Overview
This proposal seeks DAO approval to integrate Morpho Blue as an additional lending and borrowing venue within the tETH yield strategy.
The integration follows tETH’s existing Market Efficiency Yield (MEY) approach:
- Supply wstETH as collateral
- Borrow WETH at rates below staking yield
- Convert borrowed WETH back into wstETH to increase staking exposure
The objective is to improve the yield efficiency and capital utilization of tETH by expanding access to lending liquidity, while preserving existing leverage structures, safety parameters, and risk controls.
Background
tETH, like other tAssets, enhances native Ethereum Proof-of-Stake (PoS) yield by combining staking rewards with interest rate arbitrage across major lending protocols.
The current yield strategy consists of three primary components:
1. Base Yield
tETH is backed by liquid staking tokens (LSTs) that generate Proof-of-Stake (PoS) rewards. The underlying LST is currently wstETH (Lido).
2. Yield Enhancement
tETH generates additional yield through Market Efficiency Yield (MEY), where LSTs are utilized as collateral to borrow assets at rates below their underlying staking yield.
The borrowed assets are then converted back into yield-generating positions to earn additional rewards, while contributing to the convergence of fragmented rates across DeFi lending markets.
In the case of tETH, wstETH is used as collateral to borrow WETH at rates below staking yield. The borrowed WETH is converted back into LST exposure to earn additional staking rewards. This process amplifies returns while contributing to the convergence of fragmented lending rates across DeFi markets.
3. Additional Rewards
Beyond base yield and MEY, tETH holders may receive additional ecosystem incentives where applicable. These may include benefits from points and rewards programs across integrated protocols. These benefits accrue directly to tETH holders.
Current Strategy Venues
The tETH MEY strategy currently operates across four lending venues:
- Aave Core
- Aave Prime
- Gearbox
- Spark
Capital allocation across these venues is managed dynamically based on prevailing borrow rates, utilization conditions, and available capacity.
Motivation
As tETH’s TVL grows, the protocol’s ability to efficiently deploy capital across MEY strategies depends on access to sufficient lending liquidity at competitive borrow rates. Expanding to additional venues improves capital efficiency and reduces single-venue concentration risk.
Morpho Blue is a permissionless lending protocol on Ethereum. The wstETH/WETH market on Morpho Blue accepts wstETH as collateral to borrow WETH, supporting the mechanism that underpins tETH’s MEY strategy.
Integrating Morpho Blue is expected to:
- Expand the protocol’s access to WETH lending liquidity across an additional established market
- Improve capital efficiency by enabling allocation when Morpho Blue offers favorable borrow rates relative to existing venues
- Diversify MEY exposure across a broader set of lending protocols, reducing single-venue concentration risk
- Strengthen the protocol’s contribution to rate convergence across a wider portion of the Ethereum lending market
Specification
If approved, the protocol will:
- Integrate the Morpho Blue wstETH/WETH market as an active MEY venue
(Market ID: 0xd0e50cdac92fe2172043f5e0c36532c6369d24947e40968f34a5e8819ca9ec5d)- Supply wstETH as collateral
- Borrow WETH against it at prevailing market rates
- Convert borrowed WETH back into wstETH to maintain LST exposure
Capital will be allocated dynamically alongside existing venues, subject to prevailing market conditions and internal risk parameters.
The DAO retains the authority to revise allocation parameters through future governance proposals.
Risk Considerations
The integration introduces exposure to the following risks:
- Smart contract risk specific to Morpho Blue
- Oracle risk within the wstETH/WETH Morpho Blue market
- Variable borrow rate risk
Mitigations
- Existing collateral ratios and leverage limits are preserved across all venues
- Dynamic capital allocation allows the protocol to reduce or exit exposure if borrow rates or risk conditions deteriorate
- Ongoing monitoring of utilization, borrow rates, and position health across all active venues
- DAO authority to adjust the Morpho Blue allocation through governance
Implementation Plan
If approved, the DAO assigns Treehouse Protocol to:
- Finalize integration parameters for the Morpho Blue wstETH/WETH market, including collateral ratios, leverage limits, and initial allocation ranges
- Update strategy execution logic to incorporate Morpho Blue as an active MEY venue
- Update the Proof of Reserves dashboard to reflect positions held on Morpho Blue
- Monitor yield performance, borrow rate dynamics, and position health across all active venues on an ongoing basis
No structural redesign of the tETH strategy is required.
Next Steps
- Gather community feedback on the Governance Forum
- Escalate the proposal to Snapshot for formal voting
- Implement the Morpho Blue integration upon approval