The Morpho-Compound protocol is a lending protocol built on top of Compound. It optimizes both supply and borrowing rates by matching liquidity peer-to-peer.
The assets listed on Morpho-Compound are a subset of those listed on Compound. Currently, USDC, DAI, WETH, WBTC, USDT, UNI, FEI, and COMP are listed. In this proposal, we consider adding AAVE, MKR, and SUSHI.
Reasoning
Demand
In Morpho’s Discord channel, some have raised the need of financing themselves with SUSHI as collateral. Morpho-Compound would provide an optimized way to do this.
We have also noticed that some of the borrowing activity of Morpho-Compound was used to perform votes in DAOs, probably due to the low borrowing rates.
Natural fit
As Morpho is very well suited for the AAVE protocol, the AAVE token integration appears natural.
Morpho’s core values are mostly aligned with Maker’s vision of DeFi. That is why we believe the MKR integration
Low Risk
First, the Morpho Labs team followed some of the advice provided by the Token Integration Checklists of our Trail of Bits audit performed last June.
Then, the team performed our internal fuzzing tests on the Morpho-Compound protocol listing those assets. We could not find any abnormal behavior.
Finally, Compound has been listing AAVE, MKR, and SUSHI for a while without experiencing any significant problems.
Conclusion
Integrating AAVE, MKR, and SUSHI in the Morpho-Compound protocol brings additional utility to the protocol with minimal additional risk.
I’m wondering if it would would make sense to also include $YFI in this batch listing? Yearn being a pioneer of DeFi with a very decentralized organization. I think it resonates deeply with Morpho.
Plus, the spread on Compound between borrowing and lending for YIFY is 599bps as of today. Adding YIFI would bring significant value for Morpho-Compound users.
These seem reasonable to me, but perhaps we should consider a set of criteria to help us guide these decisions. Some questions to get us thinking about relevant criteria:
Does Morpho require that it shares values with the DAOs behind the tokens it lists?
Are there any liquidity requirements on the Compound market for a successful Morpho listing?
Is there a cost associated to adding new Morpho listings?
Is there a consideration of splitting Morpho rewards among too many listings, or any other reason not to add all Compound listings to Morpho?
While I get the opportunity to list SUSHI as collateral for people to finance themselves through Morpho, I still think this is going to be an annoying bet for the DAO.
Like if there’s a maintenance cost for having new assets, then I’d be 100% against adding SUSHI, if there’s none then let’s go ahead.
I followed closely everything that Maker did when they offboarded some collateral assets, and listing old “blue-chip” gov tokens has been more often a burden than an opportunity for them. Don’t know what the Aave team thinks of this, but I guess they may regret some listings.
Same comments for AAVE and MKR even though these are “stronger” tokens
It’s great that maintenance issues are being considered. Adding assets should not significantly increase maintenance, and I believe the Morpho team is well equipped to maintain the protocol even if it did. If Morpho cannot support diverse assets in underlying protocols, I would call that a relatively unambitious project.
IMO, no. The function of the protocol is to facilitate lending and borrowing of assets, not necessarily to take a stance on each asset. Users can use this market to bet against or for assets according to their own values.
Because Morpho utilizes the same liquidity as the underlying pool, I don’t think this is a concern. As long as the underlying protocol’s liquidity is sufficient, so should Morpho’s be sufficient.
Imo it is not necessary. That said, naturally, if the values of a protocol are clearly opposite to Morpho’s long-term goals and vision of DeFi, then the listing of its governance token can be put into question
That is a good question. In the current Age, morpho rewards are proportional to the activity of the asset on the Compound market. Since those assets have low activity, the dilution of other rewards distribution won t be significative.
I think that is an excellent point to notice that offboarding of tokens accepted as collateral is particularly difficult. I get that the activity of those tokens on Compound, especially MKR and SUSHI is low, so the question of the ROI if any maintenance is needed is fair. Yet, as @patrick mentioned, there does not seem to be so much to do. Indeed, the only big thing needed for those exotic assets is the monitoring of the collateral factors but Morpho actually replicates the collateral factor chosen by Compound.
Moreover, Morpho enables new borrowing and lending rates that were not previously possible on Compound, which may unlock new use cases and arbs. Eg. borrowing AAVE at 1% and staking it at 9%.
The spread is indeed very important and it could be interesting to see it optimized by Morpho. Furthermore, it would make sense to list the token with ongoing conversations with the Yearn contributors. My only uncertainty is the security implications of listing this specific token. At first sight, there is nothing disturbing, but let me come back to you on this specific subject.
Hello again. Morpho Labs has been doing advanced fuzzing tests for the YFI token. In particular, what we wanted to check is potential edge case rounding errors with YFI. Indeed, the token price of the latter is very high so a small amount of YFI (e.g. 0.001) is still worth a significant amount of USD. Looks like potential rounding errors are still very far away from being sensible based on our tests. I think the association will push the proposal to list the four tokens shortly.
With recent hacks due to illiquid tokens, the team had decided to slow down on this proposal.
Now that Compound Governance is triggered proposal 131, which aims at pausing tokens that are not so used. Morpho Labs thus decided not to pursue this proposal for the moment.