This analysis was conducted by Blockworks Advisory and Untangled.
Overview
This document provides a quantitative framework to assess the allocation of USDTb and USDT from USDe’s backing into Morpho vaults, specifically Steakhouse-curated vaults that are set up using Ethena assets as collateral (e.g. USDe, sUSDe and PTs), as a lending venue for Ethena. It focuses on Morpho’s protocol-level risks, curator risks, and isolated market dynamics, balancing yield opportunities with liquidity and operational risks using on-chain and historical data. This document was prepared by Credio (by Untangled) and Blockworks.
Morpho Protocol and Risks
Morpho Market is a decentralized lending protocol with isolated markets, each supporting one collateral and one borrow token (e.g., USDTb). The Morpho Vault enables curators like Steakhouse to allocate funds across these markets within pre-set caps.
Morpho vaults have seen strong growth, with a vibrant and competitive marketplace emerging around vaults curated by professional risk curators.
A key advantage for Morpho is its permissionless vault architecture, which enables fast onboarding of new assets, like sUSDe PTs, without the friction of whitelisting. This makes it especially well-suited for newly launched instruments.
sUSDe PTs have quickly become among the largest markets on Morpho. Their predictable, bond-like profile, trading like zero-coupon bonds with fixed maturity dates, offers stable yields that consistently outperform standard USDC lending. Their low volatility and predictable redemption terms have made them a favorite for looping strategies, where users borrow against their holdings to amplify exposure. Liquidity at maturity is also reliably strong, reinforcing their appeal for both passive and active lenders. However, using Ethena’s own assets as collateral in a vault it also supplies liquidity to, may introduce additional risks.
Below are the key risks associated with supplying USDTb and USDT to Morpho vaults managed by Steakhouse:
- Curator Dependency Risk:Description: Curator manages allocations via multisig or DAO setup such as Aragon within governance-set caps. Funds are restricted to whitelisted markets, preventing loss due to multisig failure, but misallocation or delays could result in suboptimal yields or temporary inability to rebalance. Morpho Vaults V2 includes a structured role system (Owner, Curator, Allocator, Sentinel) and per-function timelocks to manage vault parameters. While this modular governance framework is an improvement over Vaults V1, it also introduces governance lag and emergency response constraints.
Impact: Reduced APY or delayed withdrawals during market stress.
Quantification: Measure historical multisig uptime (e.g., average rebalancing delay in hours).
Management: Set a threshold for acceptable rebalancing delays (e.g., <24 hours) and monitor curator performance on-chain.
- Modular Architecture Risk:
Description: Morpho uses a modular, permissionless design where anyone can create isolated lending markets (with custom collateral, oracle, liquidation parameters). Vaults allocate capital across these markets under a curator’s control, but each market is potentially independent and uses separate oracles and parameters. This creates technical risk from misconfiguration or flawed market design, as errors are siloed but still impactful. If a market’s oracle is misconfigured or someone deploys a malicious collateral pair, the vault may allocate capital into it and suffer loss.
Mitigation: Vet every whitelisted market underlying the vault, verifying oracle sources, liquidation LTV, and supported collateral.
Use granular risk caps per collateral/oracle/market to prevent overexposure.
- Liquidity Risk in Isolated Markets:
Description: Each market’s liquidity is limited to its specific collateral-borrow pair, potentially constraining withdrawals during stress events.
Impact: Delayed or partial withdrawals if market liquidity dries up.
Quantification: Use GARCH(1,1) model to simulate liquidity volatility and estimate P10/P5 liquidity levels over 1–7 days.
Management: Allocate to vaults with high P10 liquidity (e.g., >20M USDTb withdrawable in 3 days) and diversify across multiple vaults.
- Technical Risk:
Description: Morpho Blue (~600 LOC) and Metamorpho (~800 LOC) feature compact codebases with simple logic, significantly limiting the surface area for potential faults. Their over 2-year mainnet history, combined with growing adoption, reflects increasing protocol reliability.
Smart Contract Vulnerabilities: All components in the system, i.e. Morpho Vault contracts, collateral management logic, and oracle feeds, are on-chain programs. A bug or exploit in any part of this stack (e.g. misconfigured caps, re-entrancy, oracle manipulation) could cause vaults to behave unexpectedly, misallocate capital, or be drained. This is especially sensitive for vaults involving complex collateral like PTs or composable leverage strategies.
Off-Chain Counterparty Dependencies: While the vaults themselves are permissionless, their performance may depend on oracle data, third-party frontends, or governance multisigs. Any downtime, manipulation, or collusion could affect valuation, LTV enforcement, or the liquidation process.
Impact: Low likelihood of smart contract vulnerabilities due to compact design, though undiscovered bugs could still cause operational disruptions.
- Yield Volatility Risk:
Description: Curator-driven allocations may cause APY fluctuations if markets are suboptimally selected or incentive emissions vary.
Impact: Lower or unpredictable returns compared to expectations.
Quantification: Model APY elasticity (% APY drop per 1% TVL increase) and calculate historical APY variance across Steakhouse vaults.
Management: Cap allocation to limit APY drop (e.g., <10% per $10M) and favor vaults with stable base yields.
The image below shows stablecoin supply APY intraday volatility on Morpho for widely used stablecoins, where historical data is available.
- Governance and LP Rights Risk:
Description: Morpho’s lite governance delegates allocation decisions to curators, leaving LPs with limited control. LP rights (e.g., withdrawals) are constrained by curator actions and market liquidity. Each curator offers a somewhat different LP governance structure, i.e. some with multisig, others with Aragon DAO style.
Impact: LPs may face delays or restrictions in accessing funds if curator decisions misalign with market conditions or that of LPs.
Quantification: Evaluate curator transparency.
Management: Monitor curator governance processes, including timelock delays and veto rights, to ensure alignment with LP interests.
- Bad Debt Risk:
Description: In Morpho’s isolated markets, bad debt occurs when a borrower’s Loan-To-Value (LTV) exceeds 1/Liquidation Incentive Factor (LIF), allowing liquidators to seize all collateral by repaying only a portion of the debt, leaving remaining debt as bad debt. This can be unrealized (pre-liquidation) or realized (post-liquidation). For Vault v1.0, bad debt is automatically realized, reducing the vault’s share price proportionally to its market share. For Vault v1.1, bad debt is not automatically realized, potentially affecting only the last depositors unless covered. Curator misjudgment in market selection could expose funds to riskier collateral-supply pairs.
Impact: Localized losses in affected markets without protocol-wide contagion. Vault v1.0 depositors face immediate share price reduction; Vault v1.1 depositors risk liquidity shortages if bad debt is not covered.
Quantification:
Analyze historical bad debt incidents in Steakhouse-managed vaults via liquidation events (EventsLib.Liquidate).
Calculate vault-specific loss: amountLost = proportionPercentage × badDebtAssets, where proportionPercentage is the vault’s share of the market’s total supply.
For Vault v1.1, track lostAssets delta (post-liquidation minus pre-liquidation).
Assess collateral quality (e.g., volatility of collateral assets).
Management:
Restrict allocations to vaults with high-quality, low-volatility collateral.
Monitor curator market selection criteria and historical bad debt frequency.
For Vault v1.0, prioritize markets with low bad debt incidence to minimize share price impact.
For Vault v1.1, encourage curator-led asset injection (e.g., deposit(assets, 0x000..0001)) to cover bad debt and ensure withdrawal liquidity.
Diversify across vaults to reduce exposure to any single market’s bad debt.
Supply to Steakhouse-Curated Morpho Vaults
Supply to Steakhouse-curated Morpho vault offers significant advantages that align with Ethena’s strategic goals:
Curator Expertise and Governance Structure: Steakhouse, managing ~$1,050 in TVL, brings proven experience in vault curation. The use of a SAFE 2/4 multisig for curator decisions, combined with a 3D timelock via Aragon DAO, ensures a balanced approach to agility and security, mitigating governance risks.
Dynamic Risk Management Potential: The vault’s newness (deployed on 05/16/2025) offers a chance to shape its risk profile through active monitoring and curator collaboration. With limited historical data.
Recommendations
Morpho Stablecoin Allocation Cap - To limit concentration risk and preserve exit flexibility:
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Total Morpho allocation cap: total exposure to Morpho should remain within the smaller of two limits: 10% of Ethena’s total liquid stable backing or 15% of the total USDC, USDT, and USDtb liquidity locked on Morpho across Ethereum and Base.
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With current figures, 10% of Ethena’s $5.33B liquid backing equals $533M, while 15% of Morpho’s ~$2B (USDC/USDT/USDtb) ) equals $300M; therefore, the effective cap today is $300M.
To avoid overexposure to any single curator, Ethena’s aggregate allocation to all vaults managed by a curator should not exceed 15% of that curator’s total AUM.
Per-vault entry size: For new vaults with limited history, initial exposure should not exceed 1% of Ethena’s total liquid stable backing (currently ~$53.3M), starting with a pilot allocation of $500k–$1M to test operational processes, APY stability, and curator responsiveness.
- Scaling: Increase per-vault allocation only in increments ≤ 10% of vault liquidity every week, provided yields remain above the risk-adjusted threshold and liquidity.
Dynamic Monitoring
Liquidity and APY Monitoring: Continuously track real-time liquidity and APY data daily, adjusting allocations based on data.
Weekly Curator Review: Assess curator performance weekly, focusing on multisig rebalancing efficiency and market selection transparency.
Monthly Forecast Calibration: Evaluate GARCH-based liquidity forecasts and APY volatility monthly to adapt to the vault’s evolving risk profile.
Biweekly Risk Updates: Revisit curator risk score and bad debt incidents biweekly, leveraging on-chain data to ensure alignment with Ethena’s risk tolerance.
Risk Mitigation:
Start with a small allocation to minimize exposure while the vault matures, given its recent deployment.
Cap initial increases to maintain APY stability, targeting no more than a 2% APY drop per $1M increment.
Ethena could potentially provide criteria for market selection to manage curator risk. Eg, risk disclosures, performance,…
Yield Acceptability Thresholds: Establish a minimum acceptable risk-adjusted yield band.
Redemption Contingency Plan: In the event of USDTb illiquidity due to vault or curator failure, USDtb issuer could explore operational mechanisms to burn stranded USDTb and reissue new tokens, backed by reserves held in BUIDL or other off-chain backing, ensuring user solvency and protocol trust. While this is true for USDtb, it is naturally not the case for USDT. For that reason, lending USDT from the backing of USDe on Morpho should warrant more caution.
Note: Thresholds and metrics in this assessment are conservative examples intended to guide initial analysis. They are illustrative, not prescriptive, and may be refined as more data becomes available. Furthermore, we recommend that the Risk Committee conduct a dedicated analysis on the implications of allocating a meaningful portion of backing to lending protocols, such as Morpho or Aave, including an assessment of expected VaR across varying confidence levels, particularly in tail-risk scenarios (e.g., higher sigma events). This approach to generating yield for sUSDe introduces a new layer of risk to USDe’s backing, and as such, any general cap should be carefully evaluated and deliberately set by the broader Committee.
Appendix: Quantitative Risk Framework
0. Collateral Quality and Leverage Risk
Goal: Assess collateral quality and leverage profile
Approach:
Score assets according to their type (e.g. USDe vs PT), liquidity, reflexivity (outside of their behavior on Morpho). E.g. PT-backed vaults = higher collateral degradation risk
Score leverage profile: Max LTV, liquidation threshold, incentives (higher LTV = higher risk of undercollateralized debt)
Decision Metric: Attribute a risk score from 0 to 5.
1. Liquidity Risk: Simulating Withdrawable Liquidity
Goal: Predict USDTb withdrawal feasibility during stress.
Approach:
- Collect hourly/daily liquidity data for Steakhouse vaults.
- Fit GARCH(1,1) model on liquidity returns.
- Run Monte Carlo simulation for P10/P5 liquidity bands over 1–7 days.
- Output: Percentile plot of minimum available liquidity.
Decision Metric: Ensure, e.g., >20M USDTb withdrawable within 3 days at P10 confidence. This threshold could also be set relative to the total amount deposited.
2. Yield Risk and Elasticity Modeling
Goal: Assess yield sustainability with large USDTb allocations.
Steps:
- Fit GARCH/EWMA model on historical APY data for forward-looking bands.
- Estimate APY elasticity: % APY drop per 1% TVL increase.
- Include incentive APR volatility if emissions are capped.
- Output: Yield elasticity score and expected APY band post-allocation.
Decision Metric: Cap allocation where APY drop <3% for $10M allocated.
3. Curator and Protocol Risk Quantification
Curator/Vault Scoring:
- Vault Age: Normalize with exponential decay (older = better).
- External Credibility: Audits, third-party ratings, number of vaults.
- Multisig Reliability: Rebalancing delay and uptime metrics.
- Complexity: Adapter stack, strategy layers (Multi-adapter setups = harder to unwind quickly
Protocol Scoring:
- Binary flags: Audits completed, incident history, TVL volatility.
- Operational Age: 2.5-year mainnet history.
Decision Metric: Penalize utility by risk score (e.g., 20% penalty for low curator score).
Example Output Table
| Allocation | Expected APY | P10 Liquidity | Yield Elasticity | Collateral Risk | Risk-Adjusted Score |
|---|---|---|---|---|---|
| 10M | 4.6% | 11M | -0.02 | 2 | 0.68 |
| 20M | 3.9% | 9M | -0.04 | 3 | 0.55 |
| 30M | 3.0% | 7M | -0.06 | 4 | 0.38 |
The risk-adjusted score should then serve as the basis for the cap recommendations. We can link each risk-adjusted score to a max portion of the liquid stablecoin buffer.
| Risk score (up to) | Cap as % of Liquidity Buffer | Notes |
|---|---|---|
| 1 | up to 25% | Only if vault is extremely liquid and vanilla |
| 0.8 | up to 20% | Good collateral, simple setup |
| 0.6 | up to 15% | Moderate risk, e.g. PT-wstETH |
| 0.4 | up to 10% | Reflexivity or governance risk present |
| 0.2 | up to 5% | Experimental, low liquidity, or complex vaults |
