Bad Debt Realization

Morpho has 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 treats 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.