I’m a Morpho maximalist. As a farmer, I sleep easy with their simple smart contract design that intentionally minimizes smart contract risks. I’m also a fan of Reserve, and have been using the Reserve Protocol for a while now.
As a yield farmer, I would sleep so much better at night if the only assets my rTokens held and lent out in were in Morpho. I like farming stables. It would be incredible to collaborate on creating a Morpho Dollar, basically an rToken that only accepts Morpho Vault tokens as collateral.
Currently, many rTokens supply funds into Compound and Aave, which means that the governance of the funds and risk management is outsourced to an external venue. The other risk I don’t like is these venues can just upgrade the code and make changes to the core lending market logic. I have become increasingly concerned with keeping funds in Aave as some rTokens deposit funds there, especially with their addition of borrowable / suppliable assets like GHO and tETH. The reason the listing of these assets seems problematic to me is they are both created by Aave, which would likely allow overriding of proper due diligence due to conflicts of interest since they are the creators of these assets.
By creating a Morpho Dollar (Morpho only deposit venue), the contracts cannot be upgraded as Morpho contracts are immutable. Then this asset can be enabled as collateral within Morpho so that users can get leverage on their yield bearing dollars. The rToken basket would be composed of these Morpho Vault Deposits. As an rToken holder, I would sleep so much better at night if assets in the underlying basket were USDC lent out across a few different MetaMorpho vaults that were closely watched after.
I know this is a lot of information, so I’m curious to hear the community’s feedback around how people would feel about a Morpho only USDC based rToken. I believe the native yield the basket could create could be around 9% solely lending against pristine collateral such as cbBTC, wstETH without any added incentives.
100% this, when people think of indexes they think of broad exposure and a means to capture a markets overall performance but there is just as much as a case for narrow indexes allowing for targeted exposure to specific narratives or protocol yield. I’ve actually been thinking on the same idea, a DTF indexed to Morpho and discussed the idea with the Reserve team earlier in the month.
My idea was to use Reserve’s Index Protocol rails to create to DTFs indexing the top 10 USD and ETH vaults on Morpho. Allocations to each vault would be weighted by the vaults deposits, rebalanced monthly. $MORPHO would be used as the governance token explicitly linking the DTF with the Morpho ecosystem and providing additional $MORPHO token utility. Indexing to the top 10 vaults and weighting by size feels appropriate as while we are offering broad exposure to Morpho markets most will be lent against pristine collateral. The top 10 vaults also allows for significant scaling as deposits are distributed across multiple vaults and markets reducing yield dilution and provides holders with a yield very close to the protocols average.
Morpho’s curated vault set-up is perfect for this product and I see two holder bases forming the first is someone like you, an active DeFi participant with a certain risk and yield profile that has a preference of using Morpho exclusively for their yield farming activities and and someone who is less DeFi savvy but still wants market rate DeFi yield from a leading lending market, I imagine these will enter through a third-party app… Morpho is a perfect fit here seen as though they have announced a few of these lately; Gemini Wallet and BitPanda recently and have a close partnership with Coinbase. Pushing the Morpho indexes via third party integrations is also a great way to support the entire ecosystem of curators rather than king making a select few.
Regarding the technical lift, the Morpho wrapper live on the Reserve app is a V1 plug-in which could be used easily for any V1 vaults but needs updating for V2 vaults. I’ve spoke with the Eng team about this and is a significant lift which will need a fresh audit and back-testing before going live, from conversations I’ve had this is likely going to be pushed live late Q3 / early Q4 but things may change. There was some concern in the most recent GovOps that if we built this on the Index Protocol we would need LP positions for each of the Morpho Vault tokens first but this isn’t the case. We’d instead need to add Morpho vault deposit and withdrawals into the protocol’s DTF zapper, a technical lift but a smaller one than updating the plug-in to V2 modifying it slightly for each of the 10 vaults in the index.
I’ve done some work on what a morphoUSD and morphoETH index would look like and the yields you could expect, all data taken from the Morpho UI today. Link to sheet here. Let me now what you think…
