Risks
Overview of key risks and mitigation strategies for the csUSDL vault, ensuring user security and confidence.
1. Liquidation Risk
Primary concern in lending protocols is liquidation failure, which occurs if a borrower’s collateral value drops too rapidly for timely liquidation, leading to losses.
A standard 14% haircut is applied to collateral value as a safety margin. Losses occur if the collateral price declines more than 14% before liquidation.
2. Oracle Risk
Reliable price feeds are essential for loan approvals, liquidation triggers, and collateral valuation.
Inaccurate oracle data can cause wrongful liquidations, misvalued collateral, or over-borrowing.
Mitigation Strategy
Morpho utilizes Chainlink oracles for trusted price information. For the regulated USDL stablecoin, price manipulation risk is mitigated by hardcoding its value to €1, supported by arbitrage activity and sufficient liquidity.
3. Liquidity Risk
Liquidity risk is the challenge of redeeming assets from lending protocols.
Morpho typically allocates around 90% of deposits to lending, retaining 10% for withdrawal needs.
High simultaneous withdrawal requests can push the utilization ratio to 100%, triggering a steep increase in the borrow rate (4x the rate at 90% utilization), incentivizing borrowers to repay.
Mitigation Strategy
Steakhouse vaults avoid markets with low borrow rates that could exacerbate liquidity risk (e.g., only allocate when yields are above 2.5%). Additionally, users can tap into secondary liquidity markets like Curve and Uniswap to seamlessly exchange csUSDL for USDC. This secondary market support enhances liquidity access and facilitates efficient transactions.
4. Smart Contract and Configuration Risk
Potential risks include bugs and misconfigurations in smart contracts.
Mitigation Strategy
Extensive Audits: 27 audits conducted by 12 top security firms, covering Morpho Optimizers, Front-ends, Vaults, and core infrastructure.
High Safety Rating: Morpho scored 98% on DeFiSafety, the highest among 300+ protocols.
Proven Security Record: No smart contract exploits to date.
Bug Bounty Programs: $1.5 million in rewards for vulnerability identification.
Immutable Contracts: Deployed contracts are immutable, reducing configuration risk over time.
Thorough Oversight: Rigorous checks and peer reviews for all vaults and market deployments by Steakhouse.
Detailed Security Framework: Comprehensive Morpho Security Framework is publicly documented.
Conclusion
These comprehensive measures ensure that the csUSDL vault remains secure, transparent, and optimized for risk management, providing confidence to both individual and institutional investors.
For more information of the risks involved with using Morpho and Morpho Vaults, please refer to the Morpho Risk Documentation (1) (2).
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