We introduced the Ages and Epochs system for the $MORPHO distribution three months ago.
This mechanism, described in the documentation is a convenient approach to token distribution. Every three months, the community decides on a new distribution mechanism corresponding to the current needs of the protocol. Such periods are called Ages.
On the 20th of September, Age 1 will end, leaving the discussion open to decide on a new mechanism for Age 2. In this post, Morpho Labs proposes a model.
Proposal
Observations and limitations of Age 1
Age 1 of MORPHO distribution was a success. 0.5% of MORPHO’s total supply was distributed, starting the decentralization of the protocol and helping bootstrap $160M of liquidity supplied through Morpho and 100M borrowed.
Epoch 2 was the most efficient distribution as the distribution of 1,350,000 additional MORPHO helped bootstrap $100M of supply. On the contrary, Epoch 3 was the less efficient, with 1,250,000 additional MORPHO, generating only $30M of additional supply.
Age 1 rules distributed tokens between borrowers and suppliers according to the p2pIndexCursor (i.e. the position of the P2P APY within the pool’s rate spread). This choice has shown irrelevant because the P2P APY was set in the middle by default. In total, borrowers are equally incentivized as lenders. Yet, even if Morpho has much more borrowers than an average lending protocol, there are more lenders than borrowers on most markets. This model hence creates an unjustified imbalance. Indeed, the borrow incentives are currently much higher than the supply ones.
The position of the P2P APY to optimize efficiency is a very complex problem. Morpho Labs is working on this topic with other companies.
Age 1 did not take the Morpho-Aave protocol into account. Since Morpho-AAVE is still early, it may be more reasonable to slowly increase the MORPHO distribution on this protocol to equilibrate with Morpho-Compound. Yet, Morpho-Compound has been around for longer so even at the end of Age 2 we feel like it should have slightly more rewards than Morpho-Aave to compensate for native adoption that occurred on the latter.
Age 2 proposition
For Age 2, we propose doubling the MORPHO tokens allocation compared to Age 1, thus distributing 1% in total! The 10,000,000 MORPHO would be distributed according to the following repartition:
AGE 2
Epoch 1
Epoch 2
Epoch 3
Dates
20/09/22 - 24/10/2022
24/10/22 - 27/11/22
27/11/22 - 29/12/22
$MORPHO
3,000,000
3,400,000
3,600,000
Compound - AAVE Repartition
90% - 10%
70% - 30%
60% - 40%
This allocation will be distributed with the following weights: The lenders (reap. borrowers) of a market in Morpho-Pool receive a share of the amount of MORPHO distributed, which is proportional to the supply (resp. borrow) volume of the corresponding market on Pool.
N.B.: If some new assets are listed along the way, they will benefit from the rewards at the following epoch only.
N.B.: With FEI market depreciation, it would obviously not be included in the emission.
Next Step
Let’s debate on Age 2 model. Maybe the community will have other interesting ideas or remarks on Age 1 before the vote is actually proposed.
I think Compound - AAVE rewards split should be 50/50. The aave market is arguably more important for morpho: given the larger borrowed amount, wider borrow/lend spreads, longer list of assets. Yes in the beginning this will incentivize yield farmers into aave because we don’t have as large organic traction in that market yet, but getting the ball rolling with yield farming so that the p2p markets have someone to match with could be beneficial in my opinion.
@Vindicat3@mattklein thank you for your answers. I personally feel the same about Morpho-Aave being potentially more important to Morpho-Compound in the long run. Yet Morpho-Compound has more and more native integrations since it has been live for a longer time. Rewarding too much Aave too soon could frustrate those early integrators. Once both markets are bootstrapped, Age 3 could consist in balancing Morpho-Aave and Morpho-Compound according to the market size of their pool.
That said, if arbitragers are able to rebalance between Aave and Compound, it would not impact so much those users. Here is what the new repartition could look like, taking into account your thoughts:
Thanks for the context Paul. Generally agree with the sentiment that Aave seems long term the more important market due to the fact that it has both higher TVL and even larger spreads than on Compound. The P2P matching provided by Morpho is better for every market on Aave as there are also no rewards, which is not the case on Compound.
I do have a couple follow up questions:
Do we know the reason Epoch 3 in Age 1 was less efficient in generating more supply? Is the conclusion here that it is better to save more rewards for earlier Epochs, or are there other confounding variables?
You mention that you are worried about a larger share of Aave rewards frustrating Morpho - Compound integrators. Are you worried that they move somewhere else? I wonder if their frustration is outweighed by incentivizing a newer and ultimately bigger market in Morpho - Aave.
Thank you for your contribution and your questions @patmayr.
On the first point, we think that the fundraising announcement that was a few days before the start of the epoch 2 helped a lot to bootstrap liquidity, so this explains at least part of the “success” of the epoch 2. Apart from that, we don’t really know to be honest. Maybe a combination of the fact that later periods would generally be less effective, and market conditions. Also, the result might not be the same on Morpho-Aave, because all the markets there have non-inverted spread right now.
On the second point, we would not say that they would move to an other protocol, because protocol integrations are quite long processes. They might just slow down or stop Morpho’s integration. Knowing that, we think that we should show a minimum of consistency in the distribution of rewards.
Thank you.