If your collateral value drops below the required LTV threshold on Morpho, liquidators step in. They repay your debt and take your collateral. You get nothing back.Correlated pairs have naturally lower liquidation risk since both sides move together, but depegs or oracle lag can still trigger it. Non-correlated pairs face standard market risk where a big price drop in the collateral relative to the loan token puts you at risk.The protocol enforces a 2.5% buffer below the liquidation LTV and validates your LTV on every leverage and borrow operation. You can also add collateral or repay debt anytime to improve your safety margin.
Your profitability depends on the spread between what your collateral earns and what you pay to borrow. If Morpho pool utilization spikes and borrow rates jump while your collateral yield stays flat or drops, that spread can shrink or go negative. Keep an eye on pool conditions and be ready to repay or close if things turn unfavorable.
There are several interacting systems here - Morpho, external swap routers, the UserProxy delegation pattern, oracle feeds. A bug or exploit in any of them could affect your funds.The protocol mitigates this with position isolation (one proxy per position), reentrancy guards on all flash loan callbacks, whitelisted swap routers, and immutable safety parameters.
Your collateral token depends on some underlying protocol to generate yield. If staking rewards change, protocol fees get adjusted, or the underlying yield source has a smart contract issue, your expected returns could drop or the token could depeg. Do your research on what’s backing the collateral before committing.
When markets get stressed, swap liquidity between your collateral and loan token can dry up. That makes exiting expensive (high slippage) or temporarily impossible for large positions. The protocol has slippage protection on all swaps, but it’s worth sizing positions with available liquidity in mind.
LTV calculations depend on Morpho’s oracle infrastructure. Delays, manipulation, or misconfiguration in oracle feeds could lead to wrong LTV assessments, either allowing undercollateralized positions or triggering liquidations that shouldn’t happen.
