Morpho co-founder Merlin Egalite has clarified reports regarding a liquidity shortage affecting certain vaults on the platform. He explained that during periods of market stress, a simultaneous withdrawal of funds by lenders can lead to an increased capital utilization rate. This, in turn, reduces the available liquidity, and in some instances, can result in a temporary absence of withdrawable funds.
Egalite described this situation not as a system failure, but as an inherent and natural mechanism within the lending pools. The protocol's interest rate model is designed to automatically adjust and restore balance when faced with such pressures.
The Morpho Protocol Targets a 90 Percent Capital Utilization Rate for its Vaults
The Morpho Protocol aims for a 90 percent capital utilization rate across its vaults, meaning that approximately 90 percent of deposited funds are typically lent out to borrowers. When market stress pushes this utilization to 100 percent, the system automatically escalates borrowing rates. These rates can become up to four times higher than the standard level.
This significant increase in borrowing costs serves to incentivize borrowers to repay their outstanding loans and simultaneously discourages new borrowing. The resulting inflow of capital from repayments helps to improve liquidity for lenders. Egalite noted that while the market often corrects itself within minutes, periods of greater stress might see a return to equilibrium taking several hours.
The co-founder stressed that these liquidity events are typically localized and manageable. He highlighted that out of the 320 vaults available on the platform, only three or four recently experienced temporary shortages, with the vast majority continuing to operate normally.
Consequently, characterizing the entire protocol as experiencing a liquidity crunch is considered inaccurate. A shortage of available funds does not inherently mean that lenders have incurred losses. Instead, it signifies that a substantial portion of the capital is currently allocated to active loans. The system is designed to allow the market to reprice risk in real-time until stability is re-established.
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