Yield Risk Engine V1
Overview
Some of the largest exchange rate markets on Morpho are vulnerable to positive-price-swing attacks. Yield-bearing assets like liquid restaked tokens (LRTs), liquid staking tokens (LSTs), and yield-stable assets have predictable, capped yields. However, existing market configurations do not account for these expected yield ceilings. If an oracle misreports the value of a yield-bearing asset as much higher than it should be, the market could overvalue the collateral, leading to excessive borrowing and potential bad debt.
To address this, we've developed a Yield Risk Engine. This tool allows risk curators to limit oracle-reported prices for yield-bearing assets to their expected yield growth over time. In doing so, it may prevent scenarios where collateral becomes overvalued beyond reasonable yield expectations.
Of course, DeFi is inherently risky. Use this technology at your own risk. Check out our disclaimer below.
Integrate
The Yield Risk Engine is available on select networks - the process stays the same regardless of where it's being used.
Submit an "accept terms" transaction - you agree to our disclosures, etc. (This keeps the process fully permissionless.)
Pick an oracle to input into the Risk Engine (any chainlink-interface-compatible one will do.)
Pick a yieldCap. (For example, if you don't expect an APR to go above 1%, you might put it at 5%)
Done! You've spawned a chainlink-interface compatible contract that is designed to cap the yield of an asset at a particular rate. You can use this as an "oracle" in popular lending protocols like Morpho.
Networks
Audit
The Yield Risk Engine has been audited by team at Three Sigma.
Licensing
The Risk Engine is released under the Business Source License (BSL). This license allows use of the software in most commercial contexts, while reserving certain rights for the original developers. After a change date, the software becomes fully open-source under a more permissive license.
Currently there is a small per-deployment fee at the smart contract level, which grants the tx signer a license to use the spawned smart contract for a market. You may also reach out to the ojo team for a bulk discount.
How It Works
The Risk Engine is implemented as a factory that generates smart contracts for each yield-bearing asset. These contracts:
Query an underlying oracle selected by the risk curator.
Compare the oracle’s price to the asset’s expected growth, based on its yield ceiling.
Clamp the reported price to this yield ceiling if the oracle-reported price exceeds it.
For example, if an asset like stETH has an average APY of ~3%, the Risk Engine enforces an upper price limit of 3% growth per year:
Year 0: Upper limit: 1 ETH Oracle Price: 1 stETH/1 ETH Adjusted Price: 1 stETH/1 ETH
Year 1: Upper limit: 1.03 ETH Oracle Price: 1 stETH/1.0298 ETH Adjusted Price: 1 stETH/1.0298 ETH
Year 2: Upper limit: 1.0609 ETH Oracle Price: 1 stETH/1.08 ETH Adjusted Price: 1 stETH/1.0609 ETH (capped at upper limit)
Key Features
Risk Engine Factory A factory contract that lets risk curators create custom Risk Engines with their chosen oracle and yield ceilings.
Yield Interfaces Custom interfaces for each supported yield-bearing asset.
Oracle-Agnostic Design Supports major oracles already integrated into the Morpho DAO’s infrastructure.
Immutability Once deployed, the factory is immutable and not under external control.
Permissionless Deployments Risk curators can deploy new Risk Engines independently, without additional approval processes.
Documentation Detailed documentation is provided to help risk curators configure and deploy new instances.
Collaboration & Support
The design of the Risk Engine has been refined through feedback from risk curators and collaboration with partners such as Gauntlet. Risk curators retain full control over the yield ceilings and configurations for the assets they manage, ensuring flexibility and adaptability to evolving market conditions. The Ojo team does not, informally or formally, reccomend any specific configuration for Risk Curators or DeFi protocols.
Disclaimer: All software, code, or deliverables are offered “as is” and “as available,” without any express, implied, or statutory warranties. Please refer to the full Terms of Service for details.
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