Dan Elitzer

Earlier today, a user attempted to buy AAVE using $50M USDT through the Aave interface. Given the unusually large size of the single order, the Aave interface, like most trading interfaces, warned the user about extraordinary slippage and required confirmation via a checkbox. The user confirmed the warning on their mobile device and proceeded with the swap, accepting the high slippage, which ultimately resulted in receiving only 324 AAVE in return. The transaction could not be moved forward without the user explicitly accepting the risk through the confirmation checkbox. The CoW Swap routers functioned as intended, and the integration followed standard industry practices. However, while the user was able to proceed with the swap, the final outcome was clearly far from optimal. Events like this do occur in DeFi, but the scale of this transaction was significantly larger than what is typically seen in the space. We sympathize with the user and will try to make a contact with the user and we will return $600K in fees collected from the transaction. The key takeaway is that while DeFi should remain open and permissionless, allowing users to perform transactions freely, there are additional guardrails the industry can build to better protect users. Our team will be investigating ways to improve these safeguards going forward.

As we continue to iterate on USDAI underwriting requirements, something we’ve implemented recently is the requirement for a “debt service reserve account” which is basically some cash held on hand by the borrowers reserved to make cover debt payments if needed. Obviously, this adds more protection to staker capital and is marginal credit enhancement, though not particularly new or novel. What is novel, however, is that the borrowers can hold this reserve account in an onchain smart contract, in our native stablecoin USDai and earn an interest rate reduction on their loan for doing so. This simultaneously lowers the interest rate for borrowers AND increases it for stakers. Because every dollar of USDai that’s minted earns 4.5% to stakers. So while the face rate paid by borrower drops by 50bps, the face rate earned by stakers actually INCREASES by 25bps. You earn more yield and take less risk at the same time. The marriage of lending and payments together is a truly unstoppable flywheel and the real innovation of USDAI. The use of USDai in a reserve account is a very small first step towards this unified vision, but a step forward nonetheless.

As we approach the official release of Morpho’s fixed rate markets protocol it’s becoming clear that it should not be seen as an iteration of the existing Morpho variable rate markets (today known as Markets V1). It is a completely new paradigm that’s unlike anything DeFi has seen before. Fixed rate markets are an extension of Morpho's offering, not a replacement. Variable rate markets remain a foundational part of DeFi for the few years to come. The two will complement one another. For that reason, we’re drop the versioning naming we've been using up until now, and the protocols will no longer be named Markets V1 and Markets V2. We’re changing: Markets V1 → Morpho “Blue” (as it was originally) Markets V2 → Morpho “[TBA]” Blue introduced permissionless open-term variable rate markets, with externalized risk management. [TBA] will introduce fixed term, fixed rate, intent lending, with externalized risk and rate management. A completely different structure for pricing and matching that will take Morpho from $10B to $100B+. As a side note: Morpho Vaults retain versioning because Vaults V2 is a direct improvement designed to supersede Vaults V1, exactly what versioning is meant to signal. It has been an incredibly hard 2 years of building [TBA], but we are very excited to share more information about Morpho fixed-rate markets soon.

We just crossed $1B in total volume!