Can Morpho, which recently completed a $50 million financing, become a new giant in the Decentralized Finance lending track?

Just completed a $50 million Morpho is an innovative Decentralized Finance lending protocol.

According to DeFiLlama data, Morpho’s Total Value Locked (TVL) has reached $1.4 billion, with Borrowed amounting to over $880 million and total financing reaching $68 million.

So, what kind of project is Morpho, and how has it achieved such success in the field of Decentralized Finance? Let ChainTeaHouse take you on a journey to find out.

To understand Morpho clearly, we first need to understand the entire Decentralized Finance lending track.

The fact that Morpho has received such a large amount of financing is enough to prove that the lending market of Decentralization has become an important part of the Decentralized Finance field. The funding capacity of Decentralization lending has always been at the forefront, and currently the TVL (Total Value Locked) has surpassed DEX (Decentralized Exchange), becoming the largest fund recipient in the field of Decentralized Finance.

In terms of its business model, the Decentralization lending market has achieved PMF (Product-Market Fit), which means it has found a sustainable business model in the Decentralization 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 sustain operations.

But overall, the lending track has a high market concentration, with the head protocol occupying the majority of the market share. Aave and Compound, the main participants, rely on their strong brand power and long-term security record to form a clear moat.

In addition, the lending protocol needs to find a balance between Liquidity and security. Although the peer-to-pool model provides high Liquidity, capital efficiency is low; while the peer-to-peer model has high capital efficiency, Liquidity is insufficient.

Morpho provides a new solution by combining two models:

As a peer-to-peer (P2P) layer built on top of lending pools like Compound and Aave, Morpho combines P2P and P2Pool matching with its unique Interest Rate mechanism, enabling users to borrow and lend at better Interest Rates, solving the problem of high borrowing Interest Rates and low lending Interest Rates caused by low utilization of lending pools, and improving capital efficiency. At the same time, Morpho maintains the same Liquidity and liquidation protection as the underlying protocol, allowing users to earn the underlying pool’s Annual Percentage Yield (APY) or better P2P APY.

Simply put, traditional lending pool protocols (such as Compound and Aave) suffer from high borrowing interest rates and low deposit interest rates due to low utilization rates of the fund pool. Morpho directly matches borrowers and lenders to provide higher deposit returns and lower borrowing costs, thus improving capital efficiency.

For example, Xiaoming applies to borrow 1 ETH from Xiaohong provided by Morpho. They are matched through P2P and obtain an improved Intrerest Rate. The entire process is automatically handled by Morpho, and users do not need to make additional transactions.

Morpho’s matching engine sorts users and matches borrowers and lenders to ensure 100% utilization, maximize economic efficiency, and minimize gas costs.

More specifically, when suppliers and borrowers are matched peer-to-peer, Morpho’s optimizer can freely 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 for both parties.

For example, when Xiaohong becomes the first supplier of the Morpho optimizer, her funds will be deposited into the basic liquidity pool. When Xiaoming enters as a borrower, the Morpho optimizer will automatically withdraw Xiaohong’s funds from the pool and directly match them to Xiaoming, both of whom can get a better Intrerest Rate.

Therefore, whether users directly use Morpho or deposit assets into Compound to obtain cToken and then deposit it into Morpho, they can all receive the corresponding APY. Similarly, when a borrower is matched, both parties will receive an improved P2P APY, which is higher than the corresponding APY but lower than the borrowing APY, providing better incentives for both parties.

In terms of the matching mechanism, the Morpho optimizer uses a priority queue data structure to match based on the amount that users wish to borrow or lend. The new provider’s Liquidity is first matched with the largest borrower, and so on, until all the supplied Liquidity is matched or there are no more borrowers. Similarly, the new borrower’s demand is first matched with the largest supplier, and so on, until all borrowing demands are met or there are no more suppliers.

If the match fails, Morpho will use the liquidity pool of the underlying protocol as a fallback mechanism to ensure that the needs of the provider and borrower are met. Morpho DAO selects the P2P Interest Rate between the Lending APY and Borrowing APY of the underlying protocol through the p2pIndexCursor parameter.

The Morpho optimizer protocol will automatically represent the rewards accumulated by users from the distribution of basic protocol, which means that users can receive rewards just like using the basic protocol directly. In addition, the Morpho optimizer will also distribute its own Morpho rewards to its users to further incentivize them.

In addition, Morpho seamlessly integrates with existing Decentralized Finance 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 buffers to provide Interest Rate optimization services to deposit and borrow users through matching. Users do not need to worry about Liquidity issues and can carry out borrowing operations at any time.

The Evolution of Morpho: Morpho Blue

Previously, the initial version of Morpho, Morpho Optimizer, ran on Compound and Aave to improve its Intrerest Rate model’s efficiency. However, as a result, the rise of Morpho Optimizer is severely constrained 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 daily or upgrade large Smart Contract.

After the transformation, Morpho launched Morpho Blue.

Morpho Blue is an unhosted lending protocol for Ethereum Virtual Machine (EVM) implementation of ETH. It provides a new trustless primitive compared to existing lending platforms, with higher efficiency and flexibility.

It deploys the minimum and isolated loan market by specifying a loan asset, a collateral asset, a Loan-to-Loan Value (LLTV), and an Oracle Machine. The protocol does not require trust and aims to be more efficient and flexible than any other decentralized lending platform.

The lending market of Morpho Blue is independent. Unlike a multi-asset pool, the clearing parameters of each market can be set without considering the highest-risk assets in the basket. Therefore, suppliers can lend at a higher LLTV while bearing the same market risk as when supplying to a lower LLTV multi-asset pool.

In addition, the collateral assets will not be lent to borrowers. This reduces the Liquidity requirements for the normal operation of liquidation in the current lending platform, allowing Morpho Blue to achieve a higher capital utilization rate. In addition, Morpho Blue is completely autonomous, so there is no need to introduce fees to pay for platform maintenance, risk managers, or code security experts.

It is worth noting that Morpho Blue has the function of asset listing without permission. Markets can be created with any Collateral and loan assets, as well as any risk parameterization. The protocol also supports licensed markets, enabling a wider range of use cases, including RWA and institutional markets.

The characteristic of Risk Management, which does not require permission, also makes Morpho Blue a simple foundation building block, allowing for the addition of more logical layers on top of it. These layers can enhance core functionality by dealing with Risk Management and compliance, or simplify the user experience of passive lenders. For example, risk experts can establish unmanaged selected insurance repositories for lenders to passively earn income. These insurance repositories rebuild the current multi-Collateral loan pool but are built on a trustless and efficient protocol.

MetaMorpho is an Open Source (GPL) protocol of Morpho Blue that allows the building of lending experiences with optimized interest rates and transparent risk management. The insurance vault of MetaMorpho accepts passive capital and deposits it into the Morpho Blue market. Liquidity is rebalanced between different markets to manage risks and optimize returns.

MetaMorpho allows users to delegate Risk Management to risk experts who manage insurance vaults, just like they do on Aave or Compound, simplifying the borrowing and lending process.

Each MetaMorpho insurance vault can meet the needs of users with different risk conditions by depositing funds into markets with different collateral assets and parameters.

In other words, MetaMorpho supports creating any lending experience on a trustless and efficient primitive Morpho Blue, such as Aave, Compound, Spark, FLUX, and all its forks, 01928374656574839201.

MORPHO Token

Morpho Token (MORPHO) is the governance token of the Morpho protocol. Morpho DAO consists of token holders and delegates who hold MORPHO tokens, responsible for governing the Morpho protocol. The governance system uses a weighted voting system, where the number of MORPHO tokens held determines the voting weight.

holders can vote on changes to the protocol, including the deployment and ownership of Smart Contracts, enabling or disabling the Morpho optimizer and Morpho Blue fee switch, front-end hosting Decentralization, and governing the DAO treasury.

As of June 2024, the distribution of MORPHO is as follows:

• Users: 4.2%
• Early Contributors: 5.4%
• Morpho Labs 储备 (Reserve for Morpho Labs): 6.0%
• Morpho Association Reserve: 12.5%
• Founders: 15.2%
• Investors: 20.8%
• MorphoDAO储备 (Morpho DAO Reserve)：35.8%

As a non-fungible Token, although MorphoToken has already undergone issuance and has been used in voting decisions and project incentives, it is in a non-transferable state. Therefore, it does not have a Secondary Market price, and users and investors receiving the Token can participate in voting governance, but cannot dump.

While most Decentralized Finance projects achieve TokenLiquidity within weeks, Morph DAO believes that building a long-term and sustainable ecosystem may take several years. Therefore, user allocations will not only take place during the Morpho optimizer period, but also in future protocols.

Morpho’s Token incentives are determined in batches, either quarterly or monthly, allowing the governance team to flexibly adjust the intensity and specific strategies of incentives based on market changes.

Although there is no market price for Token in the early stage, users holding Token can still participate in the governance decision of the protocol. This sense of participation and governance rights themselves have Intrinsic Value, which can motivate users to hold and use Token.

In addition, users holding Tokens can enjoy unique features and privileges within the protocol. For example, Token holders can receive higher loan Interest Rates, lower fees, or have priority access to new feature testing, etc. These privileges and features increase the practical utility of Tokens, providing actual benefits to users even in the absence of market prices.

Future Outlook

Many people have asked before, will Morpho be a potential competitor of AAVE, and will it become one of the three giants in DeFi lending?

The posing of these questions alone is enough to demonstrate the potential of Morpho.

The launch of Morpho Blue could pose a threat to Aave: although Aave has a strong market share and user base, Morpho could attract more users to its platform with its flexible and efficient solutions. On the other hand, Aave also has the ability to build Intrerest Rate optimization features similar to Morpho to meet user needs and maintain its market position.

Moreover, Morpho has shown a strong rise in the lending market, especially after the launch of Morpho Blue.

Morpho Blue allows anyone to create lending markets based on the protocol, choosing collateral, borrowing assets, Oracle Machine, loan-to-value (LTV), and liquidation loan-to-value (LLTV) in the open lending market. This flexibility and efficiency provide users with a richer market selection, in line with the principles of Decentralized Finance (DeFi) freedom market.

In addition, Morpho has accumulated a management amount of 1.4 billion U.S. dollars. Although it cannot be considered close to the level of 7 billion U.S. dollars of Aave, these funds are currently concentrated in the Intrerest Rate optimizer function, but there are many ways to import them into new features.

Morpho Token has sufficient and flexible budget, which can attract users through subsidies in the early stage. The stable operation history and capital of Morpho have accumulated certain security and brand, increasing user trust.

In summary, Morpho, as an innovative Decentralized Finance lending protocol, has sufficient market potential and technological advantages. However, in order to stand out in the competitive Decentralized Finance market, Morpho needs to continue innovating while focusing on user experience and market education, ensuring security and stability, and establishing effective governance mechanisms. Only then can Morpho secure a place in the future Decentralized Finance ecosystem. Let’s wait and see.

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