Morpho: P2P Lending Protocol | TKX Weekly

4 min readAug 15, 2023

In the rapidly evolving world of decentralized finance (DeFi), the quest for more efficient and user-friendly liquidity management is a constant endeavour. Morpho is a lending protocol designed to optimize decentralized liquidity, making supplying and borrowing operations in DeFi more seamless and efficient.

Intro

Morpho is a peer-to-peer layer built on top of lending pools like Compound and Aave. It serves as a lending pool optimizer in the DeFi landscape. By introducing a unique interest rate mechanism, it addresses the common issue of high borrowing rates and low supply rates due to under-utilization of the lending pool, balancing both sides of the market. Morpho enhances capital efficiency by matching lenders and borrowers peer-to-peer, offering improved rates while maintaining the same liquidity and liquidation guarantees as the underlying protocol.

Users of Morpho receive either the APY of the underlying pool or an even better rate called the P2P APY, ensuring a rate equal to or superior to the underlying protocol.

Key Features

P2P Matching: Morpho integrates Peer-to-Peer (P2P) matching with existing liquidity protocols, allowing direct connections between lenders and borrowers.
Improved Rates: By leveraging P2P matching, Morpho offers more attractive rates for both lenders and borrowers, optimizing the overall DeFi experience.
Automatic Handling: The entire process of matching and rate optimization is handled automatically by Morpho, eliminating additional transactions or complexity.
Compatibility with Existing Protocols: Morpho works seamlessly with established protocols like Compound and Aave, maintaining the same liquidity, collateral factors, oracles, and security features.
Rate Guarantee: Users either receive the APY of the underlying pool or an even better rate called the P2P APY, ensuring a rate equal to or superior to traditional protocols.

Mechanism

Morpho ingeniously combines Peer-to-Peer (P2P) and Peer-to-Pool matching of liquidity protocols, offering users the ability to supply and borrow assets with the same liquidity as existing protocols like Compound and Aave, but at more attractive rates.

For instance, if Alice supplies 1 ETH to Morpho and Bob borrows it, they are matched P2P, and both benefit from improved rates. After a year, Alice earns close to 0.014 ETH instead of 0.001 ETH, and Bob pays 0.014 ETH instead of 0.027 ETH.

This entire process is automatic, with Morpho handling the matching, eliminating additional transactions or complexity. When users interact with Morpho-Aave or Morpho-Compound, they access the same billions of dollars available to be borrowed or withdrawn, with the same collateral factors, oracles, close factors, etc. The only difference is that Morpho provides improved rates for both borrowers and lenders, optimizing the DeFi experience without altering the underlying mechanics or security.

Matching Engine

Morpho’s matching engine is a sophisticated component that ensures a 100% utilization rate by perfectly balancing supply and borrow demand. Utilizing an on-chain priority queue, it sorts users by volume and pairs lenders and borrowers, maximizing economic efficiency while minimizing gas costs. In cases of imbalance, such as $10M supplied against $6M borrowing, the engine selects suppliers for P2P matching, and the rest goes to the pool.

Analytics

As of August 6th, 2023, the total borrowed amount stands at $386M, with approximately $300M of this sum being matched through peer-to-peer transactions. This matching process has led to an improvement in the interest on 77% of the total borrowed amount.

The majority of the supplied volume comes from Aave, which accounts for approximately 95% of the total supplied volume. When using Morpho, the APY improvement is around 0.83%, which is a significant increase considering the average borrow APY ranges from 3% to 5%.

Thoughts

Morpho is definitely a gem among other lending protocols. Its approach of building on top of Aave and Compound, by combining peer-to-peer and peer-to-pool models, could be the way of the future for lending protocols. It brings a win-win APY for both suppliers and borrowers.

Reference

https://analytics.morpho.org/
https://app.morpho.org/
https://docs.morpho.org/start-here/homepage
https://whitepaper.morpho.org/

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