho DAO selects the P2P interest rate between the Lending APY and Borrowing APY of the base protocol through the p2pIndexCursor parameter.
The Morpho Optimizer protocol automatically accumulates rewards distributed by the base protocol on behalf of users, which means that users can claim rewards just like using the base protocol directly. In addition, the Morpho Optimizer will also distribute its own Morpho rewards to its users to further incentivize users.
In addition, Morpho also seamlessly integrates with existing DeFi lending protocols such as Compound and Aave, maintaining the same liquidity and security features. This essentially means that Morpho's business uses Aave and Compound as capital buffer pools to provide interest rate optimization services to depositors and borrowers through matching. Users do not need to worry about liquidity issues and can borrow and lend at any time.
Morpho Evolution: Morpho Blue
Previously, Morpho's initial version, Morpho Optimizer, ran on Compound and Aave to improve the efficiency of its interest rate model. However, the growth of Morpho Optimizer is limited by the current design of the underlying lending pool, which relies heavily on its DAO and trusted contractors to monitor and update hundreds of risk parameters or upgrade large smart contracts every day.
After the transformation, Morpho launched Morpho Blue.
Morpho Blue is a non-custodial lending protocol implemented for the Ethereum Virtual Machine (EVM). It provides a new trustless primitive (primitive, a basic building block or infrastructure, here refers to the basic lending function or mechanism, which is the core and foundation of the entire lending protocol) with higher efficiency and flexibility compared to existing lending platforms.
It enables the deployment of minimal and isolated loan markets by specifying one loan asset, one collateral asset, one liquidation loan-to-value ratio (LLTV), and one oracle. The protocol is trustless and is designed to be more efficient and flexible than any other decentralized lending platform.
Morpho Blue's lending markets are independent. Unlike multi-asset pools, liquidation parameters for each market can be set without regard to the riskiest asset in the basket. Therefore, suppliers can lend at a higher LLTV while taking on the same market risk as when supplying to a multi-asset pool with a lower LLTV.
In addition, collateral assets are not loaned to borrowers. This alleviates the liquidity requirements required for liquidation to function properly in current lending platforms and enables Morpho Blue to provide higher capital utilization. In addition, Morpho Blue is fully autonomous, so there is no need to introduce fees to pay for platform maintenance, risk managers, or code security experts.
Notably, Morpho Blue has permissionless asset listing capabilities. Markets can be created with any collateral and loan assets and any risk parameterization. The protocol also supports permissioned markets, enabling a wider range of use cases, including RWA and institutional markets.
Its permissionless risk management also shapes Morpho Blue into a simple base building block, allowing more logical layers to be added on top. These layers can enhance the core functionality by handling risk management and compliance, or simplify the user experience for passive lenders. For example, risk experts can set up non-custodial curated vaults that allow lenders to passively earn yield. These vaults recreate current multi-collateral lending pools, but built on a trustless and efficient protocol.
MetaMorpho is an open source (GPL) protocol for Morpho Blue that enables any lending experience with optimized rates and transparent risk management to be built on top of Morpho Blue. The MetaMorpho Vault accepts passive capital and deposits it into the Morpho Blue market. Liquidity is rebalanced across markets to manage risk and optimize returns.
MetaMorpho simplifies the lending process by allowing users to delegate risk management to risk experts who manage vaults, just like it is done on Aave or Compound.
Each MetaMorpho vault can cater to users with different risk profiles by depositing funds into markets with different collateral assets and different parameters.
In other words, MetaMorpho enables any lending experience, such as Aave, Compound, Spark, Flux, and all their forks, to be created on a trustless and efficient primitive, Morpho Blue.
MORPHO Token
The Morpho Token (MORPHO) is the governance token of the Morpho Protocol. The Morpho DAO is composed of MORPHO token holders and agents, responsible for the governance of the Morpho Protocol. The governance system uses a weighted voting system, and the number of MORPHO tokens held determines the voting weight.
Holders can vote on changes to the protocol, including deployment and ownership of smart contracts, enabling or disabling fee switches for the Morpho optimizer and Morpho Blue, front-end custody decentralization, and governance of the DAO treasury.
As of June 2024, MORPHO is distributed as follows:
Users: 4.2%
Early Contributors: 5.4%
Morpho Labs Reserve (Reserve for Morpho Labs): 6.0%
Morpho Association Reserve: 12.5%
Founders: 15.2%
Investors: 20.8%
MorphoDAO Reserve: 35.8%
As a non-circulating token, although Morpho tokens have been issued and used in voting decisions and project incentives, they are in a non-transferable state. Therefore, they do not have a secondary market price. Users and investors who receive tokens can participate in voting governance, but cannot sell them.
While most DeFi projects achieve token liquidity within a few weeks, Morph DAO believes that achieving a long-term and sustainable ecosystem may take several years. Therefore, user distribution will be carried out not only during the Morpho optimizer, but also in future protocols.
Morpho's token incentives are determined in batches, quarterly or monthly, which allows the governance team to flexibly adjust the intensity and specific strategies of incentives according to market changes.
Although there is no market price for tokens in the early stages, users holding tokens can still participate in the governance decisions of the protocol. This sense of participation and governance rights themselves have intrinsic value and can motivate users to hold and use tokens.
In addition, users who hold tokens can enjoy unique features and privileges within the protocol. For example, token holders can get higher lending rates, lower handling fees, or priority participation in new feature testing. These privileges and features increase the actual use value of tokens and can bring real benefits to users even in the absence of market prices.
Future Outlook
Many people have asked before, will Morpho be a potential rival of Aave, and will it become one of the three giants of DeFi lending?
Just asking these questions is enough to demonstrate Morpho's potential.
The launch of Morpho Blue is a potential threat to Aave: while Aave has a strong market share and user base, Morpho has the potential to attract more users to its platform through its flexible and efficient solutions. On the other hand, Aave also has the ability to build interest rate optimization features similar to Morpho to meet user needs and maintain its market position.
Moreover, Morpho has shown strong business growth momentum in the lending market, especially after the launch of Morpho Blue.
Morpho Blue opens the lending market, allowing anyone to create a lending market based on the protocol, choosing collateral, lending assets, oracles, loan-to-value ratios (LTV) and liquidation ratios (LLTV), etc. This flexibility and efficiency provides users with more market choices, in line with the free market principles of decentralized finance (DeFi).
In addition, Morpho has accumulated $1.4 billion in funds under management, which is not close to Aave's $7 billion level. These funds are currently concentrated in the interest rate optimizer function, but there are many ways to import them into new functions.
Morpho tokens have sufficient and flexible budgets, and can attract users through subsidies in the early stages. Morpho's stable operation history and capital allow it to accumulate certain security and brand, increasing user trust.
In summary, as an innovative DeFi lending protocol, Morpho has sufficient market potential and technical advantages. However, to stand out in the fierce DeFi market, Morpho needs to continue to innovate, while focusing on user experience and market education, ensuring security and stability, and establishing an effective governance mechanism. Can Morpho occupy a place in the future DeFi ecosystem? Let us wait and see.
Reference Links:
https://mint-ventures.medium.com/will-rapidly-growing-morpho-become-a-formidable-challenger-to-aave-6ea3cbffad1d
https://docs.morpho.org/morpho-blue/tutorials/track-rates/
https://en.thebigwhale.io/article-en/morpho-the-killer-app-for-decentralised-finance