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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 a more flexible, curator-managed 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. This flexibility makes automatic, onchain aggregation of yield computationally infeasible and complex. To solve this, Vaults V2 introduce the Vault Interest Controller (VIC).

The Vault Interest Controller (VIC)

The VIC is an external smart contract, set by the Curator, that is responsible for telling the vault how much interest to accrue. Instead of calculating yield from its underlying positions, the vault simply queries the VIC.

  • Curator Responsibility: The Curator is responsible for monitoring the vault's actual performance across all its allocations and regularly updating the interest rate via the VIC. The rate set in the VIC should be a fair representation of the vault's earnings.
  • Flexibility: This model allows the vault to account for yield from any source, including those with complex or delayed reward structures (like fixed-term loans or farming rewards). It separates the vault's core accounting logic from the specifics of its investments.

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. Curator Monitoring: The Curator (or an automated system they manage) monitors the performance of these offchain or onchain positions.
  4. Setting the Rate: Based on this performance, the Curator updates the interest rate (interestPerSecond) in the vault's designated VIC.
  5. Vault Accrual: When a user interacts with the vault, the vault calls the VIC, retrieves the interestPerSecond, and updates its totalAssets accordingly.
  6. Share Price Growth: As the curated interest accrues, the vault's share price increases, delivering yield to depositors.

Provided VIC Implementations

While a Curator can design any custom VIC, Morpho provides default implementations to simplify the process:

  • ManualVic: A simple contract where the Allocator can set the interestPerSecond up to a maximum rate defined by the Curator. This is the most flexible option but requires active management.

  • SingleMorphoVaultV1Vic: A specialized, automated VIC designed for a common use case: a Vault V2 that allocates exclusively to a single Morpho Vault V1.

    • How it Works: This VIC is linked to a MorphoVaultV1Adapter. It automatically reads the share price appreciation of the underlying Vault V1 and translates it into an accurate interestPerSecond for the Vault V2.
    • Purpose: It allows a Vault V2 to mimic the automated, onchain yield accrual of a Vault V1, providing a straightforward and accurate representation of yield with no manual rate-setting required. This is the recommended approach for curators looking to create a simple, pass-through vault on top of an existing Vault V1.

Practical Implications for Curators

  • V1 Curation: Focus on market selection and capital allocation. Yield accounting is handled by the protocol.
  • V2 Curation: The focus expands to include performance monitoring and rate setting via the VIC. The Curator is now responsible not just for where the money goes, but also for accurately reporting its performance back to the vault.
  • Risk of Mispricing (V2): A Curator must be diligent. Setting an interest rate in the VIC that is higher than the actual yield generated will cause the vault to leak value to exiting depositors. Conversely, setting it too low will penalize them. Using automated VICs like SingleMorphoVaultV1Vic where possible can mitigate this risk.