TBW - Morpho vs Euler: The Battle of Modular Lending Protocols

In the jungle of decentralised finance (DeFi), lending protocols have a seemingly simple mission: to connect those who have capital with those who need it. All without intermediaries, on a shared and transparent infrastructure.

But behind this common principle, strategies diverge.

While incumbent players such as Aave opt for centralised and cautious architectures, a new generation of protocols such as Morpho and Euler V2 are banking on a modular, flexible and open approach, based on market "curators".

Morpho and Euler are not content to play the alternatives. They embody a breakthrough.

Monolithic lending: Aave

Aave is the behemoth of the sector. And its architecture reflects its position. In its model, liquidity is concentrated in large unified markets, governed centrally. The idea is to pool deposits, pool risks and pool returns. To put it plainly, if you deposit on Aave, you are participating in a gigantic pool where gains and losses are shared by all.

This model has the advantage of simplicity and robustness. It makes it possible to secure billions of assets and guarantee a degree of predictability... but it also imposes extreme rigour:

• The pooled risk imposes a drastic selection of assets: only BTC, ETH, or stablecoins.
• Innovation is curtailed: with a TVL in excess of $20 billion, the slightest change must be validated, audited, locked down.
• Niche assets, experimental strategies, or tokenised real-world products remain at the gates.

Result: Aave is a giant. But a giant that walks slowly.

>> With Horizon, Aave plays its institutional card again

>> Fee switch arrives on Aave: how much can stakers earn?

>> Uniswap, Aave, Sky: What strategies for the "OGs of DeFi"?

Modular lending: Morpho and Euler

Facing this model, Morpho and Euler are adopting a radically different philosophy.

Their vision? To offer a modular lending framework, in which each market is isolated, customisable, and governed by its own rules. Gone is the big collective bath, welcome to the era of à la carte lending vaults.

In this system, the user also becomes an architect. They can create specialised markets, set their risk parameters, define liquidation mechanisms and choose their oracles.

An example? Creating a lending market between Pendle Principal Token (PT-stETH) and USDC, using the Euler V2 infrastructure. This kind of strategy, impossible on a protocol like Aave, becomes trivial here.

This curator-based turn opens up a new field of possibilities:

• The emergence of niche markets for more exotic assets.
• Highly customised yield or leverage strategies.
• Boosted capital efficiency through market specialisation.

But while Morpho and Euler share this modular philosophy, their implementations are far from identical. And the devil is in the detail.

Morpho's design

Morpho doesn't just offer a lending protocol. It is building a neutral, modular, permissionless foundation on which anyone can build their own markets. An infrastructure that is as simple as it is powerful, in stark contrast to the verticality of the incumbent players.

The heart of the protocol? The ability for anyone to create a lending market. Think there's a demand to lend wstETH against USDC collateral? Create your market. Set the assets involved, the rate model, the price oracles and the liquidation parameters (LLTV) yourself. No governance to convince, no tokens to vote.

A logic reminiscent of Uniswap: you don't have to ask permission to launch a liquidity pool, you just open it, full stop. The difference? Here, it's credit.

Once a market is launched, its parameters become immutable. The governance of the protocol can neither freeze nor modify it. It simply validates the options available at creation. The objective? To provide a robust, low-vulnerability, truly decentralised foundation.

Morpho is 600 lines of code. A unique, minimalist smart contract, designed for security and gas efficiency. No token overlay like Aave's aTokens: the protocol uses internal accounting. This approach enables flash loans between markets, multi-market transactions and extreme simplification of the infrastructure.

Vaults: to avoid losing the user

But where there's modularity there's complexity. With the multiplication of isolated markets, the user experience could quickly become unreadable. To avoid this, Morpho offers a solution: Morpho Vaults.

These vaults do not create markets, they aggregate them. A vault can group up to 30 existing Morpho markets, depending on their level of risk. For example:

• A "Conservative ETH Vault" will only allocate to very safe markets (blue chips, low LLTV).
• A "High-Yield USDC Vault" may target more exotic, but higher-yielding markets.

Each Vault is structured around four distinct roles:

• Owner: the creator of the Vault, who can delegate roles.
• Curator: decides which markets are authorised, sets deposit caps.
• Allocator: dynamically allocates funds between the chosen markets.
• Guardian: security role, which can block certain decisions. Often embodied by the depositors' DAO.

Vaults can set performance fees of up to 50%, deducted from the interest generated. These fees do not go to the Morpho DAO, but to the owners of the Vaults.

A classic problem with modular lending: the fragmentation of liquidity. Morpho addresses this with an amplification mechanism. When several Vaults allocate on the same markets, a network effect is created. Liquidity becomes concentrated and markets become deeper. An isolated market then becomes... a little less isolated.

>> Paul Frambot (Morpho Labs): "Aave is a bank whereas Morpho is an infrastructure for banks"

>> Aave vs Morpho: the great lending match

Euler's design

As opposed to Morpho and its minimalist architecture, Euler chooses an approach that is just as modular, but much more structured. Where Morpho gives everyone the keys, Euler builds a system where the building blocks can fit together, connect and mutually enrich each other. Welcome to the age of credit vaults.

At the heart of Euler: vaults that comply with the ERC-4626 standard, but on steroids. These credit vaults are not used to manage return strategies like Yearn or Beefy. No: here, each vault becomes a lending market in its own right, with its own rate, collateralisation and liquidation logic.

By depositing your assets in a vault, you can:

• Lend them out to generate interest.
• Use them as collateral to borrow from another vault.
• Or do both at the same time (known as rehypothecation).

A powerful concept, allowing each user to build complex strategies à la carte.

Two modules reinforce this flexibility:

• Euler Vault Kit (EVK): to create a zero vault.
• Ethereum Vault Connector (EVC): to connect vaults together.

With the EVC, you can make one vault recognise the deposits of another as valid collateral. This is how Euler creates networks of interconnected markets, from the simplest to the most sophisticated:

• Two vaults (ETH → USDC) forming an isolated market.
• Three, five or ten vaults linked in a multi-collateral system.
• Totally new topologies, impossible in a protocol like Aave or even Morpho.

Euler doesn't just provide a basis: it proposes a credit composition language.

Flexible but asymmetric governance

Another strength of Euler: the ability to choose between two types of vaults:

• Governed vaults: with active curators who adjust the parameters (LTV, rates, oracles...).
• Ungoverned vaults: with fixed rules, created to last without human intervention.

But in reality, the market has made up its mind: over 95% of LTV is concentrated in governed vaults. Far from shunning governance, users prefer to delegate it to experts - even if it means increasing centralisation.

Two other types exist:

• Escrow vaults: deposits that can only be used as collateral, with no return or borrowing possible.
• Unverified vaults: vaults created via EVK, but with no particular status or role.

Euler's modular approach is accompanied by a highly sophisticated risk management infrastructure:

• LTV ramping: to gradually adjust collateralisation parameters, avoiding sudden liquidations.
• Supply/borrow caps: to limit exposure to certain assets.
• Hooks: customisable functions that can be activated in the event of stress (e.g. market pause, address whitelist).
• Oracle agnosticism: like Morpho, Euler leaves the choice of price provider to the curator.

Euler doesn't just sell lending. It offers a Lego box of credit, with bricks to be assembled under supervision.

>> Analysis: How Euler (EUL) builds its place between Aave and Morpho

Comparing the differences between Morpho and Euler

While Morpho and Euler share a common philosophy - that of modular and permissionless finance - their technical executions take radically different paths. They are two grammars of programmable lending, each with its strengths, blind spots, and implicit bets on the future of DeFi.

Primitive core

At Morpho, isolated markets are the fundamental unit. They are created independently, without native interconnection. Vaults are just a secondary, optional layer, built on top to aggregate these markets and smooth the user experience.

Inversely, Euler takes the opposite approach. It is the vaults themselves that define the markets. Each credit vault carries its own logic: accepted assets, LTV, interest rates, oracles. And these vaults can operate in silos or be connected via the Vault Connector. At Euler, the vault is not an interface, it is the market.

Linking mechanisms

Morpho links its elements via shared liquidity: several Vaults can allocate funds to the same isolated market. It is this passive layering that creates market depth.

Euler, for its part, weaves a graph of active dependencies: each vault can use another vault as collateral. This allows for almost infinite combinations and a denser mesh of assets. Result: leverage, arbitrage or risk management strategies become more sophisticated - and potentially riskier.

Objective of vaults

At Morpho, Vaults are aggregation tools, designed to simplify the use of underlying markets. They select markets, apply allocation rules and set a risk profile. They facilitate access, but do not create any financial value of their own.

At Euler, Vaults are the heart of the protocol. They carry the market parameters, the lending logic, and the governance rules. They don't simplify use, they architect it.

Optimising liquidity

Morpho relies on concentrated liquidity through convergence: several Vaults target the same markets, making them deeper. A passive network effect logic.

Euler achieves capital efficiency through cross-collateralisation: assets in one vault can be used to borrow elsewhere, creating inter-vault leverage. Riskier, but also potentially more profitable.

Governance structure

Morpho opts for immutability by default. Once a market has been created, it becomes independent. The governance of the protocol no longer affects it. The DAO simply approves the bricks available for creation. It's a decentralised model through and through.

Euler leaves more room for financial engineering. It proposes governed vaults, where curators adjust the parameters continuously - or ungoverned vaults, frozen at creation. In practice, over 95% of TVL is on governed vaults. The market wants expertise, even if it means giving up a share of decentralisation.

Comparison of Morpho and Euler growth

In an ultra-competitive market like lending DeFi, growth is a formidable revealer. TVL, users, revenues: these metrics tell us about the speed of adoption, but also the depth of use. And in this respect, Morpho and Euler are following two impressive... but very different paths.

Market penetration

Morpho, launched well before the second version of Euler, has taken a massive lead. Between March 2024 and March 2025, its TVL grew from $105 million to $3 billion, representing growth of 2,900% in one year. On its own, it now captures more than 10% of the lending market, just behind Aave.

Euler V2, launched in October 2024, operates on a tighter timeframe. But its growth has been meteoric: in less than six months, it has gone from $5.93 million to $333.91 million in TVL, a leap of 5,530%. In absolute terms, it is still 10 times smaller than Morpho.

Adoption

The same dynamic applies to users. Morpho has gone from 783 monthly active users in March 2024 to 25,300 a year later. This represents a 32-fold increase, driven by the arrival of the Vaults and the expansion of the market offering.

Euler, a younger company, started from a very low base - 72 active users in September 2024 - to reach 9,200 in March 2025. That's a 127-fold increase... in just six months. Fewer people, but a more brutal acceleration, which testifies to a real product-market fit.

Revenues and fees

Morpho has generated $109.7 million in fees since March 2024. But be warned: all of these fees are passed on to users via Vaults. The protocol captures nothing. It's a conscious choice, focused on growth and distribution, but one that raises the question of long-term sustainability.

Euler, which is more pragmatic, has racked up $3 million in fees in six months, of which $469,000 has been captured by the protocol. It's not much, but it's already an operational business model. Euler is banking on building recurring revenues through a redistribution mechanism, which we'll see later with the $EUL.

Diversification

Another sign of maturity: the diversity of markets. Morpho claims to have created 491 markets since its launch (Dune figures), with outstandings of 2.58 billion supplies for 1.98 billion borrowers. This represents a very healthy utilisation rate, even if some markets remain relatively inactive. The protocol also recorded 4,160 billion dollars in flash loans, proof of its adoption by arbitrageurs.

Euler shows more moderate use, with 508.5 million in deposits compared with 217.9 million borrowed, i.e. a 42.8% usage rate. This is a significant margin for growth, but also a guarantee of stability: Euler is not yet under pressure on liquidity.

Cross-chain expansion

On the multi-chain front, the two protocols are advancing at their own pace:

• Morpho is deployed on Ethereum and Base. But it has just moved up a gear with the release of the "Morpho Stack", its full suite of contracts, on Polygon PoS, Arbitrum, Optimism, Scroll, Ink, World Chain and Fraxtal. An important step towards an interoperable infrastructure.
• Euler is already operating on Ethereum, Base and Sonic, with a more progressive but multi-chain strategy from the outset.

Comparison of value accumulation mechanisms for $MORPHO and $EUL

Morpho and Euler each have their own native token - $MORPHO and $EUL - but their approaches to value capture are diametrically opposed. One relies on pure governance, the other on an ingenious mix of remuneration and redistribution. A duel between long-term vision and immediate efficiency.

Euler

$EUL is a classic ERC-20, which gives its holders governance rights over the Euler protocol and its DAO treasury. But Euler doesn't stop there: the protocol has devised clear mechanisms to generate value around its token.

First stage: the $rEUL rewards, an improved points system. Every interaction with the protocol earns you rEULs, which turn into $EULs according to a simple formula:

• 20% are unlocked immediately.
• 80% are acquired gradually over six months.
• If you withdraw too soon? The remaining tokens are burned. A vested burn system that reduces the total supply, and rewards patient holders.

Second floor: Fee Flow, an in-house innovation. Euler collects fees from a multitude of assets (ETH, USDC, etc.). Rather than using an oracle or swapping on the fly, the protocol organises continuous Dutch auctions to convert all these revenues into $EUL. The result: a constant stream of buybacks, which:

• Increases the liquidity of the token.
• Can be redistributed to the DAO or users.

It's clean, readable, and already operational.

Morpho

At Morpho, the $MORPHO token is... a governance token, and nothing else. It gives the right to vote on:

• Changes to the protocol.
• The launch of new products.
• The activation (if any) of a fee switch.
• The allocation of DAO resources.

But no economic value is currently captured by the protocol. Even the Vaults, which can charge up to 50% performance fees, pay nothing to the DAO. These fees go directly to the owners of Vaults, not to the holders of $MORPHO.

The philosophy is clear: maximise usage, not immediate profitability. $MORPHO is therefore a bet on the future: the bigger the protocol grows, the more strategic the power of governance becomes. And if one day the community activates a cost-sharing mechanism, the token's valuation could soar.

So there are two visions:

• Euler, which is already paying hidden dividends via its rEUL and buyback mechanisms.
• Morpho, which is capitalising on the political captivity of its DAO and the future promise of a must-have protocol.

Conclusion

Morpho and Euler embody two diametrically opposed - yet complementary - visions of modular lending.

Morpho relies on a permissionless infrastructure, where anyone can create a market, without authorisation, without intrusive governance, without compromise. It's the Uniswap version of lending. But this choice comes at a price: the multiplication of markets entails a risk of fragmentation of liquidity, duplication of strategies, and saturation of supply.

To respond to this, Morpho is banking on Vaults as a tool for abstraction and concentration. And on minimalist governance which, paradoxically, could become one of its greatest levers of value in the future.

Euler, for its part, is building a programmable lending machine. Each vault is a brick, each brick can connect to another, and the whole forms a dynamic web of credit. More sophisticated, more demanding too: this model relies on skilled curators, active governance mechanisms, and an ability to balance innovation and security.

But behind this freedom lies a tension: today, more than 95% of funds on Euler are in governed vaults. Is this a form of institutionalisation in disguise? Perhaps. Or simply a signal that, in the midst of complexity, users are looking for solid reference points.

Morpho is a bet on radical decentralisation, Euler a bet on controlled engineering.

Who will win? Perhaps neither. Perhaps both. If Morpho manages to resolve its fragmentation, and if Euler manages to make its system more accessible, the DeFi of tomorrow could very well rest on these two pillars. One protocol for free experimentation, the other for controlled structuring.

>> Lending onchain: market status, trends and outlook

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