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Bad Debt

Morpho has different mechanisms for accounting for bad debts.

Morpho Vaults v1.0 - Bad debt realization​

The Morpho Vaults created with the MetaMorpho Factory v1.0 have a mechanism to account for and realize bad debt in the event it arises.

Typically, in other lending pool designs, accrued bad debt remains in the market forever until manual intervention to pay down the bad debt. If small enough, the markets can continue functioning. If it is significant, the market becomes unusable.

Morpho Vaults v1.0 treat bad debt differently. When a liquidation leaves an account with some remaining debt, and without collateral to cover it, the loss is realized and shared proportionally between all lenders.

As bad debt is realized at the time it occurs, a market can be used in perpetuity.

Morpho Vaults v1.1 - No bad debt realization​

The Morpho Vaults created with the MetaMorpho Factory v1.1 have a different mechanism to account for as it does not realize bad debt and behave as other lending pools with accrued debt remaining in the market forever until manual intervention to pay down the bad debt.