Reduce MORPHO rewards rate on mainnet by 20%, reduce rewards on ETH-denominated assets by 1/3 on both mainnet and Base, reduce rewards on BTC-denominated assets by 1/2 on both mainnet and Base.
Context
Now that the MORPHO token is tradable, it’s possible to observe accurate price data about the DAO’s MORPHO rewards expenditure. The MORPHO DAO is currently allocating about 26.5M MORPHO tokens per year for incentives on mainnet, representing almost $70M dollars per year in emissions at current prices. While they are currently uniform across all assets, not all emissions are equally productive — stablecoins have structurally higher interest rates than ETH, which in turn has higher rates than BTC.
Proposal
This is a proposal to make two changes to the MORPHO rewards rate:
Reduce the r^0 value on mainnet by 20%, from 1.45E-04 to 1.16E-4 MORPHO per dollar per day, bringing the mainnet reward rate in line with Base at current TVL.
Implement a multipliers system where certain assets earn a multiplier (can be a decimal, meaning less) of the base reward rate.
Apply a multiplier of 2/3 to lending and borrowing of ETH-denominated assets, meaning these would earn 2/3 the reward rate earned by stablecoins
Apply a multiplier of 1/2 to lending and borrowing of BTC-denominated assets, meaning these would earn 1/2 the reward rate earned by stablecoins
The proposed multipliers will still allow ETH and BTC lenders on MORPHO to earn a highly competitive rate, while substantially reducing the DAO’s expenditure in combination with the general reduction. Further adjustments can be made in the coming weeks or months once data about the results of this initial change is available, subject to future proposals. In the future, these multipliers can be indexed to market rates to create a dynamic and automated system, but this will take additional time and engineering effort. Given that the total incentives expenditure is quite high at current prices, it is worth pursuing a simple initial solution in the short term.
Next Steps
Pending the result of the Snapshot vote, implement the rate changes specified above and gather data about their results before proposing further reductions.
The incentive system should be optimized for long term sustainable growth and follow the most organic forms of distribution.
As probably Morpho’s largest P&L expense and the fact these incentives are finite Morpho Association needs to carefully balance driving rapid growth and sustainable growth.
I would have preferred to not previously increase the rewards on Base to now decrease rewards on Ethereum which is stickier.
I assume the Morpho Association has done its research though and will not vote no.
Thank you for your feedback on this. My 2¢ – this proposal will bring rates on mainnet and Base into rough alignment at current TVL, inclusive of the results of the recent Base rewards rate increase.
I don’t believe Ethereum mainnet TVL is necessarily stickier – we are seeing a higher level of unique visits to the UI on Base, as well as smaller average deposit sizes there. While we don’t know for certain (since this is the first rates decrease since the token became transferable, there is no data), there is some reason to believe whales are more mercenary than small users and that Base TVL may thus be less rewards-sensitive.
This proposal will provide very useful data points for the comprehensive rewards data model we are working on, which I anticipate will be available in the form of a public dashboard early in the new year.
In the longer term, my personal preference is that MORPHO rewards rates should be indexed to market interest rates on a per-asset basis (likely to a square root of the rate or other similar mechanism, to not be too biased in favor of stablecoins vs ETH deposits)
One update: I’ve been gathering some data and feedback and it appears that we could be more aggressive than a 1/2 multiplier for BTC. Currently the incentivized rate for BTC-denominated asset lenders on Morpho is ~7.1%, while the organic interest rate on Aave is only ~0.03% for wBTC.
Therefore I propose to amend the multiplier on BTC-denominated assets to be 1/6 rather than 1/2. This would result in an incentives yield for BTC assets of ~1.2%, maintaining a sufficient premium above competing markets to encourage growth, while avoiding excessive MORPHO expenditure on assets that have relatively low interest revenue potential.
Strong support for differentiating between different borrowable assets (USD vs ETH vs BTC). In my opinion, it makes sense for the MORPHO rewards offered to be roughly proportional to the typical market equilibrium borrow/supply rates for the asset type. This will help reduce unnecessary expenditures for assets with lower typical borrow/lend usage such as tokenized BTC. Think it would also make sense to have an “everything else” category with a very low multiplier (to avoid cases of low utility altcoins siphoning off rewards).
Otoh, I think benchmarking BTC usage to Aave might not be the best comparison as Aave does not currently list any yield bearing BTC assets that would support a looping strategy (such as pendle PTs or Babylon BTC staking tokens).
While I (@justErik) fully trust the @MorphoAssociation and team to have the data supporting this proposal, I haven’t seen it myself and therefore cannot make a reasonable call on it – hence, I choose to abstain.
The data on smaller average deposits on Base is interesting but I’m not surprised given the Coinbase → Base onramp. Similarly, looking forward to see the data later on ETH and BTC user behaviour should this pass.
Fully agree with you @OneTrueKirk that developing an automated multiplier system should be a priority to align incentives with market conditions and reduce governance overhead.
I think when setting these rates we need to consider our benchmarks more closely. Aave’s rate of 0.03% doesn’t really apply, as that’s not the true yield users of the platform will receive. The advantage Aave has over Morpho is that deposits can be utilized as collateral, meaning that the true yield of BTC on that platform will be 0.03% + [yield generated by borrowed funds]. Deposits into Morpho vaults cannot be used as collateral, so the rate received by lenders needs to compensate for that in order to remain competitive.
Cutting the rate to ~1.2% would of course be well ahead of Aave, and in line with Moonwell, but again, Moonwell deposits can be used as collateral so the “real return” on deposits there can be much higher. I could, for example, use my BTC there to take out an ETH loan at 50% LTV and deposit it into a vault earning say 6% which would essentially add 3% to my BTC deposit RoR (plus/minus market fluctuations) for a total return of (1.2% supply + 3% loan return) 4.2%.
Due to the above, I would suggest that if rates are cut, we do so less aggressively and also ensure that the rates provided remain competitive not simply with the supply rates of other platforms, but with the potential additional returns that their enabling of supply collateral adds.