Decentralized lending project Morpho Labs has released a whitepaper for a new lending protocol, Morpho Blue. The new crypto lending protocol is meant to increase efficiency and reduce gas cost for users.
Morpho was originally launched as a layer on top of other lending protocols to match borrowers and lenders in a peer-to-peer manner and at lower rate. Morpho Blue will now be an improvement on it for better service delivery.
The most notable thing about the new protocol is that it eliminates the need for DAO participants to determine how assets are handled, and introduces a simpler alternative based on “permission-less risk management”.
“DAOs are also not best suited for operational scaling and they can often become a bottleneck as the protocol grows,” the white paper notes. “What we will present is in line with the vision that DeFi should be organized into layers around trustless and open protocols like the Internet.”
Morpho Blue isolates markets through autonomously operated individual vaults without the need for manual intervention by the DAO to adjust risk parameters.
This new method enables lenders to provide capital to borrowers at higher levels while maintaining lower overall risk compared to multi-asset pools since they only have to worry about the risk of one asset.
MorphoLabs claims that this approach reduces gas consumption by 60% compared to conventional protocols that use DAOs.
Addressing Fragmented Assets
Morpho Blue also seeks to address the issue of fragmented assets. Most DAOs that lending protocols use are highly fragmented and highly inefficient. Morpho Blue seeks to fix this by by allowing for additional layers to enhance the core functionality of the base layer.
“Morpho Blue externalizes risk management by making it a separate layer of the stack with unlimited permutations, versus the one-size-fits-all approach we see from today’s lending services,” Frambot said in an email to The Block.
“Therefore, institutional players can integrate it into their own risk and compliance management systems. On their end, crypto risk managers could even rebuild the classic lending pool abstractions such as Aave, Compound, Spark, or Flux, but on top of a common trustless, efficient, and flexible primitive,” he added.
The decision is based on feedback from several institutional users who said they wouldn’t want to enter the decentralized finance (DeFi) space via the DAO model, adding that it is “clear they don’t want their funds to be managed on their behalf and have specific compliance requirements.”
Morpho Blue is more attractive to such players in this regard as it externalizes risk management and allows institutions to integrate it into their own risk and compliance management systems.
The Rise of Crypto Lending
The DeFi industry came like a whirlwind in 2020 and has since made a big impression on crypto as a whole. Top among its services is crypto lending, which makes it possible for borrowers to use their crypto assets as collateral to access fiat loans.
The lending industry has grown rapidly since then, as investors hardly wish to part with their crypto holdings, and will rather stake them as collateral to borrow fiat. However, the use of DAOs has been a limitation.
With Morpho Blue, more institutional players will be more willing to come into the lending space, further facilitating the growth of the industry.