Dion Chu

Liquidations are essential for keeping lending markets safe. Since launch, Aave has processed over $3.3B in liquidations to protect the protocol against bad debt. We've published a blog post introducing V4's new liquidation engine and how it improves on V3's approach.

Common questions on looping - 1/ Why would you lend stables at lower yield (5%) to someone that loops a yield bearing token with higher yield (7%)? 2/ Why not just straight up buy the 7% yielding token? (after all 7% is bigger than 5%) 3/ Why not loop it yourself 5x and make 15%? (at 80% LTV) -- The simplest analogy(!) that answer these questions is junior v senior capital - essentially, in case of loss, loopers are liquidated first to try to make lenders whole. Broadly, both parties have exposure to the credit risk of the yield token, however the loopers (borrowers) are the ones to get liquidated first. Assume the yield token starts having problems and losing value (say the issuer reports an impairment of 10%) and the price immediately reflects that. If redemptions are satisfied and liquidators can repay 1 yield token for 90% of original dollar value (so basically a 10% loss), then lenders can still be made whole. So in reality, loopers take the first loss and both of them start suffering if impairment is bigger than Liquidation LTV buffer (1-LLTV). -- So, you should leverage loop, buy and hold or just lend depending on your assumptions of loss and yield spread. (broad strokes, utilization rates, slippage, liq bonuses, etc have to be taken into account)

A vault is comparable to an onchain fund, and just like traditional funds, some will perform well and others won't, but this is what we must accept and mitigate if we want to build a truly open and decentralized system. The fact that only 1 out of ~320 vaults on the Morpho App had limited exposure to xUSD isn't evidence that the model doesn't work — quite the opposite. Morpho's isolated market + vault model meant all 319+ other vaults and their depositors, each with different risk profiles, had zero exposure. Many assume losses equal system failure. However, in open financial systems, losses are a natural consequence of risk-taking, even when systems operate exactly as designed. As an industry, we should not fall for the fallacy that yield is risk-free. Instead, we should focus on better surfacing and educating about risks — ourselves included. For DeFi to be the backend of finance and scale to trillions in lending volume, lending infrastructure must remain separate from risk management. We firmly believe that this open and permissionless approach is the right one, and how DeFi was intended to work.

Saying two isolated Morpho markets aren’t isolated just because they share a user (a vault, an aggregator, a lender…) is one of the most disingenuous — and frankly desperate — arguments I’ve seen. By that logic, Morpho, Compound, and Aave wouldn’t be isolated either. Come on.

DeFi doesn't repeat TradFi, but it rhymes. Black Rock valued collateral "at par" even though it had been losing actual value for years. Now they're valueing that collateral as worthless. This is like hard coding a strategy vault 1:1 with the dollar as it's depegging / losing NAV.

Introducing Plasma One: the one app for your money.