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Vault as collateral

Tenor markets accept the variable-rate lend position as collateral against a fixed-rate borrow, on otherwise identical market parameters. This creates continuity between Morpho Blue markets (variable rate) and Morpho Midnight markets (fixed rate).

This is done by listing vault shares as collateral on Morpho Midnight, where the underlying vault is an unmanaged, immutable Vault V2 allocating entirely to a Morpho Blue variable-rate market.

Example​

Take a variable-rate market where USDC is borrowed against cbBTC. A Vault V2 is created that lends only to that market, and its shares are listed on the Midnight market alongside cbBTC. Users can then borrow USDC at a fixed rate against either cbBTC or the variable-rate USDC vault shares.

Side-by-side comparison of two markets. Left: a Morpho Blue variable-rate market with cbBTC as collateral at 86% LLTV using a Chainlink BTC/USD oracle, and USDC as the borrow currency. Right: a Morpho Midnight fixed-rate market with two collateral assets — cbBTC at 86% LLTV and an immutable, unmanaged USDC vault wrapper at 98% LLTV that allocates 100% to the variable-rate market on the left — and USDC as the borrow currency.
  • Vault shares: Vault V2 shares are listed as collateral on the Midnight market. Because the shares are denominated in the same asset as the borrow currency (e.g., USDC vault shares used to borrow USDC at a fixed rate), they are listed at 98% LLTV. The 2% buffer accounts for rare bad-debt events in the variable-rate market.
  • Matching parameters: The vault's underlying Morpho Blue market shares the Midnight market's loan token, main collateral token, LLTV, and oracle, so the share value tracks the same risk parameters the fixed-rate market is priced against.

Use cases​

Expressing a view on rates​

This market structure allows more advanced users to borrow at a fixed rate and use the proceeds to lend at the variable rate. The position's net rate is the spread between the realized variable rate over the term and the fixed borrow rate, so users can take a position on whether the variable rate will trade above the fixed rate.

Improving liquidity for borrower exits​

A borrower can post a resting sell (borrow) offer at a target rate (e.g., 3%). The offer is paired with a supply callback (described below) that wraps the proceeds into vault-share collateral when filled, so the offer rests without parking idle capital.

Resting borrow offers of this kind add sell-side depth on the Midnight market. Other borrowers exiting early — who must take buy (lend) offers to close their debt — can match against these offers instead of repaying at par (paying back the full face value of the debt), reducing the mark-to-market cost of an early exit. More advanced users can thus create liquidity for normal borrowers (e.g., borrowing USDC against cbBTC) to exit early.

Creating the position via callbacks​

As part of a borrow offer, the borrower can attach a callback that wraps and unwraps the position atomically. When the offer is taken, the callback is invoked: the borrowed loan tokens are deposited into the Vault V2 and the resulting shares are supplied as collateral on the Midnight market.

Conversely, another callback can be used to exit the position — it withdraws the required shares from collateral, redeems them for loan tokens, and uses the proceeds to lend on the fixed-rate market (closing the borrow position).

For the technical implementation, see the technical documentation on the supply vault shares and withdraw vault shares callbacks.