How onchain credit is evolving with offer-based markets

TLDR: There are two ways to price a loan onchain. In a pool, capital is committed up front and a formula sets the rate. In an offer-based market, lenders and borrowers set the terms themselves, and capital is committed only when an offer is matched. Pools trade control for simplicity and always-on liquidity. Offers trade simplicity for control and capital efficiency. The Morpho protocols include both: isolated variable-rate pool markets on Morpho Blue, isolated fixed-rate offer-based markets on Morpho Midnight.

A pool sets the rate with a formula, usually based on utilization: the share of the pool's liquidity that is currently borrowed. When utilization rises, the rate rises, which attracts deposits and lowers borrowing demand. When it falls, the rate falls. Lenders and borrowers both take whatever the formula returns.

The pool model has been proven since 2018, with the launch of Compound V1. It is a mechanism most DeFi users know, and it has helped DeFi lending grow from 0 to $80B+.

Pools emerged from an era when blockchain technology was less mature. When a single transaction cost 10 dollars in gas, most users preferred to sign and allocate once and forget. Two main benefits of pools:

• Simple to use: the user experience is passive. You trust the pool is properly managed, and there is no need to set your terms or manage a maturity.
• Instant liquidity: In a bootstrapped pool, lenders can deposit and withdraw whenever, while borrowers can access instant liquidity as long as the pool has available liquidity.

• Everyone is a price taker of the interest rate model: You enter at the rate that’s given. If utilization goes up, the rate goes up; if utilization goes down, the rate goes down. This leaves participants with little control. As more sophisticated participants come onchain, pools lack predictable cost and returns to their allocations.
• Capital has to be deposited into the market ahead of demand: the need to commit capital can lead to inefficiencies and opportunity costs ****since choosing one pool means the capital is not available elsewhere, where it could be more productive.
• Bootstrapping can be challenging: A new market generally needs liquidity deposited before borrowers can use it. This requires users to deposit into a pool that does not provide any yield until borrowers show up.
• Scaling assets can become a systematic risk: most pools have shared credit risk, which means lenders are exposed to every collateral asset in that pool. Isolated pool-based markets (e.g. Morpho Blue) contain credit risk to a single collateral, but users are still price takers and capital must still commit to a single market up front.

In offer-based markets such as Morpho Midnight, a loan starts with an offer, which allows lenders and borrowers to set their own terms, including the loan asset, collateral(s), rate, and maturity. Unlike pool-based allocations, offered capital is committed once an offer settles. Until then it can be put to work elsewhere, for example, earning variable yield on Morpho Blue.

When DeFi first emerged, the conditions didn’t support offer-based credit. Things have changed:

• DeFi has exponentially more active and sophisticated participants such as curators, market markers, funds, and even fintechs.
• There has been an explosion in the types of assets that exist onchain. What was limited to a handful of native crypto assets used in onchain credit is now a list of thousands of assets that include long-tail crypto assets, tokenized funds, tokenized stocks, and more.
• The underlying blockchain infrastructure is both fast and cheap, making it possible to support the transaction velocity required to make offers work.

Offers are built for the new reality of onchain credit, where sophisticated participants want more control and the number of new assets is growing exponentially.

• Rate certainty: Participants no longer have to be price takers. They can choose the rate at which they are willing to lend or borrow.
• Capital efficiency: since capital is not committed until settlement, lenders can use the same capital to make offers across multiple markets. Additionally, with callbacks, that capital can earn a variable rate until an offer is matched at a fixed rate.

• Make bootstrapping markets trivial: there isn’t a need to seed a pool with liquidity prior to demand. A market can be formed as soon as a single lender and borrower agree on offer terms. It is especially attractive for loans backed by tokenized treasuries, tokenized stocks and other long-tail assets, each of which often needs a new market to isolate risk.
• Safe support for long-tail markets: Offers make it much easier to quote across many markets with a wide variety of isolated markets with exotic collateral(s).

• Greater complexity / user effort: An offer-based model requires users to choose the rate and maturity and the collateral against which they're willing to lend or borrow. They must also manage and decide what happens at maturity. That control is valuable for sophisticated participants, but it is additional complexity for passive users.
• Execution uncertainty: Posting an offer does not mean anyone will take it. You may wait, get partially filled, or never get filled. Callbacks solve much of the opportunity cost because the capital can earn on Blue while waiting, but they do not guarantee a match.
• Exit liquidity may not always exist: Lenders and borrowers commit to a term defined by the offer. Participants can exit positions early, but that depends on available secondary market demand.

Ultimately, users can choose the market structure that best fits their needs.

Pools are well suited to open-ended, variable-rate lending, especially for passive capital and participants who value simplicity and instant liquidity. Offer-based markets are better suited to fixed-term credit, where participants want greater control over pricing, duration, risk, and capital allocation.

As onchain credit expands to more sophisticated institutions, we expect offer-based markets to play an increasingly important role in how the market scales.