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Aggregating then Amplifying Liquidity For Lenders

This part explains one the most powerful features of the Morpho approach: how Morpho Vaults (formerly known as MetaMorpho) aggregate and then amplify withdrawable liquidity to give lenders a better liquidity profile than multi-asset lending pools.

We break down this part into three sections:

  1. Why isolated markets fragment liquidity
  2. How Morpho Vaults reaggregate liquidity to match the liquidity profile of a lending pool
  3. How multiple Morpho Vaults sharing liquidity amplifies withdrawable liquidity beyond what is possible in lending pools

1. Isolated markets fragment liquidity​

One of the main drawbacks of isolated markets is liquidity fragmentation.

For lending protocols, liquidity is the assets available for users to withdraw or borrow from the market immediately. It is defined by:

liquidity=totalsupply∗(1−UtilizationRate)liquidity = total supply*(1-Utilization Rate)

For example, a market with $1000 supply and 90% utilization rate has $100 liquidity.

When $1000 is supplied to a single lending pool versus equally across five isolated markets, the lending pool would have much more liquidity ($100) than individual markets ($20).

Fragmented Liquidity

2. Reaggregating liquidity​

Lending to isolated markets via a Morpho Vault solves liquidity fragmentation. The chart below illustrates how liquidity from each market is aggregated resulting in users having the same liquidity profile as a multi-asset lending pool, despite the underlying markets remaining isolated.

Reaggregated liquidity

3. Shared Liquidity amplifies liquidity beyond lending pools​

Now, the key realization: With Morpho Vaults, the liquidity profile for lenders is even better than a lending pool. This works as liquidity from each vault is is aggregated on Morpho (formerly known as Morpho Blue) and therefore shared by anyone lending to the same markets.

This chart illustrates how liquidity increases when there is a second Morpho Vault.

Shared Liquidity

Let us break it down:

  1. Morpho Vault #2 supplies an additional $500 to market #5.
  2. Total supply on market #5 increases from $200 to $700 ($630 borrowed + $70 liquid)
  3. The liquidity in market #5 increases from $20 to $70

Next, the crucial part:

  1. Liquidity available in Morpho Vault #1 increases 50% from $100 to $150 because Morpho Vault #2 supplied to market #5.
  2. Liquidity available in Morpho Vault #2 is $80 rather than $60 or 33% higher than it would be if Morpho Vault #1 was not supplying on market #5.

This effect is called 'liquidity amplification’, which occurs when multiple vaults share liquidity from the same markets. The benefits of liquidity amplification grow with the number of vaults, leading to greater liquidity, efficiency, and scalability.