A NEW BREED OF DEFI LENDING - MORPHO
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Classic DeFi lending protocols operate as a liquidity pool that aggregates deposits and that liquidity further can be borrowed. Now that’s where the interest rate spread challenge comes in, as interest rate proceeds are shared across all depositors in a particular pool - the lower is the utilization of the deposit by borrowers (amount borrowed vs total deposits pool size) the lower is return on every deposited ETH for example. Meaning if a borrower pays on his/ her loan 5% depositors get 1% on their deposit.
That is where Morpho comes in, to optimize the interest rate for both sides making it almost equal at some mid point eg. 3%. Instead of pooling deposits, Morpho matches borrowers with depositors so interest payments of one are the proceeds for another.
The important design element is that Morpho integrates and sits on top of classic DeFi lending protocols (already started with Compound), to utilize their liquidity pool as a backup reserve. In order to do that Morpho fully mirrors all economic parameters of the lending protocol it sits on top of. To extend this reminds Commercial and Central Bank relations in TradeFi. Where Compound in this exercise serves as the liquidity pool of last resort.
Let’s dive in how this works
Using our known fellows Alice and Bob let’s play a small scenario and build a classic balance sheet for Morpho, denominated in ETH to see how things move.
1. Alice comes to Morpho and places a deposit of 1 ETH.
This is an easy one. There has been nothing at the start, then 1 ETH came in that is on one hand Asset that Morpho holds on the other is a liability in front of Alice to return it when she claims back.
2. Morpho places unutilized deposits in Compound.
As there are no loans yet, any unutilized liquidity Morpho places to Compound as a deposit to generate at least a minim possible yield for Alice. In return to the deposit Compound gives to Morpho a derivative token cETH that represents the ownership of the deposit.
What else did you miss?
Continuation of how it works
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