Morpho PYTs: risk-adjusted P2P interest rates
Introducing the new DAI, USDC, and USDT Perpetual Yield Tranches based on Morpho-Aave
A few days ago, we released the first Perpetual Yield Tranches based on Morpho-Aave, on DAI, USDC, and USDT. These strategies enable users to take advantage of the improved rates of Morpho’s peer-to-peer layer built on top of Aave, while benefiting from the resilient risk-segmentation of Perpetual Yield Tranches.
Equip DeFi with Risk Segmentation
Perpetual Yield Tranches are a new DeFi primitive that allows segmenting the risk on any DeFi yield source. Investors often want different kinds of risk exposure and yield on the same asset class. In the traditional finance world, one way to achieve this is by using structured finance products and introducing a tiered investment structure, or in other words, different tranches. This means that investors can invest in the same asset through different classes of shares with different risk/return profiles.
Perpetual Yield Tranches bring these features to DeFi yield sources while maintaining the non-custodial, flexible, and composable nature of DeFi.
The Senior class usually has a rather stable but lower return than the Junior class. In exchange, the Junior class usually has higher, but also more variable returns, as it protects the senior class from losses (e.g. from defaulted assets). This is coupled with a powerful Adaptive Yield Split mechanism, which allows to dynamically direct the underlying yield across Senior and Junior classes in order to incentivize Junior coverage, when needed, or ensure a minimum yield to the Senior class.
In addition, USDC and USDT Junior Tranches based on Morpho-Aave have also been added as yield sources to the new Junior Best Yield vaults: from now on, risk-on users who want to maximize their returns through a set-and-forget product can deposit into these vaults and take advantage of the typical automation processes of Best Yield, while enjoying the boosted returns of Morpho and Euler-staking Junior Tranches.
The twist behind Morpho
The main lending and borrowing protocols in DeFi such as Aave and Compound implement pool-to-peer models: LPs provide liquidity in a pool, and the borrowers can use it, paying a borrowing fee in return. In a liquidity pool, yields are socialized, meaning numerous lenders have to share the interest paid by a limited number of borrowers.
The main advantage of this mechanism is that users are able to withdraw or borrow funds at any time. But to make this possible, the utilization rate in the pool must be low enough to meet withdrawal and borrowing demands. This requirement creates a high spread between lending and borrowing rates, resulting in poor capital efficiency: suppliers earn less, while borrowers pay more to make up for low utilization.
Instead, when liquidity is matched peer-to-peer, the capital utilization rate is 100%, resulting in a better rate for both borrowers and liquidity providers. At the same time, the downside of this model is that it doesn’t allow users to borrow or withdraw their funds whenever they want.
Morpho solves this problem by introducing a peer-to-peer layer built on top of lending pools such as Aave and Compound, thus combining the efficiency of P2P with the liquidity of lending pools.
The supplied liquidity dynamically and seamlessly matches peer-to-peer as borrowers come and go. When lenders and borrowers are matched, rewards are no longer socialized.
Morpho can freely choose the P2P rate, but it must remain within the spread of the underlying protocol’s pool to be profitable for both parties:
When either a borrower or lender is unable to be matched via the P2P mechanism, Morpho will apply the so-called fallback mechanism: it falls back onto the underlying pool (Aave or Compound), by depositing/borrowing the user’s funds in the pool’s smart contract.
Under this configuration, in case there is a match, users will benefit from an improved rate (i.e., the P2P APY), whilst in the worst-case scenario, the APY will be the same offered by the underlying pool.
To sum up, Morpho preserves the same liquidity, liquidation guarantees, and risk parameters associated with the underlying protocols (Aave and Compound), while improving rates.
What’s next
The launch of DAI, USDC, and USDT Perpetual Yield Tranches based on Morpho-Aave marks the beginning of an exciting collaboration.
In the near future, we expect Perpetual Yield Tranches based on Morpho to expand towards new assets, with more and more Junior and Senior Best Yield vaults adding them as yield sources, unlocking new opportunities for our users to maximize their yields.
About Morpho
Morpho is a lending pool optimizer which improves the capital efficiency of positions on lending pools by seamlessly matching users peer-to-peer.
Morpho improves rates while preserving the same experience, the same liquidity, and the same parameters (collateral factors, oracles, …) as the underlying pool, providing boosted P2P rates or, in the worst-case scenario, the APY of the underlying pool.
About Idle
Idle DAO is a decentralized organization that builds yield automation infrastructure for DeFi. From brand new DeFi protocols to institutional and DAO treasury managers, businesses of every size use our protocol to optimize capital efficiency and manage their treasuries with DeFi.
We believe everyone deserves the best for their idle funds in terms of returns and risks. Over the past three years, Idle has rolled out the features and services, defining and shaping the yield automation space. To learn more about our products and services:
