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Capital allocation on decentralized lending platforms

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Listed:
  • Bastien Baude
  • Vincent Danos
  • Hamza El Khalloufi

Abstract

This work complements our previous paper, which studies borrower-side strategies in decentralized lending markets, by focusing on lender-side capital allocation. We consider a lender who seeks to allocate a fixed budget across multiple markets sharing the same supplied asset. Accounting for the impact of supplied capital on lending rates, we derive closed-form solutions under three interest-rate models: linear, kinked, and adaptive (Morpho's AdaptiveCurveIRM). Backtests are conducted first on USDC and then on WETH Morpho lending markets on Ethereum. We also show that, under the kinked rate model, an allocation that brings a market exactly to the kink is never optimal on the lender side, whereas it can be optimal on the borrower side. This asymmetry may create tension between lenders and borrowers around the kink and thereby exacerbate rate volatility.

Suggested Citation

  • Bastien Baude & Vincent Danos & Hamza El Khalloufi, 2026. "Capital allocation on decentralized lending platforms," Papers 2608.24206, arXiv.org.
    • Handle: RePEc:arx:papers:2608.24206
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    File URL: https://arxiv.org/pdf/2608.24206
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    1. Bastien Baude & Vincent Danos & Hamza El Khalloufi, 2026. "Leveraged positions on decentralized lending platforms," Papers 2601.14005, arXiv.org, revised Aug 2026.
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