Morpho Aave V3


Morpho is a peer-to-peer lending protocol that is built on top of third-party lending platforms. Users interact with Aave V3 through Morpho's interface to receive improved rates for both borrowers and lenders.

Risk Rating
Protocol Code Quality
Protocol Maturity
Protocol Design
What we like
Morpho-Aave V3 improves the capital efficiency of lending positions by matching lenders and borrowers through a peer-to-peer (P2P) model. New features include an improved matching engine, efficiency mode, gasless token approvals, and account management.
What we like less
Users are exposed to an extra layer of smart contract risk (Morpho's set of smart contracts). Lenders also are subject to potential liquidity constraints due to borrow caps introduced in Aave V3, meaning they may not be able to withdraw their P2P funds instantly.
What it means for you
Offers users improved rates for both lending and borrowing while preserving the same liquidity and lending protocol parameters.

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  • Website
  • Token: MORPHO
  • Tags: Lending
Key Metrics
  • TVL: $399M (Rank #39)
  • TVL Ranking by Lending: #11
  • Blockchain: Ethereum
  • Chain TVL
    • Ethereum: $398.98M
Risk Assessment
Protocol Code Quality
  • Code reviewed by several experienced auditors
  • Public team promotes accountability
  • No documented protocol hacks since launch
Protocol Maturity
  • Latest protocol version launched in 2023; maturity over one year minimizes technical risk as smart contracts are well battle-tested
  • Bottom 80% by total value locked increases risk
  • Multisig wallet controls protocol upgrades
  • Multisig consists of at least 4 signers, which means the protocol is less susceptible to centralization risks
  • Timelock is less than 48hrs, which provides users with less time to exit if any malicious upgrades are approved
  • Low voting power concentration reduces risk
Protocol Design
  • No death spiral concerns
  • This protocol is susceptible to risks related to yield optimizers which deploy custom strategies to automatically manage user funds
Things to know about Morpho Aave V3

How Morhpo-Aave V3 works

Morpho enables money market users to be seamlessly matched peer-to-peer when available. There currently exists a large spread in existing lending protocols as numerous lenders share the interests generated by a few borrowers. With Morpho, the yield is no long socialized. Instead, the supplied liquidity is matched peer-to-peer with borrowers on a come-and-go basis. Lenders' interests correspond to the interests paid by the borrowers they are paired with. Due to this, the protocol's lending and borrowing rates can be freely adjusted by Morpho but must stay within the spread of the underlying protocol's pool to be profitable for both parties. To match users, Morpho holds an on-chain priority queue that sorts users according to the amount they want to lend or borrow. When new lenders supply liquidity to the protocol, their liquidity is matched with the largest borrower first. And when new borrowers seek liquidity, their demand is first matched with the most significant lender. Overall, users who use Morpho receive in the worst-case scenario the yield of the underlying money market pool or an improved yield due to peer-to-peer matching. There is currently no interest-bearing token because each user has a non-fungible position (similar to Uniswap V3).

What are the new features?

Morpho-Aave V3 is similar to the Aave V2 version but also introduces several new features and design choices. One of the new features that Morpho-Aave V3 introduces is efficiency mode (E-mode), a feature that enables users to borrow more when their collateral and borrowed assets are correlated in price, such as stablecoins or ETH derivatives. Currently, Morpho only offers E-mode for ETH, which includes WETH and wstETH. Another feature is account management, which allows users to delegate their borrowing and withdrawing actions to a manager contract, which can perform multiple actions in one transaction and save gas fees. A third feature is gasless token approvals, which uses the Permit2 contract to let users approve any token on any protocol with a signature, without having to pay gas for each approval. Finally, Morpho-Aave V3 also features an improved matching engine, which uses logarithmic buckets to match users with similar volumes, resulting in lower gas costs, better fairness, and higher efficiency.

What are the mechanism changes?

Aave V3 introduced new supply and borrow caps, which limit the amount of liquidity available in each pool. To overcome this challenge, Morpho-Aave V3 implements a new mechanism that splits suppliers into two types: suppliers and collateral providers. Suppliers are users who lend their assets without borrowing anything, and they can enjoy fixed rates by being matched with other users in a peer-to-peer fashion. Collateral providers are users who lend their assets as collateral for borrowing other assets, and they deposit their assets directly into the Aave V3 pool to ensure liquidations can happen smoothly. By using this mechanism, Morpho Aave V3 can offer better rates for borrowers and suppliers, while also managing the risk of liquidity constraints. However, suppliers should be aware that there is a tradeoff involved: if the Aave V3 pool reaches its borrow cap, they may not be able to withdraw their peer-to-peer matched funds instantly, and they may have to wait until some liquidity becomes available in the pool.

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