Introduction

Morpho introduced “aggregated” lending architecture, the specific design elements discussed in greater depth in our prior report, that enables permissionless market creation and modular vault curation, while also shifting risk management away from slow-moving DAO consensus and instead towards vault curators with pertinent expertise. Thanks to pioneering the curator model, risk curators have moved swiftly in adopting Morpho Vaults and several existing, as well as newly introduced, lending protocols have begun shifting focus towards this approach. Looking ahead, product integrations, such as Coinbase’s launch of Bitcoin-backed loans via Morpho on Base, will be key for the continued growth of the protocol. Later on, we will highlight current integrations, measure their relative success, and make the case as to why other onchain and/or crypto-based businesses might consider building products via the Morpho Stack. First, let’s provide an update on Morpho’s adoption and growth within the DeFi lending ecosystem.

The Growth of Morpho

Growth of total deposits for Morpho has been incredibly strong over the past year, with an inflection point in late November to early December of last year which coincided with similar upticks in cryptoasset prices and onchain activity. These deposits also appear to be relatively sticky as onchain activity and prices have dropped considerably over the past two months, but total deposits remain near their highs of $5 billion. Recall that Algorithmic Market Operations (AMOs) are typically used by stablecoins like DAI or FRAX to manage stability. In this case, growth of AMO deposits largely trailed off in mid-2024, correlated heavily with DAI deposits and SparkDAO’s DAI vaults.

Additionally, while Aave remains the largest lending protocol on Ethereum mainnet, Morpho has been able to claw its way into the leading position in terms of TVL including borrows on Base, and also leads by net assets (excluding borrows). We view the integrations with Moonwell and, more recently, Coinbase as positive catalysts fueling Morpho’s growth on Base.

sUSDE PTs and USD0++ have become the largest markets on Morpho due to their predictable, bond-like behavior and attractive yields. sUSDE PTs trade essentially like zero coupon bonds with fixed maturity dates, offering returns that consistently outperform standard USDC lending rates. This predictability, combined with their relatively low volatility, has made them extremely popular for "looping" strategies where investors borrow against their positions to increase exposure. sUSDE PTs offer superior liquidity at maturity and more reliable redemption terms, meanwhile USD0++ is effectively a bond that receives USUAL token emissions. An additional point in Morpho’s favor is that permissionless vault curation has allowed for quick listings of new and attractive instruments (sUSDE PTs in this case), allowing it to capture market share relative to competitors like Aave. In contrast, Aave’s governance process for listings can lead to significant wait times in incorporating desirable assets - onboarding Pendle PT tokens to Aave V3 has spent months in deliberation and analysis on the forums and yet these tokens remain unlisted today. Ultimately, these characteristics explain why these two assets dominate Morpho's lending markets, attracting investors seeking optimized yield with manageable risk profiles.

On the other hand, the rise of the cbBTC/USDC market on Base is reflective of positive growth due in large part to Coinbase’s Bitcoin lending integration and the related growth of cbBTC liquidity on Base.

Morpho vaults have also experienced strong growth and a competitive vault marketplace served by popular risk curators has emerged. The value of vault growth can be visualized via the growth of cumulative vault performance fees. For mainnet vaults, there was an uptick in vault fees following the surge of deposit growth in late 2024. Unsurprisingly, USDC vaults have seen the greatest absolute demand as many holders often seek risk-adjusted yields on stablecoins. Note, this excludes Spark’s DAI vault, the largest vault by deposits, as it is operated as part of the Spark Liquidity Layer which allocates liquidity across various platforms in order to supply yield for the Sky Savings Rate. We should also note that performance fees remain highly varied across vaults. For example, MEV Capital’s Usual Boosted USDC and Gauntlet’s USDC Core vaults currently take 10%, while the Steakhouse USDC vault is set at 0%, and the Smokehouse USDC vault at 5%. We expect these rates to continue evolving in a competitive landscape where curators may at times drop their performance fees to incentivize deposit growth or build customer confidence, while at other times increasing rates to boost revenues while relying on brand strength and reputation to maintain overall deposit levels. 

On Base, top vaults by fees are dominated by Gauntlet’s stablecoin vaults as well as Moonwell’s vaults. We highlighted Moonwell’s integration of Morpho Vaults in our prior report, and since then Moonwell has also created a cbBTC vault in addition to their existing USDC, EURC, and ETH vaults. It is also worth noting that again the largest vault by deposits on Base is SparkDAOs USDC Vault which is also part of the Spark Liquidity Layer.

Case Study: Coinbase Integration

We’ve commented briefly on this above, but a major milestone for the broader adoption of Morpho can be seen in Coinbase’s use of the protocol to build a Bitcoin lending product into their platform. As a reminder, we covered this integration and its potential implications in a prior flashnote. Here we will review the specifics, analyze key data related to the integration, and consider how and why this model may be replicated by other firms like Coinbase in the future.

Back in January, Coinbase launched a crypto-backed loan service that allows customers to borrow USDC using their Bitcoin as collateral. When users take out a loan, their Bitcoin is automatically converted to Coinbase Wrapped Bitcoin (cbBTC) and deposited into Morpho on Base. Users can currently borrow up to $100,000 USDC, with variable interest rates determined by market conditions on Morpho's lending pool. The borrowed USDC can be converted to USD at a 1:1 ratio without fees. The service is currently available through the Coinbase mobile app's Cash tab. There's no fixed repayment schedule, though loans may face liquidation if they reach certain thresholds relative to collateral value. This service is part of Coinbase's broader initiative to provide onchain financial services and integrate with the wider cryptoeconomy.

As part of this integration, Coinbase made use of several pieces of infrastructure for a smooth and simple UX. At the heart of this is the Coinbase Smart Wallet which when created is simply connected to a given Coinbase user’s account and can be used to access onchain protocols. Additionally, the use of passkeys for private key management and transaction signing remove complexity from the user onboarding experience. Finally, Paymaster enables gas fees to be paid in any token, cbBTC for example, while MagicSpend allows for funds to be spent directly from a connected Coinbase account even if no assets are available in the user’s onchain wallet. With these pieces in place, a user that is only holding Bitcoin in their Coinbase account can easily borrow USDC via the Morpho integration as the onchain wallet, transfer of funds, gas fees, and related complexities are all handled seamlessly under the hood. 

As discussed, this integration wraps Coinbase customer Bitcoin holdings into cbBTC on Base, deposits them into the cbBTC/USDC Morpho market, and then borrows USDC against the cbBTC collateral. Since the integration went live in January, there has been step function growth in USDC borrows alongside consistent USDC supply growth to the cbBTC/USDC market - with supply growth largely attributable to Spark, Moonwell, and Gauntlet’s USDC vaults with 150 million in combined USDC supply between them. 

Direct analysis of Coinbase Smart Wallet usage of Morpho on Base shows consistent, linear growth in collateral and borrows since the Morpho integration went live, with over $44 million in total borrows against $88 million in user collateral today. Part of this growth trajectory may be explained by a gradual rollout process being conducted by Coinbase as this product was not made available to all customers from day 1.

Currently, there are roughly 95 wallets borrowing at the Coinbase-specified maximum limit of $100k USDC, and the total number of users utilizing the service is over 2400 to date. Thus, fewer than the top 5% of users are contributing to nearly 25% of total borrows.

Further, if we examine LTV, we find that the average LTV of all users is 0.51, or nearly $1 in Bitcoin collateral for every $0.51 in USDC borrowed. At the top end however, LTV trends higher as the top 50 users have an average LTV of 0.59, while all other users have an average LTV of 0.51. At the top of this distribution, there are also many wallets currently borrowing the maximum amount of USDC, but at below the average LTV (as low as 0.19) indicating that borrow activity could experience further growth if Coinbase were to raise the per user USDC borrow cap.

The Case for the DeFi Mullet

Coinbase's integration with Morpho demonstrates a compelling blueprint for cryptocurrency exchanges and fintechs to unlock significant value from dormant assets. By enabling Bitcoin holders to borrow against their holdings through wrapped tokens (cbBTC), Coinbase can effectively monetize their massive customer asset pool (2.26 million BTC units) while driving adoption of their Layer 2 solution, Base. With $2.4 billion in cbBTC already circulating, this strategy creates multiple revenue streams without introducing substantial risk. Note that wrapped products by themselves are generally not profitable businesses. Wrapped Bitcoin, for example, only makes money on creation and redemption which does not drive meaningful recurring revenue relative to TVL. However, facilitating the growth of a native DeFi ecosystem via wrapped products can lead to additional indirect revenue streams.

Other exchanges are also uniquely positioned to replicate this model. The approach leverages existing custody infrastructure to create wrapped tokens that seamlessly integrate with DeFi protocols like Morpho. This allows exchanges to offer customers attractive borrowing options while increasing stablecoin circulation, driving liquidity to their preferred ecosystems, and generating transaction fees. For exchanges with native or preferred blockchains or stablecoins, these benefits multiply as the integration drives adoption across their entire product suite. We see this strategy of expanding the adoption of Base via utilization of onchain assets reflected in the evolution of Coinbase’s onchain assets over time.

The downstream effects extend beyond immediate revenue. As more assets flow into DeFi through these integrations, the entire ecosystem benefits from increased liquidity, more efficient pricing, and greater utility. Exchanges that fail to implement similar offerings risk competitive disadvantage as customers may increasingly expect seamless access to DeFi services without dealing with the complexities of onchain interactions, which in Coinbase’s case have been abstracted via their smart wallet, passkeys, Paymaster, and MagicSpend, among other developments. By bridging CeFi and DeFi through Morpho-like integrations, exchanges can satisfy both traditional and crypto-native customers while establishing new growth vectors in an increasingly competitive market.

Other exchanges with similar dynamics such as Kraken with its recently launched Ink chain, or Binance and its Binance Smart Chain (along with various Binance-wrapped assets: BTCB, BETH, BNSOL, etc.) could adopt the same approach in growing their onchain ecosystems in this manner. Outside of pure crypto exchanges, broader fintech platforms such as Robinhood may consider a similar approach in providing seamless DeFi access to their existing crypto users. Zooming out, the easing regulatory climate in the U.S. could also lead to an eventual convergence of onchain and offchain lending as discussions of traditional banks being enabled to custody crypto have also come into the spotlight as of late. 

Becoming Core DeFi Infrastructure

Morpho is strategically positioning itself as a fundamental DeFi primitive through its aggressive multichain expansion across Polygon POS, Arbitrum, Optimism, Scroll, Ink, World Chain, and Fraxtal. This infrastructure-first approach allows Morpho to establish its technology stack across multiple ecosystems before fully integrating with front-end applications or implementing token incentives. By deploying its complete smart contract suite across these chains, Morpho is creating the groundwork for an extensive network of lending and borrowing services that can be customized and branded by third-party developers - ultimately aiming to repeat Moonwell's successful model which peaked at over $200M TVL in Morpho Vaults on Base.

Base’s OnchainKit Earn component represents a significant acceleration in Morpho's adoption strategy as well, particularly in the Base ecosystem. By simplifying the integration of Morpho Vaults to a matter of minutes rather than weeks, the barrier to entry for developers looking to incorporate yield-generating capabilities into their applications has been drastically reduced. This plug-and-play approach enables even developers with limited blockchain experience to offer sophisticated financial services, potentially expanding Morpho's reach beyond traditional DeFi applications into more mainstream financial products. Potential use cases include offering passive income opportunities, creating value-added services, increasing daily user interactions, and improving retention rates by keeping users' funds active within the application.

Lastly, high-profile integrations, such as the recent announcement of Compound DAO building on Morpho on Polygon, demonstrate Morpho's ability to attract long-standing DeFi protocols seeking more efficient lending infrastructure. Compound has struggled to maintain relevance as of late and this particular arrangement showcases Morpho's value proposition. By enabling Compound to maintain its brand identity while ditching its tech stack for Morpho’s, Compound can list assets and perform parameter optimizations more quickly, reduce governance overhead, and ultimately focus more of its resources on potential growth levers. Both Compound and Polygon are offering token incentives as part of this product launch and vault deposits have exceeded $20M within the first week.

Furthermore, the impressive growth metrics from existing implementations—SparkDAO vaults with $650M and Moonwell vaults at $75M in TVL—provide compelling evidence for Morpho's scalability. Similar strategies with smaller protocols like Seamless and Ionic, where specialized risk curators manage protocol-branded vaults, further validate this white-label approach as a repeatable growth model that could potentially be deployed across dozens or even hundreds of protocols seeking to offer lending services without building the infrastructure from scratch.

Risks

Morpho faces several key risks that could impact its future growth and market position. From a regulatory perspective, while the outlook appears more favorable under the new U.S. administration, significant uncertainty remains regarding legislation that would enable broader institutional adoption of DeFi services. Though growth through additional DeFi/CeFi integrations seems plausible in the near term, expansion into traditional finance lending markets may be years away or potentially unattainable.

Customer concentration presents another concern, with Spark being Morpho's largest vault curator on both Ethereum and Base, alongside the growing Coinbase integration. If these major partners were to switch to competitors or develop in-house alternatives, Morpho could experience substantial negative impacts on its protocol usage. However, Morpho's advantage lies in the difficult-to-replicate liquidity depth of its underlying markets, as well as the benefits for vault curators in maintaining control over asset allocations and performance fee rates.

On the competitive front, while Morpho currently leads with its model, other protocols like Euler are developing similar approaches, though with limited traction, and Kamino has announced plans for a comparable design in its v2 release, but this competition is more indirect as Kamino remains focused on the Solana ecosystem. Additionally, while Aave maintains its position as the leading DeFi lending protocol by total TVL, it seems unlikely to directly challenge Morpho's specific approach in the near term, instead focusing on blockchain expansion and tokenomics refinements. Perhaps more concerning is the potential entry of established fintech companies into the DeFi space. As Robinhood CEO Vlad Tenev noted, small engineering teams leveraging DeFi tools could rapidly build competitive platforms. These large fintechs might bypass existing DeFi protocols entirely, creating their own solutions using open-source technology while leveraging their substantial customer capital bases to seed liquidity for CeFi-DeFi integrations. However, despite public comments we have yet to see significant developments in this area as of yet, which may allow DeFi incumbents to further develop moats and expand their value proposition in the meantime.

Conclusion

Morpho has established itself as a cornerstone of DeFi lending infrastructure through its innovative curator model, which has driven remarkable growth across multiple chains with total deposits holding steady at nearly $5 billion despite the recent market downturn. The Coinbase integration serves as a powerful validation, demonstrating how centralized exchanges can leverage Morpho to unlock value from dormant assets while simultaneously boosting their native blockchain ecosystems and adoption of their wrapped assets. With cbBTC/USDC emerging as a standout market on Base and over 2,400 users already utilizing Coinbase's lending service, this integration blueprint provides a compelling roadmap for other exchanges and fintechs to consider.

Looking ahead, Morpho's aggressive multichain expansion and tools like Base's OnchainKit Earn position the protocol to become fundamental DeFi infrastructure, dramatically reducing integration barriers for developers. While regulatory uncertainty and customer concentration present notable risks, Morpho's deep liquidity and flexible vault curator model create meaningful competitive advantages. As the boundaries between CeFi and DeFi continue to blur, Morpho's architecture appears uniquely positioned to capture value from both ecosystems, though the potential entry of large fintechs developing proprietary solutions remains a future competitive threat that bears monitoring.





This research report has been funded by Morpho. By providing this disclosure, we aim to ensure that the research reported in this document is conducted with objectivity and transparency. Blockworks Research makes the following disclosures: 1) Research Funding: The research reported in this document has been funded by Morpho. The sponsor may have input on the content of the report, but Blockworks Research maintains editorial control over the final report to retain data accuracy and objectivity. All published reports by Blockworks Research are reviewed by internal independent parties to prevent bias. 2) Researchers submit financial conflict of interest (FCOI) disclosures on a monthly basis that are reviewed by appropriate internal parties. Readers are advised to conduct their own independent research and seek advice of qualified financial advisor before making investment decisions.