MIP: Raise the P2P Cursor on Morpho-Aave V2/V3 Optimizers for the WETH market

Previous Proposal to adjust cursors

Summary

Morpho Labs proposes to raise the peer-to-peer index cursor α on wETH markets for both Morpho’s AaveV2 and AaveV3-ETH Optimizers.

This change will increase the P2P supply from APY and should encourage more wETH supply. In turn, increasing the percentage of borrowers receiving the peer-to-peer APY.
The proposed values for the peer-to-peer index cursors are the following:

Market Current α Proposed α
Morpho-Aave V2 (wETH) 47.4% 80%
Morpho-Aave V3 (wETH) 50.0% 80%

Context

The peer-to-peer rate proposed by the Morpho protocol is defined as r^{P2P}=α×r^B+(1−α)×r^S where r^b and r^s are the underlying pool’s borrow and supply rates. The α coefficient is called the P2P index cursor and represents the percentage of the spread where the peer-to-peer rate sits.

By raising the cursor on a given market, the P2P APY increase. This results in increased supply rates and increased borrowing costs.

Motivation

The demand for borrowing WETH on Morpho’s AaveV2 and AaveV3-ETH Optimizers is far outpacing the supplied liquidity leading to a low percentage of borrowers being matched.

To date, on Morpho-AaveV2’s Optimizer, for the wETH market

  • $188,452,411 have been supplied and matched P2P while $249,032,185 have been borrowed.
  • Thus, $60,579,774 (or 24.32%) is unmatched and waiting for additional wETH supply

To date, on Morpho-AaveV3’s Optimizer, for the wETH market

  • $4,187,133 have been supplied and matched P2P while $25,319,319 have been borrowed.
  • Thus, $21,123,203 (or 83.42%) is unmatched and waiting for additional wETH supply

Increasing the P2P cursor has two valuable properties: it would increase the P2P supply APY, creating additional incentives for wETH suppliers to deposit on Morpho. Also, it would enhance the total matched borrow volume.

If successful, the borrowers in peer-to-peer positions currently would experience a slightly higher borrowing cost but more borrow liquidity will experience Morpho’s improved rates.

Finally, Morpho Labs recently deployed a ma3WETH/wstETH composable stable pool on Balancer. The Lido DAO’s reWARDs committee has budgeted liquidity incentives for the first month to help bootstrap this pool.
Half of the liquidity provided on this pool will be directly deposited into Morpho-Aave V3 wETH’s Optimizer. Increasing the P2P index cursor would significantly increase the organic APY of this pool, making its bootstrapping more competitive overall, and cheaper to incentivize (at target APY constant). Looking at similar pools, this P2P cursor increase could help the pool reach a mature size in the range of $100-300m of TVL.

Here are the expected changes to the P2P APY as a result of the proposed changes:

Market Current P2P APY Expected wETH P2P APY
Morpho-Aave V2 (wETH) 2.66% 3.27%
Morpho-Aave V3 (wETH) 2.66% 3.29%

Methodology & specifications

For both protocols, the function setP2PIndexCursor will be triggered with the correct parameter through the ProxyAdmin after a delay of 24 hours.

Next steps

After a discussion with the community, Morpho Labs will push a proposal on Morpho’s Snapshot.

4 Likes

Hello,

I’m glad to see that Morpho has more than one trick up its sleeve to encourage liquidity where needed, incentives in $MORPHO (for the time being), but also the peer-to-peer index cursor.

The documentation states that the peer-to-peer index cursor can be modified by governance.
Are there any long-term plans for this factor to be dynamically and automatically updated according to the lending/borrowing ratio?

It is also worth pointing out that even if the cost of borrowing increases, it remains slightly more attractive than that of the underlying protocol, in this case AAVE.

I support this proposal, which will also have a positive impact on the creation of the Balancer pool.

1 Like

Hello,
For allready matched borrowers this is a very bad situation as it will increase borrowing cost by 0.61% (from 2.66% to 3.27%) which would not be far from AAVE-v2 borrowing cost at 3.68%.

While I aknowledge the need for the most people benefitting from morpho matching engine, I think a more beneficial parameter could be set.

Could we have a more balanced increase in the α ? Something like α = 0.65 instead of the 0.8 proposed ?

1 Like

Hey @remilm
Thanks for your valuable feedback as a borrower and for bringing up suggestions.
Rather than setting up a precise metric (like 80%), we could give optionality to voters in the way they want to incentivize the wETH supply side while balancing the effect on the borrowing side. I propose to add the following options to the Snapshot:

  • Don’t change anything
  • Increase the P2P cursor to 60%
  • Increase the P2P cursor to 70%
  • Increase the P2P cursor to 80%

Happy to hear your and the community thought about this

4 Likes

Here is the live vote by the way:
https://snapshot.org/#/morpho.eth/proposal/0xb9640ef8b0e6b98ee93a7a43f2ce9b394a3cf8ca9a8053037315c8074f0eb66d
Cheers

1 Like

The transaction has been executed: Ethereum Transaction Hash (Txhash) Details | Etherscan

1 Like