Morpho Blue: A new DeFi bluechip in the making?
What makes Morpho Blue and its MORPHO token unique? Can Morpho Blue challenge the dominance of AAVE and position itself as the next bluechip in money market protocols?
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Introduction
Lending protocols are among the core primitives of DeFi alongside decentralized exchanges. While DEXs have seen significant innovation in recent years, with developments such as Uniswap v3's concentrated liquidity, Trader Joe's liquidity book, Maverick's dynamic distribution AMM, and Uniswap v4's hooks, updates to lending protocols have been less exciting by comparison.
It's not to say that there hasn't been progress. For instance, Compound v3 introduces an upgrade that transforms the cross-asset market into a single borrowing market. In this model, the 'base asset' (USDC) can be borrowed using other assets as collateral. This iteration puts a strong emphasis on simplicity and security.
AAVE v3, on the other hand, introduces 'efficiency mode' (e-mode) that allows for a loan-to-value (LTV) ratio of more than 90% for correlated assets (e.g. stETH & ETH), enabling users to take advantage of it for lucrative leverage looping trades.
At present, Compound and AAVE are the most forked protocols aside from Uniswap, which speaks to the strength and soundness of their designs. However, this raises the question of whether or not this is the final form that lending markets will take. Is it possible that a new model will emerge to challenge their dominance?
Morpho Labs is a project that aims to enhance the efficiency of lending markets and address their shortcomings. Their initial product, Morpho Optimizer, is a peer-to-peer (P2P) matching layer built on top of existing lending pools. It utilizes a matching engine to connect borrowers and lenders, providing a better rate for both parties compared to the interest rates determined by the lending protocols. Earlier this year, Morpho Labs launched Morpho Blue, its own next-generation lending market that seeks to address the design inadequacies in traditional lending markets.
How does Morpho Blue's isolated lending market design differ from others? What is Metamorpho Vault? What is the adaptive curve interest rate model (AdaptiveCurveIRM)? How do non-transferable MORPHO token emissions work? And can Morpho Blue challenge the dominance of AAVE and present itself as the next bluechip in lending? These are the questions we explore in this memo.