Risk Documentation
By using Morpho Optimizers, you assume the risks associated.
The following section provides an overview of different types of risks you should be aware of when using Morpho Optimizers.
This overview is not exhaustive and may not cover all potential risks to which you might be exposed.
Morpho is committed to transparency and strives to provide users with the best-in-class security practices. Yet, there are still a number of risks associated with the use of Morpho Optimizers that users must be aware of.
Underlying pool risk
Morpho Optimizers are optimization layer built on top of underlying lending protocol. As a user of an optimizer, you are exposed to the risk associated with the underlying protocol, which include:
Smart Contract risk
There is an inherent risk that underlying protocols (Aave or Compound) could contain a smart contract vulnerability or bug. Users should conduct their own review of the smart contracts and security reviews reports to formulate their own risk assessments of these protocols.
Oracle risk
The prices used by Morpho Optimizers mirror those from the lending pools they're connected to. These prices are provided by oracles. 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.
Liquidation risk (for borrowers)
Using Morpho Optimizers subjects you to the same liquidation conditions as the underlying protocol. If your debt value exceeds the collateral requirements specified by the underlying pool, you may face liquidation. When borrowing on Morpho Optimizers, carefully 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 user holding this position has no incentive to repay the debt. Ultimately, this could lead suppliers to have their supply blocked due to an underlying pool filled with bad debt.
The risk parameters chosen by Aave and Compound are intended to prevent this. However, they can't cover all potential pitfalls. Additional measures have been implemented to address this issue, such as Aave's safety module and reserves on Compound's markets. Users can refer to Aave's and Compound's forums to understand how bad debt has been managed in the past.
Liquidity risk (for lenders)
Liquidity refers to the access to supplied assets. A lack of liquidity can block some operations, and in particular prevent suppliers from withdrawing their assets.
Liquidity issues on Aave and Compound are tackled through their interest rate model. When lending on Morpho Optimizers, ensure you understand the interest rate model of the relevant markets to estimate the level of liquidity you can anticipate.
For additional information on risks associated to Aave and Compound, you may refer to the following ressources:
Optimizer layer risk
Smart Contract risk
Morpho Optimizers introduce additional lines of code compared to a standalone lending pool. There is an inherent risk that they could contain a smart contract vulnerability or bug. Several security measures are employed to mitigate this risk:
- Open-sourced code base
- The code has been audited 12 times by leading firms,
- Formal verification has been applied using best in class tools: Certora and Why3,
- An ongoing bug bounty program.
More details about Morpho Optimizers' security and audits can be found in the dedicated section.
Oracles and Liquidation risks
As explained in the Liquidation & Price Oracles section, Morpho replicates onchain the different risk parameters of the underlying lending pool, like the oracles, collateral factors, close factors, etc. As a result, the risks associated with the oracles, as well as the liquidation conditions, are identical to those of the underlying pools.
Liquidity risk (for lenders)
Morpho Optimizers were designed to optimize rates while ensuring seamless access to liquidity, mirroring the experience of the underlying pool. However, there are certain edge cases where liquidity may differ.
If a peer-to-peer matched supplier wishes to withdraw, and there isn't enough supply on the optimizer to re-match the corresponding borrow, the optimizer borrows the remaining unmatched amount from the underlying pool. However, this is only possible if the amount is less than or equal to what is borrowable on the pool. For instance, if the pool's borrow function is paused, or if the borrow cap has been reached, further borrowing would not be feasible, preventing the supplier from withdrawing the desired amount.
Bad debt risk (for lenders)
If a significant amount of bad debt has accumulated at the optimizer level and a withdrawal would render the optimizer position insolvent, such a withdrawal will be blocked.
Systemic risk
Each optimizer maintains a position in its underlying pool representing the supply and borrow volumes of its users that are not matched peer-to-peer. This position carries a liquidation risk that affects all optimizer users.
It is important to note that as long as liquidations of unhealthy users are occurring, this position cannot become unhealthy and is thus not liquidatable (see the proof in the Yellow Paper). Additionally, by design, the volume matched peer-to-peer provides Optimizers with a margin of safety in case of pitfall events. You can find more information and historical data on this issue in the study available here.