Risk Documentation
By using Morpho Blue, you assume the risks associated.
The following section provides an overview of different types of risks you should be aware of when using Morpho Blue.
This overview is not exhaustive and may not cover all potential risks to which you might be exposed.
Morpho is committed to use industry-leading security practices. Yet, there are still a number of risks associated with the use of Morpho Blue that users must be aware of.
Smart contract risk
There is an inherent risk that the protocol could contain a smart contract vulnerability or bug.
Several security measures are employed to mitigate this risk:
- Core contracts are immutable,
- It is a simple and public-sourced code base that avoids complexities,
- The code has been audited by OpenZeppelin and Cantina, in addition to a competitive security review.
- Formal verification has been applied using Certora,
- 2 ongoing bug bounty programs:
More details about Morpho Blue's security and security reviews can be found in the dedicated section.
Oracle risk
Every Morpho Blue market is connected to an oracle, established at market creation. It is important to understand that no oracle is immune to price manipulation, which can lead to liquidations or even bad debt. However, some oracles will be more resistant and resilient than others.
When assessing the reliability of an oracle, consider factors such as safety and liveness, particularly if the oracle is centralized. Also, take into account the settings and processes pertaining to the definition and frequency of price updates.
Counterparty risk
Before entering a market, it's crucial to conduct thorough due diligence on the loan asset and the collateral asset to understand who holds power over them. Factors to consider include centralization, as a centralized governance could blacklist a specific user or even Morpho Blue, resulting in a loss of funds. The distribution of the asset is also important, as a high concentration can cause extreme price fluctuations.
Liquidation risk
Liquidation risk (for borrowers)
Each Morpho Blue market is linked to an immutable Liquidation Loan-to-Value (LLTV). If the Loan-To-Value of your position exceeds this LLTV, you will face liquidation. When borrowing on Morpho Blue, carefully select the market and diligently manage the health of your position.
Bad debt risk (for lenders)
There could be circumstances in which the collateral's value for a position drops below the borrowed amount before liquidators can close the position. In such cases, the borrower holding this position has no incentive to repay the debt. Morpho Blue has a mechanism for accounting for bad debts. This mechanism socializes the losses proportionally among the lenders, resulting in an immediate loss for the lenders.
Liquidity risk (for lenders)
Liquidity refers to the access to supplied assets. A lack of liquidity can prevent suppliers from withdrawing their assets for a certain period of time. Liquidity issues are tackled through the interest rate model. Before providing liquidity, it's essential to understand the market's interest rate model. This understanding will help you estimate the level of liquidity you can expect in that market.