Compound adopts Morpho’s tech for new Polygon vaults in controversial Gauntlet-led move

On Thursday, decentralized lending protocol Compound launched a new series of vaults on Polygon via a partnership with web3 advisory firm Gauntlet and rival lending protocol Morpho. Depending on one’s perspective, the move is being cast as either a way to breathe life into one of DeFi’s longest-running projects or as a complete disembowelment of Compound. Though intended for Compound to regain market share, it is seen by some as a surrender of its core technology. While the partnership could generate millions in revenue, critics argue it puts Morpho’s growth ahead of Compound’s and raises potential conflicts of interest since Gauntlet is playing a central role in both governance and execution.Risk management firm Gauntlet proposed the controversial idea in late January. The aim was to help Compound recover lost market share from competitors like Aave, the largest lending protocol on Polygon, by teaming up with one of the fastest growing onchain credit markets in crypto. However, the proposal is also a blow to Compound, which would theoretically profit from the arrangement, if successful, at the expense of essentially abandoning its native tech stack. Worse, Compound is paying for the honor. Both Compound DAO and Polygon are putting up $1.5 million worth of native tokens to bootstrap growth and acquire users. Compound, launched in 2018, was one of the main catalysts of the mythical “DeFi Summer”. In 2020, founder Robert Leshner launched a governance token, COMP, and handed the reins of the protocol to the community in one of the earliest experiments with community governance.Although an early success, Compound has lost steam. COMP trades around $40 today, down from a peak above $850 in 2021 while its total value locked is down to about $2.3 billion from a high above $12 billion. This puts it below the TVL of Morpho, a protocol launched in 2022 (the same years as Compound’s latest V3), with about $3.2 billion in assets. “Since Compound V3 was released in August 2022 by Compound Labs, the protocol has not made meaningful updates to its tech stack,” Gauntlet wrote in its proposal. “Over the past year, Compound’s market share has declined. Compound V3’s competitiveness will be further pressured with the upcoming versions of Aave V4 and future iterations of Morpho and other protocols.”Mutually beneficialUnder the plan, which passed with nearly 93% of the voting weight, Compound would launch four new USDC, WETH, USDT and WPOL lending vaults using the permissionless Morpho Blue infrastructure. Compound DAO owns the vaults and accrues all the revenue while Gauntlet would oversee and optimize their risk parameters. Some estimates suggest that the arrangement could generate $2 million to $3 million in revenue over the next two to three years.The arrangement is also beneficial to Morpho, as it would give it “greater distribution” and face less competition. It’s worth noting that the move comes shortly after Aave essentially voted to abandon its deployment on Polygon PoS. In late February, after months of community debate, Aave decided to update its parameters to incentivize users to withdraw their $300 million worth of assets from Polygon following a major fallout between the communities. Last year, Polygon’s community shut down a proposal to repurpose bridged assets — which otherwise would remain locked — to earn yield on Morpho and Yearn vaults. Even though the idea was refused, Aave DAO considered the proposal an unacceptable breach of trust and pulled support. Seeing a gap in the market, Gauntlet proposed that Compound and Morpho, the next largest lending protocols, partner to capture some of that volume. At a technical level, the protocols are relatively distinct. Compound uses a monolithic, governance-heavy design with pooled liquidity markets where users deposit and borrow assets. It employs a single base asset model in V3, with interest rates. Its risk parameters — over aspects like collateral factors and liquidation specifications — are set by DAO votes.Morpho, on the other hand, is a modular and immutable architecture that supports isolated lending markets that users can create permissionlessly. Morpho Blue matches lenders and borrowers peer-to-peer via a singleton smart contract and externalizes its risk management to curators, including Gauntlet. Conflicts of interest?Aside from being repositioned as a “fee-driven holding company leveraging” or glorified frontend for Morpho’s tech, some Compound supporters have called out potential conflicts of interest throughout this quasi-merger. For one, Gauntlet was the largest voter by voting weight, when some argue it should have abstained considering it proposed the deal. Gauntlet also has pre-existing relationships with both Compound and Morpho through involvement in their governance. While Gauntlet and Morpho will not receive revenue from the vaults, some critics have argued Gauntlet is prioritizing Morpho’s growth over Compound’s."If Compound itself refuses to use its own product, it raises serious concerns. Why would anyone continue to believe in the project?" as one COMP holder said.And while Gauntlet claims no fees will be taken initially, the proposal mentions a future possibility of introducing a “fee-splitter contract” subject to Compound DAO approval. “It seems like an opportunity to make an investment into the Morpho ecosystem at the expense of Compound,” another user said. Others have noted more indirect forms of conflict. Notably, after leaving Compound a few years ago, founder Robert Leshner delegated a large portion of his COMP tokens to Gauntlet. Additionally, together with Gauntlet CEO Tarun Chitra, Leshner founded the Robot Ventures VC firm, which invested in Morpho.Competitive cyclesWhile some have criticized the arrangement, there’s no arguing that crypto is a cutthroat industry that often has clear winners and losers. The fact that Compound has survived this long is a testament to its steadfast governance in face of a constantly evolving competitive landscape. As Morpho CEO Paul Frambot noted, Morpho began as an “optimizer on top of Compound” before splitting off to become an independent primitive. “Now, Compound is transitioning to build on Morpho,” Frambot said. “This move underscores the power of open financial infrastructure: projects gain a more efficient, immutable tech stack, save significant development time and costs, reduce overhead, and benefit from a shared network—all while focusing on the most value-added activities.”Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. 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