How Morpho Achieves a Balance Between Liquidity and Capital Efficiency
It seems that Bitcoin does not want to play a solo act on the current stage. As the BTC/ETH exchange rate continues to hit new lows, Ethereum has finally shown some strength and slowly revved up its engine. The DeFi ecosystem, derived from the Ethereum ecosystem, is also stirring. Since the dollar interest rate cut meetings a few months ago, the community has been waving the banner of "DeFi Rising Again."
As one of the three driving forces behind DeFi development, the future of decentralized lending is highly anticipated. Even the Trump team has jumped in, announcing the launch of the lending project WorldLibertyFinancial (WLF).
In discussions about who will lead the DeFi revival, Morpho, which announced a $50 million funding round in early August and has raised over $80 million in total, is frequently mentioned.
### 1. What is Morpho?
In the decentralized finance (DeFi) market, decentralized staking has become an important means of enhancing blockchain network security and incentivizing users. However, despite staking increasing network security, capital efficiency and liquidity remain major challenges. For example, in the lending market, over-collateralization reduces capital efficiency, and when lending demand is mismatched, funds often remain idle and cannot be fully utilized.
To address these issues, DeFi protocols have introduced "pool-to-pool" and "peer-to-peer" (P2P) models. This model can match the needs of both lenders and borrowers, thereby improving capital efficiency.
The Morpho protocol was created based on this idea, aiming to optimize the capital efficiency of lending pools. It is a lending pool optimizer built on top of lending protocols such as Compound and Aave. Through the peer-to-peer model, Morpho can match the needs of lenders and borrowers, improving capital utilization while maintaining liquidity and liquidation mechanisms.
Specifically, users in the Morpho protocol can earn higher annual percentage yields (APY) than traditional lending protocols, known as P2P APY, benefiting both lenders and borrowers. Morpho enhances capital efficiency through this innovation, reduces idle funds, and optimizes liquidity.
Essentially, the Morpho protocol is a lending pool optimizer that builds on mainstream lending protocols like Compound and Aave, matching the needs of lenders and borrowers through a peer-to-peer (P2P) model to enhance the capital efficiency of lending pools. The innovation of Morpho lies in that users can not only enjoy the high liquidity provided by platforms like Compound but also obtain a higher APY (annual yield) through the peer-to-peer matching mechanism, known as P2P APY.
Specifically, the Morpho protocol allows users to interact with the Morpho-Compound market, adhering to the same collateral ratios and liquidation mechanisms as traditional Compound. However, unlike the traditional model, when the needs of lenders and borrowers are successfully matched, both parties can receive higher interest returns than the original base protocol. This model addresses the issue of idle funds in traditional staking protocols, allowing for more efficient use of capital.
### 2. Morpho Operating Mechanism
As an aggregator based on existing lending protocols, Morpho optimizes capital efficiency by combining "pool-to-pool" (P2P) and "peer-to-peer" models, enhancing the capital efficiency of lending pools. The innovation of Morpho lies in that it provides liquidity through existing lending pools (such as Compound, Aave, etc.) and matches lending demands through a peer-to-peer approach, optimizing capital usage and enhancing the yield experience for both lenders and borrowers.
- Combination of Pool-to-Pool and Peer-to-Peer Models
- Pool-to-Pool Model: Morpho is built on existing lending pools (such as Compound, Aave), providing the same liquidity.
- Peer-to-Peer Matching: When users deposit assets into Morpho, it attempts to match them with borrower demands, forming a peer-to-peer lending relationship that enhances the capital efficiency of the lending pool.
- Yield Enhancement: Through peer-to-peer matching, both borrowers and lenders can achieve higher APY. Specifically, borrower APY is usually higher than lender APY, and through Morpho's matching, both parties can obtain a P2P APY that lies between the two, enhancing the yield for both.
- Separation of Debt and Deposits
- onComp: Deposit balances are measured through the underlying lending pool (such as Compound), represented by cTokens or aTokens.
- inP2P: The portion matched through peer-to-peer lending is measured by mTokens, representing the funds matched between borrowers and lenders.
- Debt Tracking Mechanism: Morpho accurately tracks users' debt and deposit balances by managing deposits and loans separately between "onComp" and "inP2P."
By introducing a combination of peer-to-peer and pool-to-pool models, Morpho enhances capital efficiency and optimizes the lending experience based on existing lending protocols. Both lenders and borrowers can not only achieve higher yields but also enjoy instant liquidity and low-risk lending experiences. Morpho's innovation lies in its capital efficiency improvement through the matching engine, while the $MORPHO token brings governance and incentive mechanisms to the protocol, further enhancing its sustainability.
### 3. Morpho Team and Funding Information
The Morpho protocol was co-founded by Paul Frabot and Vincent Danos. After 9 months of development, it has received support from renowned investment institutions including a16z, Variant, and Coinbase Ventures, raising over $20 million.
### 4. Morpho Token Economics
The Morpho token is $MORPHO, with a maximum total supply of 1,000,000,000. Currently, the deployed tokens are non-transferable. The Morpho DAO (composed of MORPHO holders and delegates) is responsible for managing the Morpho protocol. The governance system employs a weighted voting system, where the number of MORPHO tokens held determines voting power.
MORPHO holders can vote on changes or improvements to the protocol, including:
- Future initiatives for the development of the Morpho protocol;
- Deployment and ownership of Morpho smart contracts;
- Opening/closing the fee switch built into Morpho smart contracts;
The token distribution plan is as follows:
Morpho DAO owns and controls: 35.7% (375,000,000 MORPHO)
Strategic partners: 27.6% (276,000,000 MORPHO)
Founding team: 15.2% (152,000,000 MORPHO)
Morpho Association: 6.6% (66,000,000 MORPHO)
Morpho Labs reserve: 6% (60,000,000 MORPHO)
Early contributors: 4.8% (48,000,000 MORPHO)
Protocol users and launch pool participants: 4.2% (42,000,000 MORPHO)
### 5. Future Value Analysis of Morpho
As an innovative DeFi lending optimization platform, Morpho has strong market potential and technological advantages. It brings more efficient capital utilization and a better user experience to the lending market, aligning with the development trends of DeFi. With more user participation and continuous ecosystem development, the $MORPHO token is expected to become an important asset in the DeFi space.
The ongoing expansion and maturation of the DeFi market, especially in areas such as lending, derivatives, and stablecoins, means that the market demand for Morpho will continue to increase. Morpho's innovative model perfectly meets the current DeFi market's urgent need to improve capital efficiency and optimize user experience.
