Impact of Compound borrow caps on Morpho

This post covers how the proposal 135 of Compound impacts Morpho-Compound, and the adaptations that we, the Morpho association, had to make to the protocol.


On Nov 23, Gauntlet proposed a risk parameter update for Compound II on Compound’s forum, introducing borrow caps on all markets that did not have one, and reducing them on markets where it was already in place (except ETH). This parameter of the Compound protocol puts a limit on the total debt that can be incurred globally in a market, preventing any new borrow when it is reached. The proposal 135, setting borrow caps notably on the WBTC, and reducing the borrow cap of COMP and UNI, has passed, and has been executed on Nov 30.

Morpho Labs commented on the choice of Gauntlet, in the replies to their forum post.

Implications for Morpho and measures taken

Morpho’s peer-to-peer mechanism is notably built on of the symmetry between the “borrowable liquidity” and the “withdrawable liquidity”. Indeed, in case of a withdraw, Morpho may want to demote some borrowers, to put them back to the pool, and needs to borrow from the Compound pool. Then, if borrowing from the pool is not possible, it means that withdrawing a peer-to-peer matched credit line can be impossible, notably in the context of a liquidation. In effect, it means that borrow caps pose an issue to the whole peer-to-peer mechanism of Morpho.

Therefore, we deactivated the peer-to-peer matching engine for the UNI and WBTC market. Note that the peer-to-peer matching was already deactivated for COMP and WETH for the same reason. This means that the matching engine will not try to create new peer-to-peer credit lines, but rather put every new supply or borrow on these markets on Compound.