Rates on Morpho
How Morpho design impacts interest rates
On traditional lending pools such as Aave or Compound, there is a single pool per loan asset, with an associated Interest Rate Model (IRM) that defines the interest rate for that loan asset. While for these protocols it makes sense to look at a market in isolation and therefore rely on its IRM to give a rate projection, for Morpho it doesn't.
Morpho markets structure
On Morpho, there are many markets for the same loan asset, providing a more efficient and flexible protocol (more about Morpho benefits here), each market having its own IRM. As a consequence, these individual markets will have a smaller relative size than the single pool approach. Hence, a user interaction will have a higher instantaneous impact on the utilization and, as a result, on the rate.
However, focusing on this instantaneous impact would be missing the whole point of Morpho design. Take USDC as an example: the different USDC markets are highly connected. Liquidity in the markets comes from vaults that supply to multiple USDC markets, reaggregating the overall liquidity. These vaults actively move liquidity between the different markets to provide the best rate to their depositors. A rate increase on one market is a yield opportunity that will be quickly seized by vaults moving liquidity into that market, until the rate returns to normal levels, making the rate spike in that market very temporary.
Due to Morpho's multi-market design, temporary rate changes in a single market do not reliably predict future rates in that market.
For this reason, the Morpho interface displays the 1D Average Rate, which provides a more accurate representation of the actual borrow and supply rates users experience.
How it reflects on the Morpho Interface
When a market event (such as borrowing or withdrawal) occurs, it increases the utilization rate, which raises the market's borrow rate. However, curators quickly correct this spike by reallocating assets to the market, thereby decreasing both the utilization rate and interest rate.
In the above example, while the instantaneous rate had a first temporary spikes above 6%, the daily average:
- Didn’t go above 3.38%
- Quickly came back to 2.63%
Showing a borrow rate of 6.27% would be misleading since this spike was quickly eliminated through arbitrage.
For this reason, the Morpho Interface displays the 1D Borrow APY by default, as it more accurately reflects the actual rates users experience.
For information purpose, the instantaneous rate is still visible at market level.