Standardized method for distributing incentives on Morpho Blue markets

Context

Unlike traditional lending pools, Morpho Blue allows projects to take a more targeted approach to incentivizing specific use cases. On Morpho Blue, they can incentivize a specific pair of assets with a strong use case that will help drive further adoption of their token. As a result, we anticipate that many projects will want to distribute incentives on Morpho Blue.

In this post, we outline a standardized method for distributing incentives on Morpho Blue markets. This post is not intended to prompt a snapshot vote. Instead, it serves as a guide for projects and token holders in their discussions about rewards.

Distribution mechanism

Distributing rewards can quickly become operationally challenging, and complexity often leads to errors. Therefore, it’s important to properly frame the use of rewards and to maintain operational efficiency.

To standardize all reward distributions on Morpho Blue, Morpho Labs is developing a general rewards distributor framework to distribute external project incentives and MORPHO rewards. The mechanism is very similar to what was used in Morpho Optimizer and is composed of two parts:

  • An offchain script, computing a Merkle tree defining how much rewards each user earned;
  • A Universal Reward Distributor contract (one for each reward program), initially owned by the Morpho DAO, in which Morpho Operator can update the root (with timelock).

Every time the Merkle root is updated, users can claim their tokens.

In addition, a smart contract could display the incentive emission rate for each market, making it easier for other protocols and applications to query the rates and simplifying Merkle tree construction.

To be included in this mechanism, projects should request that the distribution of incentives be delegated to the Morpho DAO. Inclusion will only take place upon receipt of the fund.

Standard incentives distribution

Three-Month Schedule

Bootstrapping a market takes time. Projects aiming to establish a sustainable market on Blue should keep this in mind. While reward periods on DEXs usually occur over one or two weeks, we believe they should happen from a three-month perspective on Morpho Blue.

Projects should thus commit for a three-month period and send the corresponding incentives upfront.

During these three months, the volume of the market should hopefully grow. To anticipate this, the standard distribution plan is as follows:

  • The total budget allocated by the project as an incentive is linearly distributed over a period of 90 days, defining emission rates ($/day).
  • This continuous evolution of emission rates is discretized by taking the average value over each 30-day period. These discretized values give the effective daily rates that will be applied over the three-month period.

Focused on Lenders

We believe that concentrating incentive distribution towards lenders is appropriate and more aligned to achieve organic growth. Several reasons support this:

  • Attracting supply is the main challenge when launching a lending market because it’s necessary for any borrowing to occur.

  • As the AdaptiveCurveIRM automatically adjusts the interest rate based on utilization, incentivizing lenders will also benefit borrowers:

    1. Incentives are provided on the lender’s side.
    2. This attracts more lenders.
    3. As the lending volume increases, the interest rate decreases.
    4. As a result, borrowers enjoy favorable rates.

    In other words, whatever the side of the market is incentivized, the rates should equilibrate. Yet, for borrowers, lenders should come first, hence the idea of distributing rewards on the lending side.

  • Data suggests that lenders are less responsive to changes in interest rates than borrowers. Therefore, the supply volume attracted by rewards is likely to be more sustainable.

  • Although this is a different context, this approach was used in Morpho Aave V3 - ETH Optimizer, which resulted in over $700 million in supply and over $500 million in borrow in six months.

MORPHO Rewards

Projects can request MORPHO tokens to be included as additional incentives in the relevant market. Upon governance approval, the corresponding MORPHO tokens will be included in the unified mechanism and distributed using the method described above.

Next steps

Projects that wish to be integrated into this setting can use the Forum post template for project to distribute rewards on Morpho Blue

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