MIP65 - New scalable rewards model

Summary

This proposal introduces a new framework for distributing MORPHO rewards to Morpho Blue users.

The framework defines a set of trusted vault curators and applies a uniform reward rate for each dollar supplied in a market listed by these curators. It also includes rewarding borrowers using a similar model.

Context

Rewards are a powerful tool for bootstrapping a protocol. In an increasingly competitive lending landscape, attracting liquidity to reach the critical market sizes necessary for organic growth is a top priority.

On Morpho Blue, up until now, MORPHO rewards have been distributed to suppliers on a market-by-market basis, often within a co-incentive framework. Specifically, a certain amount of MORPHO was allocated to a market for a certain period of time, which was then shared among the lenders in that market.

While this approach allows for targeted, market-specific strategies, it also presents several challenges:

  • Scalability: As the number of markets with rewards programs grows, so does the number of operations to perform.
  • Incentive misalignment:
    • Differences in reward rates between markets can distort vault allocation and inhibit use case exploration.
    • Rewards from a market listed in a single vault are fully captured by that vault, regardless of the volume allocated to that market (assuming the volume is not zero).
  • Opinionated: While we emphasize that the allocation of rewards does not imply an endorsement of market risk, the incentives appear to be market specific.

We advocate for a revised method of distributing rewards on Morpho Blue to effectively address these challenges.

Proposed new approach

Systematized Market Eligibility:

The idea is to incentivize the overall growth of Morpho Blue, rather than individual markets, by incentivizing every dollar supplied on the protocol by regular users.

Since market creation is permissionless, we can’t default to including every market. Instead, we propose to use established MetaMorpho vaults as a filter, assuming that markets with potential product market fit and traction will be listed on them.

Specifically, a set of established curators consisting of each curator who meets the criteria to receive a Morpho Olympics grant will be added to this set. Markets listed in vaults managed by curators in this set will receive MORPHO rewards by default.

The DAO reserves the right to withhold rewards from specific markets through a dedicated vote. This includes but is not limited to, cases where rewards on a market are deemed unnecessary for its growth.

Global MORPHO rate:

To encourage organic growth and prevent bias in vault allocation, we propose a uniform MORPHO rate across all eligible markets.

Every dollar of supply in eligible markets, excluding supply from algorithmic market operations, will be rewarded with MORPHO at a uniform rate.

This uniform rate will be determined by the formula:

r_S = \begin{cases} r^0_S &\text{if } S \le S_\text{limit} \\ r^0_S*\frac{S_\text{limit}}{S} &\text{if } S > S_\text{limit} \end{cases}
  • r^0_{S} is the base rate (MORPHO per dollar deposited per day)
  • S denotes the total supply on eligible markets, excluding supply not eligible to rewards

The formula ensures that each new dollar of supply is rewarded at a consistent MORPHO rate, up to a predetermined limit to cap the total daily distribution amount.

output

The values of r_0 and S_{lim} can be adjusted by governance as the protocol expands, and customized for each chain where Morpho Blue is deployed.

We propose to first deploy this system on Morpho Blue on Ethereum, with the following values:

  • r_0 = 1.45E-04 MORPHO per dollar deposited per day
  • S_{lim}=\$500,000,000

Transition from current to new system

Current rewards programs with specific end dates will continue until they expire, then transition to the new reward system. Programs without specific end dates will be discontinued and transitioned directly to the new system.

Rewarding borrowers

Historically, our focus has been on rewarding lenders, with the view that a robust supply side benefits borrowers by increasing liquidity and reducing rates. This strategy has proven effective, but we see value in also incentivizing borrowers directly.

Indeed, rewarding borrowers could address several important issues:

  • Market stability: During growth phases, markets often experience volume fluctuations that lead to rate volatility. Even if average rates are very competitive over time, rate spikes can be a pain point for borrowers that could be offset by rewarding them with some MORPHO. This is also strategic in the case of high competition on some assets with other protocols.
  • Attract Borrowers: Some loan assets have significant supply but struggle to attract borrowers.

We propose to incentivize borrowers in eligible markets through a uniform rate, defined as a fraction of r_S, set at the loan asset level. These values can be adjusted by governance as markets expand and customized for each chain where Morpho Blue is deployed.

We propose to start incentivising borrowers on Ethereum with a reward rate r_B = \frac{r_S}{10} on the following loan assets: WETH, USDC, USDT, PYUSD.

Next steps

After discussions with the community, we will push a vote on Morpho’s Snapshot.

DISCLAIMER: The approval of a governance proposal or distribution of incentives by Morpho DAO does not signify its endorsement of any protocol, vault, market or token. Morpho DAO makes no representations or warranties on any kind with respect to the information, descriptions, protocols, vaults, markets or tokens included in or associated with any governance proposal, including the accuracy, reliability, suitability or completeness of any information contained in any proposal. Your use of such protocols, vaults or tokens is entirely at your own risk. The value of tokens and other digital assets can increase or decrease and there can be a substantial risk that you lose money buying, selling, holding or investing in tokens or other digital assets.

3 Likes

hey, thanks for this proposal.
Applying the same rewards rate to all whitelisted markets is a big upheval of the incentives system!
I’d like to point out that the market-by-market approach has also advantages. Some markets have a high TVL elasticity to APR (meaning that adding one percent of APR produces a high growth rate of TVL). I think the stETH/WETH market falls in this category. Those markets could be prioritized by the incentive system. Other markets have a lower TVL elasticity, e.g. LRT markets where adding (say) 2.5% of APR doesn’t change the overall APR much, which is already very high (e.g. 50%). Those markets could receive less rewards.

Also, could you clarify a point. Does the new system mean that non-whitelisted curators cannot list markets with MORPHO rewards? Or that they can once at least one whitelisted curator has listed the market? Thanks for your answer.

Hey @prevert,

Thank you for your comment.

Your reasoning makes sense, but user elasticity to rewards is very difficult to estimate. There are many factors that influence users’ actions and choice of protocols / markets (rates are only one part of it, so are rewards). if there was a satisfactory automated method to estimate elasticity across different markets, we could consider it. Otherwise we prefer to aim for simplicity.

To answer your question, rewards are still distributed at the market level. Whitelisted curators are just a means of deciding which markets get rewards, but any other vault can list those markets and get the rewards associated with them.

1 Like

On the borrow side, if PYUSD is included as an incentivized loan asset, USDA should also be included. Currently, $11.5M of USDA is being borrowed while only $3.8M of PYUSD is being borrowed.

PYUSD:

Collateral $k # borrowers
WBTC 2,872 7
wstETH 861 8
wbIB01 42 2
Total 3,775 17

USDA:

Collateral $k # borrowers
wstETH 8,218 13
ezETH 1,367 5
PT-weETH-27JUN2024 684 6
rsETH 666 7
PT-USDe-25JUL2024 503 5
re7WETH 109 1
re7USDT 19 1
Total 11,557 38

The vote is live here.

Will this rule also be applied to protocol level supplies, e.g. Spark DAI 1 vault’s markets, which is directly minted by MakerDAO?

It seems like it gives protocols a big advantage over retail suppliers, wondering if that’s considered or where will it be discussed

We propose to deploy this system on Base as well, with the following values:

r0 = 5.45E-04 MORPHO per dollar deposited per day

S_{lim}= $10,000,000

The values of r_0 and S_{lim} can be adjusted by governance as the volume increases.

Hello @antonttc! Indeed Spark DAI vault, as well as other projects/protocol addresses having the capacity to conduct AMOs, are blacklisted from the rewards model.