Days After Ditching Aave, Risk Manager Gauntlet Moves to Rival Lender Morpho

Less than a week after its high-profile split from blockchain lending platform Aave, crypto risk manager Gauntlet announced Tuesday that it’s teaming up with Morpho, a rival decentralized lender.

Under the new plan, Gauntlet will create its own lending products – relying on a direct competitor to Aave called MorphoBlue, a service launched by Morpho in January that allows anyone to spin up a lending pool for a particular pair of digital assets.

“Gauntlet has decided it could better pursue its mission of making DeFi safer and more efficient by joining forces with Morpho, which endorses a layered risk management approach rather than the traditional monolithic approach,” Gauntlet said in a statement shared with CoinDesk.

Aave and Morpho are similar in that they both allow users to lend and borrow cryptocurrencies without traditional middlemen.

Gauntlet was initially contracted to help Aave manage risk beginning in 2021, but Gauntlet co-founder John Morrow, made the surprise announcement last week that his team was splitting up with Aave because they “found it difficult to navigate the inconsistent guidelines and unwritten objectives” of the lender’s “largest stakeholders.”

While the abrupt breakup left some members of the crypto community scratching their heads, the Morpho news could help shed light on Gauntlet’s decision to part ways.

Gauntlet will manage its MorphoBlue pools using a new feature called MetaMorpho, which allows “risk curators” (like Gauntlet) to create pools, manage their risk parameters, and earn associated fees.

From a risk management perspective, the Morpho model is designed to be more efficient than Aave’s, and Gauntlet’s embrace of Morpho could be viewed as a swipe at its old partner. But Gauntlet’s rationale for switching allegiances may be clearest when viewed in strict business terms, since it offers the risk manager the potential to earn more money, with greater flexibility.

Aave is far-and-away the market leader in decentralized lending, with more than $9 billion in total value locked (TVL), according to DefiLlama.

Aave’s lending pools are managed by the Aave DAO, a collective of holders of the AAVE token, which confers governance rights over the protocol. The DAO regularly votes on changes to risk parameters, and it pays “risk stewards” (like Gauntlet, until last week) to perform analyses and weigh in on key decisions.

Aave’s risk stewards are given limited emergency controls to help safeguard the protocol, but parameter changes are generally left up to community votes, which can be an arduous process given the hundreds of risk parameters that Aave must oversee on a day-to-day basis.

Morpho started out as one Aave’s biggest users, funneling more than $1.5 billion into the lender via its “Morpho Optimizers,” which help investors earn extra yields on their Aave deposits.

Morpho’s new competing service, which places risk managers directly in control of their MorphoBlue pools, is designed to streamline things. MetaMorpho’s “risk curators” take on risk management responsibilities for the pools they create – like setting collateral requirements, borrowing limits, and other parameters – and can directly set the fees they charge users.

On Aave, risk managers “answer to the DAO,” Gauntlet’s vice president of growth Nick Cannon told CoinDesk this week. “Morpho,” on the other hand, “makes Gauntlet and other risk curators closer to a first-class person.”

After Gauntlet’s Aave exit was announced last week, Cannon told CoinDesk that his team was motivated, in part, because Aave wanted “exclusivity from Gauntlet without paying for it.”

“We will explicitly not have exclusivity with Morpho,” Cannon said this week.

Aave DAO paid Gauntlet $1.6 million per year to serve as an official risk steward. That sum was reduced from $2 million to bring Gauntlet’s compensation in line with that of rival risk manager Chaos Labs, which joined Aave as its second risk steward in 2022.

When the Aave community was mulling whether to renew Gauntlet’s contract last year, some members of the DAO threatened to pull their support because Gauntlet had done risk management work for Morpho.

“We did this one-off economic audit with Morpho, and they said we were moonlighting for them,” Cannon said. “Moonlighting? We made it very public and didn’t have any explicit exclusivity at all.”

According to Cannon, Gauntlet felt as if Aave DAO gave its competitor and fellow risk steward, Chaos Labs, more leeway to work with other lenders.

“If you want to pay for exclusivity, there’s plenty of models to do that,” said Cannon. “I’m happy to find a number there, but it’s definitely tough when we have a direct competitor that’s eating our market share.”

Chaos Labs CEO Omer Goldberg denied that Aave DAO gave his firm special treatment. According to Goldberg, Chaos has a different business model from that of Gauntlet: Chaos offers an automated risk management platform on top of its traditional “white glove” risk management service. The white glove service is reserved for Aave, whereas anyone can use its risk platform.

“Aave’s never thrilled that we’re working with other borrow/lends, but it’s not really been an issue,” Goldberg told CoinDesk. “We have a platform so we’re able to do these things, we’re able to scale very quickly.”

The different business models help to explain why a risk firm like Gauntlet might stand to earn more from a partnership with Morpho.

Aave DAO pays Gauntlet a yearly fee, but Cannon says his team would have preferred if its compensation scaled up with its performance.

“You want to fix your costs as a DAO,” said Cannon, but he added that the flat rate made it difficult for Gauntlet to “align incentives” with Aave and “grow over time.”

On Morpho, Gauntlet will earn fees directly from users of its pools, meaning profits can scale up in proportion to usage.