Introduction
Morpho is a matching layer for pool-based lending platforms like Compound or Aave. It offers a way for borrowers and lenders of these money markets to get improved rates that are otherwise unavailable when using the platforms directly. Morpho has attracted investors like Coinbase Ventures and a16z, and has over $220 million in TVL today.
To achieve these rates, Morpho peer-to-peer (P2P) matches depositors of the same platform whenever possible. Simply put, market participants can get optimized interest rates and yield when using their favorite lending platforms through Morpho.
The Problem
Early onchain money markets were based entirely around matching borrowers and lenders P2P. This was ideal since lenders could put 100% of their capital to use and get paid directly from the borrower(s) of their capital. However liquidity was not instant, and loans were fixed-term (had to be repaid by a certain time). Borrowers would post debt agreements that lenders would sift through and manually accept if they agreed to the terms, all while capital would sit idle in the meantime.
Today, lenders deposit into asset pools that anyone can instantly borrow from with enough collateral. The rate paid by borrowers is socialized amongst all lenders in a pool relative to their share. When a pool has many lenders and few borrowers, interest is diluted as it gets split amongst the many lenders on the other side of the pool. This creates a large spread, or gap in rates paid by borrowers and yield earned by lenders, and this generally deters market participants.
The Goal
Morpho combines the benefits of liquidity pools and P2P matching by acting as a secondary P2P market built on top of pool-based lending platforms. Users can lend or borrow on their favorite lending platform through Morpho “gateways”, and Morpho will P2P match users whenever possible. The rates in these P2P agreements are always better than what is offered by the underlying P2Pool protocol.
In this simple yet ingenious hybrid approach, Morpho can offer the optimized rates that come with P2P lending plus the instant liquidity and simplicity that comes with P2Pool lending. Even better, these lending markets are aggregated into a single UI to make switching between them easier than ever.
How Does it Work?
Users access their favorite lending platform through Morpho gateways such as Morpho-Compound or Morpho-Aave. These are basically just frontends to the underlying P2Pool protocol, however depositors of these gateways are put in a queue to be P2P matched whenever possible.
Morpho’s on-chain matching engine “Caterpillar” orders the queue by size, so new lenders start by filling the largest borrower in the queue (and vice versa). New deposits are matched until either side of the matching queue is empty. Once new users can no longer be instantly matched, deposits are deployed to the underlying lending protocol until a match is found. Caterpillar will only P2P match if it can achieve a better rate than the underlying protocol.
After a match is found, the lender’s liquidity and the borrower’s collateral is withdrawn from the lending market in order to facilitate the P2P debt agreement. Since Morpho calculates a rate within the spread on the underlying lending platform, P2P agreements usually offer substantially better rates for both parties. P2P rates are calculated using a governance-determined “index cursor”.
If one party exits the P2P agreement, the other party is re-queued for matching. If a P2P match cannot be arranged right away, the liquidity is redeployed back to the underlying P2Pool protocol. This is known as Morpho’s fallback mechanism, and it is also utilized in the event of a P2P liquidation.
Risk parameters such as collateral ratios and fees are identical to the underlying protocols and update in realtime. While Morpho also mimics the underlying liquidation mechanisms, it uses its own liquidators to act on under-collateralized positions.
Partnerships
Beyond the Morpho-Aave and Morpho-Compound gateways, Morpho has lots of established partnerships. Volt Protocol, a stablecoin protocol that deploys collateral to earn yield, has chosen to lend through Morpho-Compound to earn better rates from P2P matching.
Similarly, the Nested Finance and Spool Finance yield protocols will both plug into Morpho gateways to offer its users improved lending yield with P2P rates. Sense Finance is also integrating Morpho-Aave into their market for trading and speculating on interest rates in DeFi.
Tokenomics
$MORPHO Price: N/A
Market Capitalization: N/A
Circulating Supply: ~14,868,000
Total Supply: 1,000,000,000
Fully Diluted Valuation: N/A
SOURCE: Etherscan
$MORPHO is the governance token of the protocol which is used to vote on new market deployments, $MORPHO rewards, the transferability of $MORPHO, and maintaining the DAO treasury. Morpho is notably leveraging the 7-step Gnosis Zodiac framework to progressively decentralize control over the protocol as time goes on.
$MORPHO is currently non-transferrable. Users who borrow or lend through Morpho gateways can earn $MORPHO rewards which vary by asset. $MORPHO emissions follow an “ages and epochs” schedule, where each age has a fixed reserve of $MORPHO rewards that is evenly distributed amongst all three epochs in the age. There has been no public sale and no tokenomics have been released as of now.
Conclusion
Morpho has a simple yet incredibly novel product design that all P2Pool lenders and borrowers can benefit from. Individuals and protocols alike can plug into their favorite money markets and get substantially better rates through Morpho’s P2P engine.
Thanks to Morpho, P2Pool lending markets can finally start to spread their wings.
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DISCLOSURE: I do not hold any $MORPHO. The information provided in this article is solely for educational purposes and should not be considered as financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. I have not been compensated in any way for writing this article. Readers should always conduct their own research and seek professional advice before making any financial decisions.