You can deposit crypto asset in a Morpho Vault on the Morpho interface or by using an app from the Morpho ecosystem.
A Vault V1 is a product allowing suppliers to deposit one loan asset in order to get a passive yield.
The vault is actively curated by a curator, allocating liquidity into underlying Morpho markets where borrowers borrow the loan asset, paying interests on there loan and generating a a yield for suppliers.
Vault V1 APY
A Morpho Vault APY (what suppliers earn) is not fixed and may fluctuate over time based on market conditions. The Net APY can be broken down into:
The Native APY, from interest paid by borrowers. It will depend on the utilization rate of the underlying Morpho markets (supply and demand).
The additional rewards APR, any rewards provided by the Morpho governance or third parties to a Market or a Vault for a limited period of time.
Choosing a Vault V1
The choice of a Vault depends on the user’s risk profile and priorities. There’s several criteria to assess which Vault is right for you:
Who is the curator? What’s their track record and expertise ?
What risks is the Vault exposed to? Assess the markets it allocates to as some may be seen as riskier than other (collateral exposure, LLTV, Oracle, etc.).
The curator’s performance fee.
Current and historical Net APY (interest generated and rewards).
Vault V1 Liquidity
When you deposit asset on a Morpho vault, this assets do not stay idle and are actively allocated into underlying Morpho markets where they are meant to be borrowed.
When markets come under stress, people tend to de-risk, meaning many lenders try to withdraw all their funds at once, resulting in higher utilization and less liquidity, or in extreme circumstances, no short-term available liquidity.
This isn't a bug. It's how lending pools naturally function under stress.
To restore balance, the interest rate model automatically raises borrowing rates. The higher rates encourage borrowers to repay and/or attract new suppliers to deposit, bringing utilization back down and increasing available liquidity over time. For Morpho specifically, the target utilization is 90%, meaning that most of the time, 90% of deposited funds are borrowed. When it spikes to 100% (all funds are borrowed), the rate increases by 4x. The market rate then usually shortly returns to equilibrium (around 90% utilization).
Vault V1 risks
Along with general risks associated with Morpho, using Earn has specific risks including:
Bad debt risk: There is a risk that a position’s collateral value falls below the borrowed amount before it can be liquidated leading to bad debt. In such cases, the bad debt is shares the losses proportionally among the lenders.
Liquidity risk: There is a risk that all liquidity is borrowed. In this case, you might not be able to withdraw your assets right away. Instead, you will have to wait until new liquidity is available.
Vault risk: Key roles within a Morpho Vault wield significant power, impacting user interests. When investing in a Morpho Vault, it is important to conduct thorough due diligence on the vault’s settings and its allocation strategy, as well as to stay up to date with its changes.
Read more about the risks here.
You can read more about vaults v1 in the documentation here.