This proposal has been co-drafted by @0xloth, a contributor to Morpho Labs and @Carvas, a contributor to Lido.
Disclaimer: the financial projections provided below are based on certain assumptions, estimates, and forecasts. However, they are inherently uncertain and subject to change. These projections may not be accurate, complete, or reliable, and there is no guarantee that the actual results will match the projections.
Summary
Currently, the wstETH/wETH pool is a prime example of a successful core pool on Balancer, with a TVL of around $100m (2nd biggest pool on Balancer). The native APY of this pool comes mainly from staking rewards, while the other half ($52m) of the pool’s liquidity is not inherently productive.
Building on top of the boosted pool technology to create an improved liquidity venue for ETH on Balancer, productive on both sides, Morpho Labs is deploying a ma3WETH/wstETH composable stable pool.
For this purpose, we would like to propose:
- Adding a gauge for the ma3WETH/wstEH on Balancer
- Making this ma3WETH/wstEH a Balancer “core-pool”
The Lido DAO’s reWARDs committee has budgeted liquidity incentives for the first month to help bootstrap this pool, as was done with the aforementioned wstETH/ETH pool.
References/Useful links:
| Protocols | Morpho | Lido |
| Apps | Morpho’s Aave V3 Optimizer | Lido App
| Docs | Morpho docs | Lido docs
| Blog | Morpho - Medium | https://blog.lido.fi/
| Morpho White Paper | https://whitepaper.morpho.org/ |
| Morpho Yellow Paper | https://yellowpaper.morpho.org/ |
| GitHub | morpho-org · GitHub | Lido · GitHub
Protocol Description:
Morpho is a lending protocol, built on top of Aave & Compound that matches borrowers and lenders’ liquidity peer to peer, improving APY on both sides. TVL is hovering around $752m, and the protocol has been audited more than 20 times by the audit’s majors.
Lido is a liquid staking protocol for Ethereum and other proof-of-stake tokens. It allows users to stake their tokens without needing to run staking infrastructure themselves, all along while remaining liquid and able to use that capital elsewhere in DeFi. Users who stake via Lido receive daily staking rewards simply by holding the stTokens. Lido’s TVL currently sits at $12.7B.
Motivation
BIP 19, introducing the concept of core pools, insisted that “Balancer’s most important metric is protocol revenue”. More generally, **yield is a core variable for the Balancer ecosystem and its attractivity:
- For LPs: LPs get 50% of the pool’s yield alongside trading fees. Yield creates incentives for sticky liquidity.
- For the Balancer DAO: Balancer takes a 50% protocol fee from yield and swap fees, which fuels Balancer’s future growth
- For veBAL holders: They get 65% of the protocol fees via incentives to vote for the pool, part of a “buyback and bribe” mechanism.
As of today, there is only one boosted pool paired with ETH, while boosted pools are the most optimized way to utilize deposited liquidity and, therefore, appeal to the three key stakeholders of the aforementioned ecosystem. Building on top of this technology to create an improved liquidity venue for ETH on Balancer, productive on both sides, Morpho Labs is deploying a ma3WETH/wstETH boosted pool.
Depositing into the ma3WETH/wsETH balancer pool, LPs would benefit from wstETH’s staking rewards alongside maETH’s improved yields (Aave V3 ETH 2.5% rate + 1.1% Peer-to-Peer improvement on average) instead of non-productive plain WETH. Swapping this $52m of plain wETH for working maETH would earn LPs an additional 1.8% APY or $930k in nominal yearly yield, on average.
This higher organic yield also implies smaller liquidity mining incentives need to both bootstrap the pool and maintain its attractivity through recurrent bribing.
Assuming that a ma3WETH/wstETH pool could be as deep as the current wETH/wstETH (which is likely if LPs are rational actors ), we think the Balancer community could be inclined to consider it a core pool. In this event, LIDO incentives would be matched/complemented by incentives to vote.
Finally, the ma3WETH/wstETH basket composition allows LPs to get diversified exposure to their ETH, with the yield coming from both staking rewards (Lido) and peer-to-peer lending revenues (Morpho)
Note: this 1.1% improvement assumes full matching of positions. If not fully matched peer to peer, the remaining liquidity will be deposited into Aave and earn the Aave V3 normal rate.
Technical implementation
A vault based on the ERC4626 standard has been created for this purpose. This vault was audited by Spearbit, a top-tier audit company.
Pool address: 0xC5DC1316AB670a2eeD5716d7F19CeD321191F382
gauge address: 0x8eeB783A4A67f626c6E3952AAeD0D6b104AaC85f
The code can be found here. The vault contract can be found here
Specifications:
-
Governance:
- Morpho’s governance is conducted via forum posts and Snapshot voting. Decentralization is paramount to Morpho and the Morpho Protocol. The Morpho Association has begun a process of “Progressive Decentralization” via the Gnosis Zodiac Roles tool, to transfer control entirely to the Morpho DAO which is made up of $MORPHO token holders.
Morpho decentralization is a 7-step process currently in stage 4 called “Modular Decentralization and Deploy Delay”. Basically, the ownership of core contracts was transferred from the original 5/9 Morpho DAO Multisig to a new ownerless safe, a Delay Modifer module was deployed, and an Invalidator role was given to the 5/9 multisig. - Lido’s governance is conducted via research forum posts and Snapshot voting. Lido is then using Aragon’s DAO framework and scripts. More here.
- Morpho’s governance is conducted via forum posts and Snapshot voting. Decentralization is paramount to Morpho and the Morpho Protocol. The Morpho Association has begun a process of “Progressive Decentralization” via the Gnosis Zodiac Roles tool, to transfer control entirely to the Morpho DAO which is made up of $MORPHO token holders.
-
Oracles:
- Morpho: Morpho’s prices are the same as those used by the lending pools that Morpho plugs into. If the price changes for the lending pool, the exact change happens simultaneously for Morpho.
- stETH price feed specification: the feed is used to fetch stETH/ETH pair price in a safe manner. By “safe” it is meant that the price should be expensive to significantly manipulate in any direction, e.g. using flash loans or sandwich attacks. More here.
The feed interfaces with two contracts:- Curve stETH/ETH pool: source, deployed contract.
- StableSwapStateOracle
-
Audits:
- Morpho
- Morpho is the number 1 out of 300+ projects on DeFi Safety with a 98% mark.
- 20 audits were made on the different Morpho contracts with top-tier auditors like Trail of Bits, Chainsec, Spearbit, etc. Morpho has a recurrent partnership with Spearbit.
- Parts of Morpho’s code were formally verified in Why3 or with Certora’s automatic formal prover.
- Morpho’s logic has been formally described in the Yellow Paper. The Yellow Paper also proves important properties about the improvement of Morpho compared to underlying lending pools.
- Morpho has a large $555,555 Immunefi Bounty for smart contracts and front end.
- Lido: GitHub - lidofinance/audits
- Morpho
-
Centralization vectors:
- No centralization vectors exist in the core protocol beyond the multisigs described above
-
Market History:
- Morpho Protocol has been live for 11 months, crossed the $750m of deposits last month, and keeps growing.
- Lido Finance has been live since December 2020 on mainet and has been expanding to other chains since then. Currently, $13,188,937,860 are staked on Lido.
-
Value:
- The core pool designation is a mutually beneficial venture for:
- LPs: get higher native yield + higher boosted yield
- veBAL holders: receive more incentives to vote for the pool
- Balancer DAO: get an increased amount of protocol fees and a decreased bribing cost/need
- Lido/Morpho: grow their TVL and enjoy an attractive incentivization strategy
- The core pool designation is a mutually beneficial venture for:
Closing thoughts
We believe this pool has great potential to reach a TVL by orders of hundreds of millions, offering LPs an improvement on their organic APY by almost 2%. This yield improvement trickles down to Balancer DAO (through their protocol fee) and veBAL holders.
As the third pool paired with an ETH-boosted pool, this value proposition seems appealing to the core pool offering, potentially unlocking bribes buyback and strengthening the collaboration between Lido, Morpho, Balancer, and Aura communities.
