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Yield Generation

Understanding how yield is generated, accounted for, and distributed is fundamental to curating a successful Morpho Vault. The mechanism for handling yield has evolved from a fully automated onchain system in Vaults v1 to an even more streamlined, adapter-based model in Vaults v2.

Vault Architecture

Yield in Morpho Vaults v1

In Vaults v1, yield generation is a direct and automatic process tied exclusively to Morpho Market v1.

The V1 Yield Flow

  1. Allocation: The vault allocates capital to one or more Morpho Market v1 instances, as directed by the Allocator.
  2. Interest Paid by Borrowers: Borrowers in those markets pay interest on their loans according to the market's specific Interest Rate Model (IRM).
  3. Onchain Accrual: This interest automatically accrues to all lenders in the market, including the Morpho Vault.
  4. Automatic totalAssets Update: When any user interacts with the vault (e.g., deposits or withdraws), the vault contract automatically calculates its total assets by summing up its underlying positions on Morpho Market v1. This process is fully onchain and reflects the real, up-to-the-second value of its holdings.
  5. Share Price Growth: As totalAssets increases from the accrued interest, the value of each vault share appreciates, delivering yield to depositors.

The key takeaway for V1 is that yield is passively received and automatically accounted for. The Curator's job is to select the right markets, not to manage the yield calculation itself.

Yield in Morpho Vaults v2

Vaults v2 are designed to be protocol-agnostic, capable of allocating assets to countless different yield sources. Like V1, the yield calculation remains fully automated through a streamlined adapter-based architecture.

Automatic Asset Reporting via Adapters

Each Adapter in Vaults v2 implements a realAssets() function that reports the current value of all investments it manages. This allows the vault to automatically aggregate yield from diverse sources.

  • Adapter Responsibility: Each adapter is responsible for accurately reporting the current value of its investments through realAssets().
  • Automatic Aggregation: The vault calculates its total assets by summing the realAssets() from all adapters plus any idle assets.
  • Protocol Flexibility: This model allows the vault to account for yield from any source while maintaining automated, onchain accuracy.

The V2 Yield Flow

  1. Allocation: The Allocator deploys capital to various protocols through Adapters (e.g., to Morpho Market v1, Morpho Vault v1, etc.).
  2. Yield Generation: Each underlying position generates yield according to its own protocol's rules.
  3. Real-time Reporting: Each adapter continuously tracks the current value of its investments and reports this via realAssets().
  4. Vault Accrual: When a user interacts with the vault, the vault automatically queries all adapters' realAssets() and updates its totalAssets accordingly.
  5. Share Price Growth: As the real asset values increase from yield generation, the vault's share price increases automatically, delivering yield to depositors.

Adapter Examples

The initial adapter implementations demonstrate this automatic approach:

  • MorphoMarketV1Adapter: Automatically queries Morpho Market v1 to report the current value of supply positions, including any accrued interest.
  • MorphoVaultV1Adapter: Automatically queries the share price of the underlying Morpho Vault v1 to report current asset values.

Interest Rate Controls

While yield tracking is automatic, Curators can set additional controls:

  • maxRate: A curator-controlled parameter that caps how quickly totalAssets can grow, useful for implementing fixed-rate distributions or preventing unrealistic yield spikes.

Practical Implications for Curators

  • V1 Curation: Focus on market selection and capital allocation. Yield accounting is handled by the protocol.
  • V2 Curation: Focus on protocol selection, adapter enablement, and capital allocation. Yield accounting remains automated through adapter reporting, with optional rate controls via maxRate.
  • Simplified Management: Unlike manual rate-setting systems, the adapter-based approach eliminates the risk of mispricing yield while maintaining the flexibility to integrate with any protocol.