[RFC] Proposal: ETH Lending via Morpho

Investment
1

Capital Pool Diversification Proposal: ETH Lending via Morpho

Summary

This proposal recommends allocating 5,160 ETH from the Nexus Mutual Capital Pool to Morpho Vaults on Ethereum mainnet. The allocation aims to generate sustainable yield on ETH while diversifying beyond staking.

Rationale

Nexus Mutual recently changed its ETH allocation strategy, creating an opportunity to redeploy ETH into yield strategies aligned with the Capital Pool’s objectives:

  • Generate sustainable yield on ETH assets.
  • Diversify yield strategies beyond staking.
  • Ensure allocations are made to protocols with robust security and risk management.

Lending allocation to Morpho aligns with the stated objectives and offers key advantages: it reduces direct exposure to liquid staking depeg risks, provides greater access to liquidity through isolated markets managed by top-tier risk curators, and delivers returns competitive with or exceeding staking yields.

Morpho for Treasuries and Foundations

Morpho is the most trusted onchain lending protocol with +$13B in deposits. Morpho empowers custodians and distributors to embed native onchain lending and borrowing capabilities into their products.

In early 2025, Coinbase launched crypto-backed loans powered by Morpho, marking the largest-scale DeFi integration to date with $700m in loans originated.

Security-first

Morpho has been built with a security-first philosophy. The protocol features only 600 lines of immutable code, formally verified and extensively reviewed — making it the most audited protocol in DeFi, with 26+ external audits and a $5M live bug bounty. This minimal and immutable architecture ensures transparency, predictability, and removes risks related to upgrades. Importantly, Morpho vaults are non-custodial — assets remain fully under the lenders’ control.

Tailored Risk Profile

Morpho Vaults are curated by tier-one risk managers (Vault curators), providing independent oversight of allocations. The vault curators allocate liquidity across isolated lending markets, which means that risks remain confined to each vault rather than spreading across the protocol. This structure allows for customizable exposures — some vaults focus exclusively on blue-chip collateral, while others diversify into broader baskets of more exotic assets.

Prime Vaults: Institutional-Grade Lending

Aragon, Origin, Flowdesk, Swissborg, Stake DAO, Moonwell and many other respected DAOs and Foundations are trusting Morpho with their treasuries.

Prime Vaults employ conservative allocation strategies, focusing on the highly liquid markets with established collateral assets (wstETH, weETH, wBTC, cbBTC).

Historical APY of ETH Prime vaults

30-day avg 90-day avg Market Exposure
Steakhouse ETH 2,42% 2,54% wstETH/WETH (LTV 96,5%), wstETH/WETH (LTV 94,5%)
Gauntlet ETH Prime 2,45% 2,67% weETH/ETH, wstETH/ETH (LTV 96,5%), wBTC/ETH

Historical APY figures presented in this proposal are net of all fees. The APY data could be found on the vault’s page on the Morpho App.

Key Yield Drivers

  • Base Borrowing Demand: Rates adjust based on supply/demand dynamics.
  • Leverage cycles: During highly volatile market conditions, leverage pushes lending rates above 5% (e.g., July 17 and 23).
  • Carry Trades: Borrowers take loans to leverage ETH on higher yield strategies.

Rewards

Based on the 30-day avg for each of the proposed Morpho Vaults, Nexus Mutual’s ETH would earn the following yield net of vault curator performance fees:

  • Steakhouse ETH Vault
    • 124.87 ETH per year
    • 0.342115 ETH per day
  • Gauntlet ETH Prime Vault
    • 126.42 ETH per year
    • 0.346356 ETH per day

Fees & Ongoing Expenses

If the Mutual’s ETH deposits were scaled in the future, this would not affect the vaults’ performance fees.

Key Risk Considerations

Following the outlined provided in the Investment Philosophy Review - 2023 on the forum, here is a review of the proposed allocation to either of the Morpho Vaults outlined above.

  • Asset/Liability Match. At present, Nexus Mutual’s Capital Pool holds 50,241 ETH in assets, with 67% of those assets held in stETH, rETH, and eETH. In addition, 27.09% is held in ETH. The proposed allocation to Morpho would represent 10.15% of the Mutual’s total assets. Depositing into one of the proposed Morpho Vaults would not impact the Mutual’s ability to pay claims, as liquidity can be withdrawn from a Morpho Vault. Because Morpho Vaults allocate to isolated markets, high utilization in one market would not impact others. Even during periods of stress, the majority of the Mutual’s liquidity in a Morpho Vault would be available to withdraw.
  • Time Horizon. The ETH allocation will remain in the Morpho Vault long term to generate yield for Nexus Mutual, but it can be withdrawn at any time. Only during short periods of very high utilization across all markets in a vault might withdrawals be temporarily constrained. Importantly, Morpho’s design actively mitigates this risk. By construction, around 10% of underlying vault liquidity is always available for withdrawal, and this buffer grows proportionally as the markets expand. Liquidity is also highly dynamic: when utilization spikes, borrowers quickly repay to manage their costs, while attractive rates simultaneously draw in new lender deposits — both of which restore available liquidity within a short time frame.
  • Capitalization. At present, the Minimum Capital Requirement (MCR) Percentage (Capital Pool / MCR) is 642.5%. The MCR itself is 8,058 ETH. Nexus Mutual is well capitalized and allocating additional ETH to Morpho Vaults is well within the Mutual’s investment framework.

Risk Buckets

  • Illiquidity Risk

    • Low risk
    • Nexus Mutual will be able to withdraw the ETH deposit to either Morpho Vault at any time. The only factor here is each individual market’s utilization rate vs. the total available liquidity in the Morpho Vault. The risk is low given each vault allocates to isolated markets and even under periods of stress, the majority of the Mutual’s capital can be withdrawn as needed.

  • Basis Risk.

    • Low risk
    • Nexus Mutual’s Capital Pool primarily holds ETH, so an ETH-based investment carries no basis risk.

  • Protocol Risk.

    • As stated previously, the Morpho protocol has undergone 26+ audits and has a live bug bounty program with a $5M bug bounty for critical vulnerability disclosures. Morpho code base is immutable, so there is no risk of codebase changes or upgrades. Morpho has $13B+ in deposits and has never suffered a loss of funds due to an exploit in the past. We take security seriously.

  • Collateral Exposure Risk.

    • ETH Prime Vaults allocate liquidity to markets that use Liquid Staking Tokens (LSTs) and to smaller exposure Liquid Restaking Tokens (LRTs) such as wstETH or weETH as collateral. These assets generally trade close to parity with ETH, but a severe depeg event could impact borrower collateral values. Importantly, Morpho’s design substantially mitigates this risk:

  • Isolated markets mean that exposure to a depeg is confined to the specific vault and market, rather than spreading system-wide.

  • Robust liquidation mechanisms ensure that when a borrower’s position falls below its liquidation threshold, collateral is liquidated promptly.

  • Reliable oracles minimizes the risk of stale or manipulated pricing, further reducing the chance of bad debt.

  • Vault curators actively manage allocations — they constantly monitor markets, adjust exposures when needed, and maintain conservative risk parameters. Curators also have emergency protocols to withdraw liquidity if required, with the key objective of protecting lenders’ capital.

  • Leverage.

    • No leverage
    • The Mutual will not be using leverage.

  • Counterparty Risk.

    • Low
    • The only counterparties the Mutual will be exposed to are borrowers and vault curators. If a borrower’s position drops below the Liquidation Loan-To-Value (LLTV) factor, they will be liquidated. Each of the proposed vault curators have well-established security measures, with timelocks in place for any new vault allocations. You can review each curator’s risk disclosures and security measures below.

  • Using Nexus Mutual’s investment framework, the proposed allocation to either one of these Morpho Vaults would represent a low-risk investment allocation.

  • Both curators provide detailed explanations of their risk frameworks, available on the Steakhouse Risk Framework page and the Gauntlet VaultBook.

Conclusion

Nexus Mutual, the leader in onchain insurance, has been a long-standing partner of Morpho. While Morpho delivers trusted infrastructure for lending and borrowing, Nexus Mutual provides protection against unforeseen incidents. This proposal marks another step in deepening that partnership — aligning two leaders to strengthen both risk and lending verticals of DeFi.

The suggested allocation advances the Capital Pool’s objectives by generating sustainable ETH-denominated yield, diversifying beyond staking, and ensuring robust security through Morpho’s immutable, extensively audited architecture and curated vault design. By allocating to Morpho Prime Vaults, Nexus Mutual gains exposure to competitive returns while reducing reliance on liquid staking derivatives and containing risks within isolated markets.

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Thanks for sharing this proposal @kugusha - my view is that this is a great opportunity to diversify our Capital Pool and strengthening the partnership between Nexus Mutual and Morpho to make DeFi safer.

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Thank you, @kugusha, for this proposal!

I wanted to dive a bit deeper on the opportunity, compare the yield for these Morpho Vaults to our current investments, and highlight why diversification is beneficial for the Mutual.

Why Diversification Matters

Currently, Nexus Mutual’s Capital Pool holds 33,676.54 ETH (67.09% of the Capital Pool) in productive capital allocated to stETH, rETH, and eETH/weETH. The split between investments is as follows:

Investment Asset ETH Value % of Capital Pool Holdings
stETH 13,555.97 27.01%
rETH 11,452.53 22.82%
eETH/weETH 8,668.04 17.27%

To ensure there’s sufficient liquidity for RAMM redemptions, the Mutual will diversify out of stETH and rETH over time, as needed, to stay within the previously determined target liquidity levels.

As the Mutual underwrites more cover and we launch the new Leveraged Liquidation Cover in early Q4 2025, our exposure to leveraged loops on LSTs and LRTs will grow. Keeping stETH and rETH holdings consistent within the 15%-20% of the Capital Pool range while meeting RAMM redemption liquidity levels will be important.

Exposure to eETH/weETH exposure will also grow through Protocol Cover, Fund Portfolio Cover, and Leveraged Liquidation Cover sales. To reduce concentration risk, it’s wise, in my opinion, to keep the Mutual’s eETH/weETH exposure at current levels. As curators and operators within Symbiotic and EigenLayer allocate to AVSs, the risk of slashing will also increase for LRTs like eETH/weETH, rsETH, etc. This will happen over time and will be a trend we on the Product & Risk team plan to keep a close eye on.

Given the above factors, it’s beneficial to diversify our investment portfolio outside of just LSTs and LRTs. The two Morpho Vaults in the proposal represent lower risk allocations since the underlying markets for both vaults accept blue chip collateral assets in isolated markets with robust oracles. Each underlying market the vaults allocate to are isolated from one another to limit contagion risk–one of the notable features of Morpho’s architecture.

Comparing Yields to Current Investments

Investment 30D Yield
stETH[1] 2.82%
rETH[2] 2.02%
eETH[3] 3.06%
Steakhouse ETH Vault 2.42%
Gauntlet ETH Prime Vault 2.45%

Both Morpho Vaults provide yield that is within a range of 40-60 bps of stETH or eETH, while they both provide an additional 40 bps beyond rETH’s yield. When demand for leveraged looping strategies on LSTs and LRTs increase, both vaults can provide yields that exceed the standard LST/LRT yield while reducing the Mutual’s direct exposure to LST/LRT assets, under the assumption that liquidations happen smoothly and effectively with no bad debt occurring. While bad debt could occur, the probability of loss is low for these specific markets given the extensive secondary liquidity available for Lido’s stETH/wstETH and Etherfi’s eETH/weETH and the oracles used within the underlying markets for these vaults.

Managed Assets in Enzyme Vault

Allocating 5,160 ETH to either of these Morpho Vaults from the capital held in the Mutual’s Enzyme Vault would be a prudent decision to earn yield to offset future claims and grow book value for NXM holders, while reducing exposure to the LST/LRT assets the Mutual already holds in the Capital Pool.

My preference would be an allocation to the Steakhouse ETH Vault. Steakhouse is allocating assets to the wstETH/WETH markets and wouldn’t increase the Mutual’s exposure to weETH, which, as I noted above, we expect to see higher weETH-related cover liabilities as we grow sales and launch the Leveraged Liquidation Cover product (protection against depeg events for leveraged positions for like-kind assets).

Fully in support of this. Thank you, @kugusha, for taking the time to put forward this detailed proposal.

  1. 30D yield figure sourced from the Investment Committee Newsletter - August 2025 ↩︎

  2. 30D yield figure sourced from the Investment Committee Newsletter - August 2025 ↩︎

  3. 30D yield figure sourced from DeFi Llama’s Yields page ↩︎

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Support this and agree with Brave’s suggestion to go with the Steakhouse ETH Vault.

@kugusha thanks for putting together the proposal.

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Thank you, Ricky. We’re excited for this opportunity to build a deeper connection between Nexus and Morpho!

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Thank you for this proposal. We’re more than happy to help support and look forward to collaborating with the NM ecosystem further. As mentioned above, for more information on our risk management approach, please consult our Information Hub | Steakhouse Financial.

One final point that we don’t believe has been part of the original proposal. We take non-custodiality and lender risk seriously, for which Morpho has a suitable role, ‘Guardian’, with the ability to veto collateral onboarding decisions and other key functions (timelock changes, cap changes, etc). For more, please review the Morpho docs on the function of this role.

Our mainline vaults are all secured with trustless Guardians, operated as an Aragon DAO, where users of the vault can use their vault token to create veto proposals through an Aragon DAO (link). This is a simplified form of dual governance tha helps secure vault users from malicious actors. This mechanism can bolster the security and risk for Nexus Mutual as it begins to use Steakhouse Financial vaults.

We are available in case of any questions or comments. Thank you!

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Thanks @kugusha, would be excited to see this happen (business and personal NXM holder here)!

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Thanks @kugusha - appreciate the effort putting together the post.

I’m supportive of this proposal as well. It provides a good balance between yield opportunity and managing correlation risk for the mutual

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