Morpho Optimizer's Proxy Scheme

The Morpho Optimizer protocol acts as a proxy between the user and the underlying lending pool, such as Aave and Compound. Once suppliers provide an asset to Morpho, the protocol will put it into the lending pool and stack the received interest-bearing token (ibToken).

Bob deposits ETH into Morpho (1). Morpho deposits those ETH into the underlying pool (e.g. Compound) (2) Morpho gets the interest-bearing token from the underlying pool (e.g. cToken) (3).

Then, imagine a borrower comes to Morpho. The protocol will use the stacked ibToken of the supplier to pull liquidity out of the pool and directly transfer it to the borrower. At this point, we say that a match has occurred, and users are matched peer-to-peer.

Alice deposits collateral into Morpho (4), triggering Morpho's Matching Engine. Morpho takes the interest-bearing ETH of the supplier (5), swaps it for ETH (6), and gives it to the borrower (7), who is now matched P2P with the supplier.

From this moment on, utilization is 100%, which results in a Pareto-improving APY for both the supplier and the lender.

One may ask how Morpho preserves loans' liquidity if the borrower hasn't repaid his loan yet, but the supplier wants to withdraw his funds immediately.

The Morpho protocol takes a loan from the underlying liquidity pool thanks to the borrower's collateral, refunds the supplier that wants to exit, and reconnects the borrower directly with the liquidity pool.