Most protocols follow the liquidity pooling model (pool-to-peer) to lend and borrow funds. This model is less capital-efficient and carries significant risks for lenders and borrowers due to fluctuating liquidity and reliance on shared risk pools. Morpho Protocol, on the other hand, addresses these inefficiencies by enabling direct peer-to-peer matching, offering better rates and reduced risk without sacrificing liquidity. This peer-to-peer (P2P) approach improves capital efficiency and creates a more secure and optimized lending environment for all participants. If a peer-to-peer (P2P) match isn’t found, the protocol automatically matches the loan with liquidity from underlying lending pools such as Compound or Aave.

What is Morpho Protocol?

The Morpho protocol, previously known as Morpho Blue, is a trustless, efficient lending protocol for overcollateralized lending and borrowing of crypto assets (ERC20 and ERC4626 tokens) on the Ethereum Virtual Machine (EVM) that allows permissionless market creation with Oracle-agnostic pricing. The Interest Rate Model (IRM) and Liquidation Loan-To-Value (LLTV) are governed by options set by governance, which also approves the range of parameters available for new markets. This permissionless market creation system allows anyone to create a lending market with custom parameters. This includes selecting different collateral tokens, borrowable tokens, and oracles. The protocol operates under a dual license (BUSL-1.1 and GPLv2) and is engineered to function indefinitely, relying on the Ethereum blockchain for continuity. Lenders supply assets to earn interest, while borrowers secure their loans with over-collateralization to minimize default risk. It’s implemented as an immutable smart contract, designed to be a trustless foundation for financial activities.

Background of Morpho Protocol?

Morph Protocol was founded in 2021 and is a France-based company under the Morph Lab name. It has secured a total of $70 million in funding from Ribbit Capital, a16z Crypto, Coinbase Ventures, Variant, Brevan Howard, Pantera, Blocktower, and 100+ others to support its mission to make financial infrastructure a public good. The CEO and founder of Morph is Paul Frambot, while the co-founder is Merlin Egalite.

Mechanism of Morpho Protocol

• To borrow assets, a user must provide collateral as a crypto asset supported by the Morpho protocol.
• The protocol specifies the minimum value of collateral required relative to the borrowed assets. For example, if this ratio is 90%, the value of borrowed assets must not exceed 90% of the value of the collateral, or the position is eligible for liquidation.
• A user initiates the borrowing process by interacting with the Morpho protocol. They specify the amount of the asset they want to borrow and provide the required collateral.
• Borrowers pay interest on the borrowed amount. The amount of interest paid is based on the interest rate model used by the protocol. Interest accrues over time and is payable when the borrower repays the loan.
• Borrowers can repay the loan anytime by returning the borrowed assets plus accrued interest. Once the blockchain confirms the repayment, the borrower can retrieve his collateral from the smart contract.
• Protocols include a liquidation mechanism to mitigate the risk of default. Suppose the value of the borrowed assets exceeds the LLTV (due to market fluctuations or interest accrual). The position may be liquidated in part or full to repay the loan and any outstanding interest.
• A user initiates the lending process by interacting with the protocol. They specify the amount of the asset they want to lend and transfer these assets to the smart contract.
• Lenders can withdraw their loan assets plus accrued interest if the market has enough liquidity.

Features of Morpho Protocol

• The Morpho protocol gives users full control over their funds and market creation. Users can choose loan assets, collateral, and risk parameters without interference from Morpho’s governance (DAO). Even the governance cannot manage or manipulate users’ funds, ensuring decentralization and autonomy in market participation.
• The Morpho uses an oracle-agnostic pricing model, meaning it can query price data from various internal or external trading markets. This approach ensures accurate pricing information for the assets within its lending protocol.
• Morpho Blue and Morpho Optimizers. Morpho Blue facilitates the creation of efficient lending markets, while Morpho Optimizers improves lending and borrowing rates through a peer-to-peer matching algorithm.
• Morpho Singleton has a free flash loan function, which can be taken without any collateral. Users can utilize these loans to capitalize on arbitrage opportunities, liquidity provision, or other financial strategies.
• Morpho is an actual protocol. Hence, its contract is not upgradable, and the code is immutable.

Morpho Optimizer

The Morpho Optimizer is a peer-to-peer (P2P) layer within the Morpho Protocol that enables lenders and borrowers to directly match with each other. This approach allows them to achieve better interest rates while maintaining the liquidity and risk parameters of the underlying protocols, such as Compound or Aave. The user experience with Morpho Optimizer is similar to that of CompoundV2 and AaveV3. The key difference is that Morpho provides improved rates for borrowers and lenders. Morpho Optimizer offers users two potential rates: a base rate from the lending pool (e.g., Compound or Aave) in the worst case, and a higher P2P APY when matched with another user. In both cases, the rate is always equal to or better than what users would get from the underlying protocol. In short, Morpho Optimizer serves as an optimized gateway to decentralized lending, enhancing returns without altering familiar borrowing and lending processes.

Morpho matching mechanism

Morpho Vault

Morpho Vault, previously known as MetaMorpho, is built on top of the Morpho Protocol to protect users’ funds. The vault is noncustodial and immutable, which allows users to provide liquidity and earn interest. Each vault has permission to automatically manage risk so that users are not required to make these decisions while giving full control to users over their assets. Users can look at the state of the vault at any time and withdraw their liquidity at their discretion. Because vault is noncustodial, lending on Morpho protocol is more complex than any other protocol. On Morpho, liquidity providers must look at multiple factors, including collateral assets, liquidation LTV, oracles, and caps. While on other protocols these factors are determined by governance. There are no restrictions on creating a vault. Each vault operates with four key roles: the owner, who oversees it; the curator, responsible for managing markets; the allocator, in charge of asset distribution; and the guardian, who ensures the vault’s integrity and security. This decentralized setup gives users flexibility while simplifying lending operations for participants.

Morpho Bundlers

Bundlers is a smart contract of the Morpho protocol that allows users to perform multiple actions in a single transaction. In the Morpho interface, bundlers are integrated to reduce transaction wait times and lower gas fees by using a multicall function. Bundlers simplify complex interactions within the protocol by grouping actions, allowing for faster and more cost-effective transactions. With the help of Bundlers, users can perform the following actions in a single onchain transaction:

• Stake ETH on Lido and receive stETH, wrap them to wstETH, supply them as collateral on Morpho, and borrow any other asset against them.
• Migrate their position from AaveV3 to Morpho.

Morpho Public Allocator

Another smart contract of the Morpho Protocol that allows users to relocate liquidity to specific markets, which helps borrowers get more liquidity from the market. The allocator defines how liquidity from the Morpho Vault flows between markets so borrowers can utilize it instantly. When the borrowers use the reallocation contract of Morpho Vaults, they experience the same liquidity as in a multi-asset pool like Aave. By giving the allocator role to the public allocator contract, anyone can reallocate the liquidity of the vault up to the bounds set by the curator. In Morpho Vault, the curator can designate the public allocator address as an allocator for the vault. This enables Morpho’s interface to trigger reallocations, increasing users’ available liquidity. However, it also limits how much can be supplied or withdrawn from a market listed in the vault, ensuring more efficient liquidity management.

Morpho Reward

Like most of the protocol, the Morpho Protocol also incentivizes users. Rewards in Morpho markets act as market creators or curators provide incentives to encourage user participation. These rewards can come in transferable tokens or other non-transferable assets, motivating users to engage with the platform. Users can view which Morpho vaults offer earnable rewards on the Morpho interface. These rewards can be obtained by providing liquidity or borrowing in specific Morpho markets, with the amount varying based on factors like supply, borrow rates, and market programs. Curators who wish to incentivize users can create optional reward programs to encourage participation. This system helps drive activity and liquidity while offering users additional benefits within the protocol.

Morpho App

Users can manage assets and interact with various products on the Morpho Interface. Morpho allows users to choose markets and risk parameters, accommodating various risk-reward appetites and user personas. The Interface provides an unopinionated platform for lending and borrowing without bias.

Earn

The earn section is basically depositing and withdrawing assets from Morph Protocol. Here, users can also see open positions and rewards if they have any.

Borrow

Here, the borrower can use collateral to borrow funds. Morpho enables users to take out loans by providing collateralized assets. Borrowers benefit from improved interest rates through peer-to-peer matching via the Morpho Optimizer.

Migrate

With one click, users can migrate their existing DeFi positions to Morpho. For a more efficient, secure, and flexible lending protocol on Ethereum. This migration process ensures that users can smoothly transition without losing access to liquidity or better rates.

Morpho Ecosystem

The Ecosystem page showcases all the specialized and feature-rich products built on Morpho. From within the Morpho interface, users can discover applications that suit their risk profiles or use cases.

Morpho DAO

Morpho adopts a unique approach to DAO governance compared to other protocols. It does not control users’ funds, ensuring minimal interference. Morpho’s governance cannot stop market operations or change critical parameters like Liquidation Loan-To-Value (LLTV), Interest Rate Models (IRM), or oracles once a market is created. However, the DAO plays a role in whitelisting new LLTVs and IRMs, which users can select when creating new markets.

The Morpho protocol currently follows a community governance model, where any changes to the DAO must be approved through a community vote. A Safe 5/9 mechanism initiates this process, but this mechanism will disappear as the protocol matures (in the future), ensuring a decentralized and transparent approach to protocol modifications. The multisignature will remain in place within Morpho’s DAO to manage the distribution of the MORPHO token and initiate future protocol versions. To make changes in protocol, the Morpho association (researchers, engineers, and contributors) deployed the foundational multisig for the Morpho DAO. This multisignature consists of nine signers, who are members of the association, and requires at least five signatures to approve any transaction, making it a 5/9 multisignature after that enables the MORPHO token holders to vote on changes.

What is Morpho Token?

The Morpho token (MORPHO) is an ERC20-based governance token of the Morpho protocol. It grants holders voting power based on the number of tokens they own, meaning the more MORPHO tokens a user holds, the greater their influence in governance decisions. Holders of MORPHO tokens can:

• Deployment and ownership of Morpho smart contracts.
• Turning on/off the fee switches built into Morpho Optimizer and Morpho.
• Decentralize the hosting of the front end to the protocol and the governance.
• Govern the DAO Treasury.

Currently, the MORPHO token is neither transferable nor tradable. Users can only earn it by participating in or contributing to the protocol. This non-transferability prevents centralized decision-making while allowing the DAO to enable transferability at any time, ensuring a decentralized token launch. Additionally, the MORPHO token employs a role-based access control system, defining specific roles like users, contributors, and investors, to ensure security and clarity in managing responsibilities within the protocol.

Currently, the Morpho token is on the Ethereum blockchain and has a 1,000,000,000 maximum supply.

Conclusion

Morpho has adopted a different approach than the other protocols, prioritizing user autonomy and efficiency. The protocol’s minimal governance interference and advanced role-based token system allow for a decentralized yet secure environment, empowering users to create markets and manage their funds independently.