Bad Debt

MORE Markets has implemented a unique approach, pioneered by Morpho, for handling bad debt, distinguishing it from traditional lending protocols. In conventional systems, accrued bad debt persists indefinitely within the market, requiring manual intervention for resolution. This can maintain market functionality if the debt is minor; however, substantial bad debt renders the market inoperable.

In traditional lending protocols, bad debt accumulates and remains in the market unless manually addressed. While small amounts of bad debt might not affect market operations, large amounts can cause the market to stop functioning.

On Morpho, if a liquidation results in an account having remaining debt with no collateral, the loss is proportionally shared among all lenders. This methodology allows the market to remain perpetually operational, as bad debt is addressed and cleared as soon as it emerges.

Since MORE markets are built on the Morpho protocol, the same approach is used when liquidating unrated, standard borrowers.

However, for premium borrowers, a different mechanism is used, facilitated through debt tokens.