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Risk Documentation

By using Morpho Vaults, you assume the risks associated.

The following section aims to provide you with an overview of various types of risks that should be considered when engaging with Morpho Vaults.

This overview is not exhaustive and may not cover all potential risks to which you might be exposed.

Morpho is committed to use industry-leading security practices. Yet, there are still a number of risks associated with the use of Morpho Vaults that users must be aware of.

Morpho risks​

Morpho Vaults are built on Morpho. Therefore, using Morpho Vaults comes with the risks associated with using Morpho. Find more info on them in the dedicated section.

Smart Contracts risks​

There is an inherent risk that the Morpho Vaults smart contracts could contain a vulnerability or bug. Several security measures are employed to mitigate this risk:

More details about Morpho Vaults’ security and security reviews can be found in the dedicated section.

Vaults risks​

Key roles within a Morpho Vault wield significant power, impacting user interests:

  • The Owner has the ability to set performance fees, appoint curators and allocators, and adjust various other settings. Morpho Vaults impose a timelock on actions that may affect users' interests.
  • The Curator can enable/disable markets. A timelock allows users to react to changes initiated by the curator.
  • The Allocators determine markets supply/withdrawal order, influencing returns and liquidity for suppliers.
  • The Guardian has the ability to revoke timelocked actions, providing an additional layer of protection for users.

When investing in a Morpho Vault, it is important to conduct thorough due diligence on the vault's settings and its allocation strategy, as well as to stay up to date with its changes.

Vaults as collateral​

In this section, we outline security considerations and recommendations for listing 4626 vaults as collateral on Morpho.

Liquid & flashloanable 4626 assets with share price decrease​

ERC4626 vaults with the following properties can incur a loss of funds.

  • Most of the shares of the vault can be flash loaned.
  • Most of the vault is liquid.
  • The vault's share price can decrease notably and instantly.

This is not specific to Morpho but a general statement for all ERC4626 vaults. Since assets deposited on Morpho Blue can always be flash loaned, it is important to keep in mind.

The loss is bounded by

totalLoss≤δ11−min⁡(AWA,SLS)totalLoss \le \delta\frac{1}{1-\min(\frac{A_W}{A}, \frac{S_L}{S})}

where:

  • δ\delta is the loss on the vault (that creates the share price decrease)
  • AWA\frac{A_W}{A} is the "liquid portion of the vault"
  • SLS\frac{S_L}{S} is the "loanable portion of the vault"

Recommendations for Morpho Vaults used as collateral​

For Morpho Vaults with bad debt realization, the share price can decrease in the event of a bad debt realization in one of the listed markets. If the vault is highly liquid, the supply queue has a specific order, and most of the shares can be flashloaned, then the liquidator of the market could trigger an amplified loss of funds. Since using vaults as collateral increases the proportion of the vault that can be flashloaned, it could favor this amplification. Although very unlikely, it is thus not recommended using those vaults as collateral. If one wanted to go that path, we recommend to track the risk of losses, the amount of shares that can be flashloaned and the liquidity of the vaults.

For Morpho vaults without bad debt realization, the share price of the vault can't decrease, and the above-described scenario can't happen. That said, the vault users won't have bad debt realized in their vault. You can checkout the implementation of this vault here.

Credit to 100proof on helping the Morpho team providing those security guidelines to vault curators.