The Current State of DeFi Lending

DeFi lending protocols are experiencing a resurgence, with loan volumes increasing nearly 250% year-on-year, from $3.3 billion in Q1 2023 to $11.5 billion in Q1 2024.

At the same time, the demand for including more long-tail assets on the collateral whitelist is increasing. However, adding new assets significantly increases the risk to the asset pool, thereby hindering the lending protocol’s support for more collateral assets.

To manage the additional risk, lending protocols need to adopt risk management tools such as deposit/borrow caps, conservative loan-to-value (LTV) ratios, and high liquidation penalties. Meanwhile, isolated lending pools offer flexibility in asset selection but face issues of liquidity fragmentation and low capital efficiency.

DeFi lending is recovering through innovation, transitioning from purely “permissionless” lending to “modular” lending. “Modular” lending caters to the demand for a broader asset base and allows for customized risk exposure.

The core of modular lending platforms lies in:

The foundational layer handling functionality and logic

The abstraction and aggregation layers ensuring user-friendly access to protocol features without adding complexity

The goal of modular lending platforms is: foundational layer primitives with a modular architecture that emphasize flexibility, adaptability, and encourage end-user-centric product innovation.

In the transition towards modular lending, two major protocols worth noting are Morpho Labs and Euler Finance.

The following will highlight the unique features of these two protocols. We delve into the trade-offs required to surpass DeFi money markets, all the unique features, improvements, and conditions necessary for modular lending.

Morpho

Morpho was initially launched as an improver of lending protocols and has successfully become the third-largest lending platform on Ethereum, with deposits exceeding $1 billion.

Modular Lending Market Solutions：Morpho’s solution for developing modular lending markets consists of two separate products: Morpho Blue and Meta Morpho.

Liquidity Amplification by Morpho

Before Morpho Blue, liquidity fragmentation was a significant drawback of isolated lending markets. However, the Morpho team addressed this challenge through aggregation at two levels: lending pools and vaults.

Re-aggregating Liquidity:By lending to isolated markets through Meta Morpho vaults, liquidity fragmentation can be avoided. The liquidity of each market is aggregated at the vault level, providing users with withdrawal liquidity comparable to multi-asset lending pools while maintaining market independence.

Shared Model Extends Liquidity Beyond Lending Pools

The Meta Morpho vault enhances the liquidity status of lenders, making it superior to a single lending pool. The liquidity of each vault is concentrated on Morpho Blue, allowing anyone lending to the same market to benefit.

The vault significantly enhances the liquidity for lenders. As deposits accumulate on Blue, subsequent users depositing funds into the same market increase the withdrawal funds available to users and their vaults, releasing additional liquidity.

Euler

Euler V1 revolutionized DeFi lending by supporting non-mainstream tokens and providing a permissionless platform. However, Euler V1 was discontinued following a flash loan attack in 2023, which resulted in losses exceeding $195 million.

Euler V2 is a more adaptive and modular lending primitive, which includes:

Euler Vault Kit (EVK): Allows for permissionless deployment and customization of lending vaults.

Ethereum Vault Connector (EVC): Enables vaults to connect and interact, enhancing flexibility and functionality.

Euler V2 is set to launch this year, and there is curiosity about how long it will take to establish a foothold in the competitive DeFi lending market. Below is an overview of the use cases for Euler V2, highlighting the unique DeFi products that can be achieved using its modular architecture.

Comparison of Morpho and Euler

Comparing Morpho and Euler reveals their main differences, stemming from distinct design choices. Both projects have designed mechanisms to achieve similar end goals: lower liquidation penalties, easier reward distribution, and bad debt accounting.

Morpho: Its solutions are limited to isolated lending markets, with a single liquidation mechanism, and are primarily used for lending ERC-20 tokens.Euler V2: Supports multi-asset pool lending, allows for customized liquidation logic, and aims to be the foundational layer for lending all types of fungible and non-fungible tokens.

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1. This article is reproduced from [chaincatcher], with the original title “Delphi: Modular Lending is the Next Stage of the DeFi Market,” authored by [Delphi Digital]. If there are objections to the reproduction, please contact the Gate Learn team, and the team will promptly handle the issue according to relevant procedures.

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