Morpho Blue: Unleash New Era of DeFi Lending

Morpho Blue: Essentials

Morpho Blue is a lending protocol with permissionless market creation.

What does it all mean? The protocol enables the creation of minimal and isolated lending markets by choosing one loan asset, one collateral asset, a liquidation LTV, and an oracle. 

Source: Morpho’s docs

The protocol was designed  with a main thing in mind — to be more secure, efficient, and flexible than other decentralized lending platforms. Morpho has EVM smart contracts facilitating interactions and integrations.

That’s how Paul Frambot describes the project himself: "Morpho Blue externalizes risk management by making it a separate layer of the stack with unlimited permutations, versus the one-size-fits-all approach we see from today's lending services."

"Therefore, institutional players can integrate it into their own risk and compliance management systems. On their end, crypto risk managers could even rebuild the classic lending pool abstractions such as Aave, Compound, Spark, or Flux, but on top of a common trustless, efficient, and flexible primitive."

How does Morpho Blue differentiate from the whole bunch of other protocols alike? Let’s highlight those points and compare:

Source: Morpho’s website

Trustless

• Immutable
  Morpho Blue is not going to have any upgrades. It will run the same way forever.
• Governance-minimized
  Morpho Governance can’t stop the operation of a market or manage funds on users’ behalf. Thus, risk management is delegated to the above layers.
• Simple
  The whole protocol is packed in only 650 lines of Solidity code making it really easy to understand.

Source: Morpho’s docs

Efficient

• Higher collateralization factors
  As Morpho Blue’s Lending markets are isolated (so they are efficient and flexible par excellence), liquidation parameters for each market can be set without consideration of the most risky asset in the basket. 
  It means suppliers can lend at a much higher LLTV (loan-to-value ratio) and remain exposed to the same market risk as when supplying to a multi-asset pool with a lower LLTV.
• Better interest rates
  Collaterals are not lent out to borrowers. This facilitates the liquidity requirements for liquidations to function properly in current lending platforms and by doing this, Morpho Blue can offer higher capital utilization. 
  Morpho Blue is entirely autonomous, so it does have fees to cover costs for platform maintenance, risk managers, or code security experts.
• Low gas costs
  Morpho Blue was born to be simple, so it was built in a singleton smart contract that groups every possible primitive market in the same place. It cuts off gas consumption by 70% compared to existing lending platforms.

Source: Morpho’s docs

Flexible

• Permissionless market creation
  Morpho Blue features permissionless asset listing. Markets with any collateral, loan assets, and risk parametrization can be launched. The protocol also supports permissioned markets, enabling such use cases as RWAs and institutional markets.
• Permissionless risk management
  Morpho Blue is designed to be a base block allowing adding more logic layers on top. The layers can boost the core functionality by addressing risk management issues and/or untangle the user experience for passive lenders. Actually, any lending pool with any asset and any risk management method can be built on this rather unique platform.
• Developer-friendly
  Morpho Blue implemented several latest smart contract patterns: 
  1. Callbacks empower liquidators and seasoned users to chain advanced actions without any flash loans. 
  2. Account management delivers gasless interactions and account abstractions. 
  3. Free flash loans on the singleton contract expose anyone to access the assets of all markets at the same time with a single call, as long as they are repaid in the same transaction.

MetaMorpho: Vaults

Users can deposit assets in a MetaMorpho vault and earn passive yield from overcollateralized lending on Morpho Blue. MetaMorpho vaults provide:

• Curated Risk: Each vault caters to a different risk profile, ending the one-size-fits-all approach.
• Better Yield: Dynamic rebalancing across Morpho Blue's capital-efficient markets improves returns.
• Transparent: Noncustodial with immutable logic and verifiable allocations.

First and foremost, a MetaMorpho Vault makes lending to isolated markets as simple as a lending pool.

When using a multi-asset lending pool, a lender only has one option, however, with isolated markets there could be several markets for one loan asset. 

For example, Morpho Blue could have five options to lend USDC: sDAI/USDC, wstETH/USDC, wbIB01/USDC, WBTC/USDC, and WETH/USDC.

Source: Morpho’s docs

Each market also has parameters such LLTV, oracle, and supply caps that lenders must consider. In other words, users are required to perform risk management themselves.

A MetaMorpho vault eliminates the complexity of risk management by creating a single point of entry. Rather than requiring users to make multiple decisions, they can simply deposit USDC into a USDC MetaMorpho Vault to allocate liquidity.

Source: Morpho’s docs

Not only does it make it easier to supply, but it helps to improve yield. As market conditions change, a vault can rebalance across markets to optimize interest earned by lenders.

Source: Morpho’s docs

In the end, MetaMorpho vaults provide users with the same simple user experience as a multi-asset lending pool with the benefits of lending to isolated markets.

Why Choose Morpho?

Morpho was able to stand out by developing a more stable, user-controlled risk assessment platform with a one-of-a-kind lending pooling and matching system. 

The protocol’s system narrows the spread between lenders and borrowers and allows end users to select who assesses risks as opposed to most DeFi protocols that are managed by third-party risk assessors. Morpho recently surpassed $2 billion in supplied funds, making it one of the fastest-growing DeFi protocols in the market.

Source: Morpho’s Mirror

The Morpho team has also recently announced the launch of Morpho Blue, a decentralized protocol which enables overcollateralized lending and borrowing of any digital asset. 

This protocol is a base layer upon which many other applications and protocols are built, including MetaMorpho, their protocol for noncustodial risk management. MetaMorpho enables risk experts to create a vault that aggregates and allocates user liquidity into one or more Morpho Blue markets.

The team, comprised of individuals from technical backgrounds who have dedicated years towards researching advanced topics within crypto, founded Morpho during university. 

Risk Management on Morpho

Morpho Blue lets anyone layer their risk models on top of a trustless and ultra-efficient lending primitive.

As such, users can choose the risk model that meets their needs, rather than having risk managers compete against each other with mutually-exclusive proposals that token holders must vote on. 

This model will have fewer trust assumptions, stronger efficiency, and way more use cases. 

However, it’s not only Morpho’s team work but also the community’s contribution:

• Discuss the shortcomings of the existing models;
• Propose alternatives that might enhance risk management more strong and open;
• Publish research and learnings on risk management so others could learn from Morpho’s lessons and failures;
• Open source codebases and models.

Have a look at the 1st step in that direction:

Source: Morpho’s X account

Morpho Labs has published a research paper co-written with the Simtopia team.

All thoughtful responses, ideas, and proposals inspired by Morpho’s study on how to design better, more resilient DeFi systems will be collected. It could be a kind of treasury of the best thinking in this area.

Final Thoughts

Morpho introduces a groundbreaking protocol to serve as the foundation for DeFi lending. Thanks to Morpho Blue, devs can build onchain and offchain applications going along with managing risk-return, handling compliance, and increased usability. The protocol is a simple, immutable, and governance-minimized base layer that allows building a wide variety of other layers on top. 

Users have an opportunity to interact with the protocol directly or delegate certain tasks to different layers depending on their needs. It provides higher collateralization factors, improved interest rates, and lower gas fees. 

Morpho Blue sounds like a solid and decent project that understands the challenges of the DeFi’s future and the current rather critical condition of the DeFi market being flooded with token incentives and speculations and “stuck at a local extremum.” 

Besides, serious investors such as Pantera Capital, a16z, Spark Capital, and Coinbase ventures showed their genuine interest in the project, and that is another reason to pay close attention to the protocol.

Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.