morpho

Thinking about the possibility of first loss capital staking on @morpho. Would allow curators to cater to multiple tiers of risk preference in the same vault. An implementation of this would be an interesting subject for a grant

Father, garden appreciator, Protocol Specialist @morpho

Idea for how it could work :

Create a “peg stability module” where vault shares could be used to mint or redeem a deposit receipt at a fixed exchange rate. Holders of the deposit receipt stake-lock for a bonus share of fees. Vault users can opt in to the insurance pool by minting the deposit receipt. New mints allowed only if no bad debt has been realized (vault share exchange rate has not been modified since insurance pool has been created). If vault takes bad debt, users who opted into insurance and aren’t staked-locked can redeem in the insurance pool.

Doing it in between the blue pool and the vault is interesting, that could allow for vaults to share the insurance liquidity which is a nice feature, and maybe even for one vault to insure another 🤔

Another idea:

You could front the Blue market with a tranching contract. Senior shares sacrifice some of their yield to the junior shares for taking the first loss. Given morpho socializes losses on bad debt liquidation, I think you could enforce the value of the shares on deposit/withdrawal

Admittedly I am a veToken skeptic. My concerns with that kind of model:

1. Potential abuses by whales. See for example the Humpy attack on Balancer. A large veToken holder can do something like make two bogus tokens that they own the whole supply of, then vote incentives toward this pool, growing their own share of the protocol at the expense of honest voters who try to encourage growth. 

2. Difficulty in pricing rewards streams. Since any token will have a volatile price, it can be hard to know how much is the right amount to emit to a given pool, or for LPs, how much they can expect to earn over time. For example on Aerodrome today, it’s common for pools to receive incentives greater than the swap fees

One response after being properly Velodrome-Aerodrome pilled:

What if all interest fees were captured by Morpho, and lenders only received Morpho? Morpho would use ve gauges to vote on lending term to receive rewards. If you vote on the loan terms, *you're* the first lost capital. Voters receive the earned interest.

Generates use case for Morpho beyond dilution in "bonus" yield, links first loss capital, Morpho captures fees.