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Features and Changes

New features:​

  1. Efficiency Mode:
    Aave V3 introduced efficiency mode (E-mode), a new feature designed to maximize capital efficiency when collateral and borrowed assets are correlated in price.
    In E-mode, assets correlated in price can be grouped into E-mode categories. For example, DAI, USDC, and USDT are all Stablecoins pegged to USD and would be one E-mode category.
    Each category can have risk parameters’ (LTV (Loan to value), Liquidation threshold, Liquidation bonus) configured independently, allowing users to have higher collateralization and enhanced borrowing power when borrowing assets within a category. When in a specific E-Mode, you can only borrow assets in that category.
    Currently, ETH E-mode is the only category available. It includes WETH and wstETH with the following risk parameters:

    • Max LTV 90.00%
    • Liquidation Threshold 93.00%
    • Liquidation Penalty 1.00%

    Under this configuration, risk-seeking users can get up to 10x leverage!

    A new instance of Morpho can be deployed on any E-mode category to improve capital efficiency further.

  2. Account Management:
    Morpho AaveV3 Optimizer introduces “Account Management” at the contract level. Users gain the ability to approve a so-called manager in a gasless way that will be able to borrow/withdraw on behalf of the delegator. Let’s look at some potential use cases.

    On Ethereum, you can only call one contract at a time. So to perform multiple actions such as supply and borrow means calling the contract numerous times, and may come with high gas costs.

    One solution is bulker contracts: a contract that can call protocol any number of times on your behalf. As a user, you only need to call the bulker once. For this to be possible, the bulker contract needs permission to act on your behalf. This is where the account management features come in. It allows Morpho users to sign a gasless transaction, approving the bulker contract to act on behalf of the user’s wallet and enabling batching multiple actions into a single transaction. Note this is not available on day one but will likely be added soon.

    Smart wallet-enabled platforms should also find these features particularly useful. Previously users could not import positions from an Externally Owned Account (EOA) wallet to Instadapp smart contract wallet because it could not act on behalf of the EOA. Having the option to enable “act on behalf” functions makes it possible for a single-click import of all your positions on an EOA into a smart contract wallet.

    The complete list of account manager functions available to different types of users (covered in the next section) is shown in the graphic below:

  3. Gasless token approvals:
    Utilizing the Permit2 contract, Morpho users can benefit from gasless approvals for any wallet that has already been approved on Uniswap.

    Before Permit2, users had to submit separate transactions approving every new token on every new protocol. Batching approvals was impossible, leading to users being stuck on max approvals and unnecessarily high gas costs when interacting with DeFi.

    Now, you no longer have to execute multiple transactions when you connect to a new app. After approving Permit2, any app can request approval through a signature, allowing you to do multiple actions (like approve & swap) in a single transaction.

    You may think this sacrifices security, but it’s not the case. For every new application using Permit2, you’ll have to sign a gasless transaction permitting the protocol. In this way, your assets are only shared with explicit approval.

  4. New & Improved Matching Engine:
    Morpho AaveV3 Optimizer will feature a fairer matching engine. One that is not biased towards large borrowers and suppliers. Previously used data structures — doubly linked lists (DLL) and the heap — were replaced with logarithmic buckets.

    Logarithmic buckets are a set of 256 queues, which store accounts for whom the amounts have the same logarithm. In this way, the matching engine has a high chance of matching everything in one iteration by looking at the bucket just above the one that corresponds to the amount to match.

    Imagine the following scenario with the Heap or the DLL. One user first supplies 100 ETH, and ten more supply 10 ETH each. Then ten borrowers arrive, all borrowing 10 ETH. They will get matched with the first supplier (100 ETH) because they have the largest supplied volume. If another borrower wants to borrow 100 ETH, he will loop through all the ten remaining suppliers on the pool, possibly only matching a few because of the gas limit.

    Original Matching Engine: Using doubly linked lists

    Now the scenario with logarithmic buckets. When the ten borrowers come to Morpho to borrow 10 ETH each, they will get matched with the ten users supplying 10 ETH each as these buckets sort users according to size. Then, the user borrowing 100 ETH with be matched with the person supplying 100 ETH.

    New & Improved Matching Engine: Using logarithmic buckets

    As you can see from the example above, using logarithmic buckets allows the matching engine to pair users with similar volumes to the protocol, leading to:

    • reduced gas costs;
    • better fairness; and
    • increased efficiency.

    With this change to data structures, more users will be able to enjoy Morpho’s peer-to-peer rate!

Mechanism Changes​

The new supply and borrow caps instated by Aave V3 would severely constrain liquidity under Morpho’s current design. Morpho AaveV3 Optimizer includes a new mechanism to split supply to mitigate the risk associated with such constraints.

In Morpho AaveV3 Optimizer there will be two types of suppliers: suppliers and collateral providers.

Suppliers, who aren’t borrowing against their assets, can be matched peer-to-peer and enjoy improved rates. For collateral providers, their assets are deposited directly into the pool to ensure liquidations can occur regardless of any borrow or supply caps. Therefore, borrowers can’t receive the peer-to-peer rate for supplied collateral, but they can for borrowed assets. So for borrowers using Morpho instead of Aave, it’s still a pure improvement!

It’s important to note that, unlike Morpho AaveV2 Optimizer, when using Morpho AaveV3 Optimizer as a supplier, you are accepting a liquidity tradeoff: if the borrow cap is reached on Aave V3 there is a possibility, although highly unlikely, that you might not be able to withdraw your peer-to-peer matched funds instantly.

When the liquidity of a given asset is completely matched peer-to-peer, Morpho would not have any deposits in the underlying pool. When a supplier exits a peer-to-peer position, Morpho would normally borrow from the underlying pool to fulfill the withdrawal. However, if the borrow cap is reached on the pool, withdrawals may be delayed. The withdrawal would become available when any borrow is repaid to the underlying pool or if a peer-to-peer borrower on Morpho repays their debt. This is a rare scenario and is not expected to happen often.