Impacts of Aave’s $CRV bad debt on Morpho-Aave

This post covers how the current issues faced by Aave on the $CRV market impact Morpho.

Like any protocol integrated into Aave, Morpho-Aave is exposed to this $CRV bad debt. It means that users supplying $CRV to Morpho-Aave, may not be able to withdraw from this market if the bad debt remains. Note that this account’s bad debt represent 2% of the total supply of this market. A discussion is also open on Aave’s forum to repay this bad debt.

The Morpho Association decided to disable the peer-to-peer matching engine on the $CRV market on Morpho-Aave. This means that the matching engine will no longer try to match users when one enters or leave the market. Indeed, matched users can be laborious to unmatch if the Aave protocol decides to freeze the $CRV market on their platform. Since it is still unclear at the moment what the Aave community is going to decide, the Morpho Association preferred to take a conservative approach: deactivating the matching engine on this market.

The other markets listed on Morpho-Aave (DAI, WETH, USDC, USDT, WBTC, stETH) don’t present the same issues as CRV, so we don’t think that further action is required for the moment on these assets.

The Morpho Labs team has also developed additional security features for the Morpho protocol like granular pausing, asset depreciation and constant time unmatching. Even if changes are minimal, this upgrade is currently under full review by the Spearbit and Pessimistic Security teams. Those features will be helpful to potentially depreciate markets like CRV, if such decisions are taken on the Aave governance.


Thanks for that update and safe play.
I’m wondering what could possibly happen for matched borrowers / lenders on Morpho-Aave CRV in case of a depreciation of its market on AAVE ?
What would be the rate if there is no Aave rate anymore ?
Would the borrowers be forced to payback before a due date to avoid being liquidated ?

Hello @Cyrille ! Simply put, Morpho cannot work without its underlying pool, so if Aave or Compound deprecate a market, the corresponding Morpho market must be shut down too.

1 Like

Thanks Mathis for getting back to me. Yea i know you replicate the underlying conditions. I guess my questions we’re more relevant on Aave’s chan as i didn’t exacly know what would imply freezing of assets. For those interested, i found answers there :

We mentioned two days ago that the peer-to-peer matching engine has been disabled on the CRV market of Morpho-Aave, as a preventive action, knowing the uncertainties about Aave’s next steps and the market instability. As the Aave community is looking to be in favor of Gauntlet’s proposition to freeze 17 markets, including the CRV, we decided to take further measures to prevent any issues on Morpho-Aave.

As a reminder, Aave freezing a market means that the supply and borrow functions are paused. The consequences on Morpho are that it can be impossible to withdraw or repay a peer-to-peer matched position, and thus liquidate the CRV as collateral.

To prevent this, the Morpho Association decided to speed up the upgrade process for a specific function planned (to be released in the following weeks after the audits by Spearbit and Pessimistic) allowing the DAO to move in constant time the liquidity of users from peer-to-peer to the pool on a given market. We also paused the supply and borrow functions on Morpho, to 1- mirror Aave’s behavior and 2- prevent anyone from rematching any liquidity put on the pool.

By doing so, Morpho users can still fully repay or withdraw their liquidity, but they will not be able to supply or borrow on this market. The liquidation process is still be possible in the CRV market, as debt or as collateral.

This state should last at least until the Aave governance decides to unfreeze the CRV market, or take any other decision.