Morpho Co-founder: Some vaults' "insufficient liquidity" is not a system flaw, but a natural response mechanism under pressure

Morpho co-founder Merlin Egalite issued a statement in response to the "insufficient liquidity" of some liquidity pools, indicating that when the market is under pressure, people tend to choose to reduce risk. This means that many lenders will simultaneously attempt to withdraw all their funds, leading to increased capital utilization and decreased liquidity, and in extreme cases, a situation where there is no available liquidity in the short term. This is not a flaw in the system, but rather a natural response mechanism of the lending pool under stress. To restore balance, the interest rate model will automatically raise borrowing rates.

Taking Morpho as an example, its target capital utilization rate is 90%, which means that in most cases, about 90% of the deposited funds will be lent out. When the utilization rate spikes to 100%, the interest rate will increase fourfold. In the vast majority of cases, market interest rates typically restore balance within a few minutes (around 90% utilization), while during periods of greater market stress, recovery may take several hours.

Furthermore, the so-called "insufficient liquidity" is localized and controllable, only appearing in individual markets that are out of balance. A few days ago, among Morpho's 320 liquidity pools, only 3-4 experienced a brief period of insufficient liquidity, while the rest of the vaults were operating normally. Therefore, claims that "the entire protocol is out of liquidity" are misleading. Insufficient liquidity does not equate to losses or bad debts. It simply means that a large amount of funds are borrowed out in the short term, and the market will respond in real-time, repricing risk and seeking new equilibrium.