Learn · DeFi
Morpho vaults: allocation, yield and risk
A lending vault gathers deposits of the same token and puts them into selected lending markets. Borrowers pay interest, which can grow the pool. Unpaid debts and fees can reduce what you own; borrowed tokens may be unavailable when you want to withdraw.
Fictional browser simulation. No wallet, live rates or real asset movement. Start with vault shares and receipts if shares are new. This lab simplifies allocation economics; it does not reproduce Morpho V1 or V2 transaction rules.
One deposit, several lending exposures
Your shares are receipts for a fraction of the pool. The same number of receipts can buy back fewer tokens after a loss. Someone sets which lending markets the vault may use and how much may go into each: that role is the curator. Someone moves assets within those limits: the allocator. Neither role guarantees your deposit or a return.
Borrowers pay interest on the amount borrowed. Unused assets can reduce earnings while preserving cash for withdrawals. More demand can increase income, but also leave less cash available. A cap limits how much can be newly allocated to an exposure; it does not insure that exposure.
1. Deposit assets
Receive a proportional share claim.
2. Allocate within limits
Idle cash plus selected lending positions.
3. Earn or lose value
Redeem only when sufficient liquidity is available.
Can a larger return make it harder to withdraw?
First advance one month with the starting allocation. Then select liquidity stress and advance again: the allocation stays the same, but more tokens are borrowed. Finally select collateral loss and repeat. Watch the amount you own and the cash you can actually withdraw. Extra allocation settings are optional.
Where did the deposited tokens go?
Illustrative · computed hereIn the starting example, a group deposits 10,000 tokens. The vault keeps 1,000 aside and places 9,000 in three lending markets. Borrowers pay the interest. Predict: if more of those tokens are borrowed, will there be more or less cash available to withdraw?
Deposited
10,000 tokens
Depositors hold shares, their receipts for a fraction of the pool.
Initially with borrowers
5,400.00 tokens
Interest comes from borrowing. These tokens are not ready cash in the vault.
Cash available
4,600.00 tokens
Idle tokens plus surviving unborrowed principal. Other withdrawals compete for this cash.
Choose a situation, predict the outcome, then advance one month.
Optional: change allocations, limits and rates
Requested allocations and caps are percentages of starting capital. Excess above a cap stays idle. These controls rebuild the starting portfolio; they do not move already borrowed funds.
A · ETH collateral
Allocated 4,000.00 · fictional borrow APR 4%
B · BTC collateral
Allocated 3,000.00 · fictional borrow APR 8%
C · staked ETH collateral
Allocated 2,000.00 · fictional borrow APR 12%
Idle cash: 1,000.00 tokens
See the calculation
Interest = allocation × demand × borrow APR ÷ 12. Idle funds earn zero. Rates stay fixed for this month; real rates vary. A loss is applied once to C’s whole principal, including its unborrowed portion. The illustrative fee applies only if total interest exceeds loss.
| Interest earned | 0.00 |
|---|---|
| Principal lost | 0.00 |
| Gross assets after loss, before fee | 10,000.00 |
| Fee value | 0.00 |
| Net depositor claim | 10,000.00 |
| Available to withdraw now | 4,600.00 |
| Hold the same tokens outside vault | 10,000.00 |
Rates are fixed for one fictional month; real rates vary. Loss affects all of market C’s principal, including its unborrowed part. A fee is charged only on a positive net gain.
Immediate liquidity counts idle plus surviving unborrowed principal after loss, conservatively excluding accrued interest. This is a snapshot, not a reserved withdrawal amount. Other withdrawals compete for it. The cash alternative earns zero nominal yield here and retains the token’s price and issuer risks; gas and incentives are omitted.
Optional: how Morpho V1 and V2 differ
Legacy Morpho Vault V1 allocates directly to variable-rate markets using market supply caps and supply/withdraw queues. Morpho Vault V2 uses adapters that connect to yield sources and report their assets. Its caps can apply to shared risk identifiers, such as collateral or oracle exposure, with absolute and relative limits.
This three-market lab teaches allocation economics, not either version’s full transaction rules. V2 has additional roles and liquidity controls; actual withdrawal paths depend on the vault configuration. Caps constrain allocation operations: interest or withdrawals elsewhere can subsequently leave an exposure above a cap.
Sources: Morpho Vault V2, liquidity curation and V1 market management.
Three labels do not mean three independent risks
ETH and staked ETH can fall together. Markets may share an oracle, contract or liquidation dependency. Curator mistakes, adapter failures, token depegs and bad debt can affect several positions at once. Allocating across markets changes exposure; it does not make a vault universally safe.
Explain it back
A different vault reports a gain while most borrowers have not repaid. A friend says the gain means everyone can withdraw immediately. Explain what is missing. Who paid the return, what could reduce the original deposit, and what could delay getting out?
Compare your explanation
Borrowers pay interest, but a lending claim is not ready cash. Defaults can reduce the original deposit; shared collateral or contract failures can affect several markets. Withdrawals need available tokens, so even a profitable vault may not have enough for everyone at once.