Key Highlights
- Stani Kulechov criticized Morpho’s proposed classification of certain vaults as non-custodial.
- Kulechov argued that curator discretion over capital allocation should not qualify as non-custodial solely because of a timelock.
- Morpho’s framework separates vaults into noncustodial and discretionary categories based on control, risk, and user approval mechanisms.
Aave founder Stani Kulechov has publicly criticized Morpho’s proposal to classify certain vaults as non-custodial, arguing that the categorization does not make sense and serves Morpho’s interests. The comments came in response to Morpho’s outline of standards for on-chain vaults amid growing institutional attention to the sector.
In a statement posted on X on September 24, the Aave founder argued that a vault allowing a curator discretion over capital allocation across markets, including expansion into new markets beyond a user’s initial mandate, should not qualify as non-custodial solely due to a timelock.
Kulechov’s Criticism
Kulechov described the design as a Morpho drawback that he said is not user-friendly for liquidity providers. The statement noted that implicit approvals allowing changes to the allocation mandate leave users without proper tools to monitor such changes. Role-based systems were also questioned for creating a blame game and relocating potential liability without addressing the core issue.
Vaults that could reasonably be considered non-custodial, according to the founder, are those without a manager. Examples cited included vaults that simply wrap deposits into a lending protocol or the original Yearn vaults. The founder stated there is nothing inherently wrong with discretionary vaults provided the regulatory path is addressed, while calling for industry standards that serve the broader sector rather than individual interests.
Morpho’s Vault classification proposal
Morpho released a proposal arguing that vaults have become the default solution for onchain capital allocation.
The firm stated its core purpose is to build on-chain credit markets connecting lenders and borrowers, with Morpho Vaults created as a complement to handle complexity across isolated markets. Without vaults, the proposal said, lending across thousands of markets would require manual tracking of every position. Vaults apply predetermined rules to allocate capital across many markets at once.
The proposal referenced Morpho Midnight as an example where users can express price, maturity, liquidity, and other terms, increasing lender choice but also raising allocation complexity that vaults abstract. The proposal also referenced SEC Commissioner Hester Peirce’s July statement that crypto vaults and lending strategies should be evaluated based on their specific structure and circumstances rather than labels.
The proposed categories
Morpho proposed two categories. Non-custodial vaults are designed to prevent curators from increasing risk or taking control of user funds without mechanisms for user approval or exit. Allocations follow rules enforced by smart contracts that cannot change without first allowing users to exit. These include a timelock requiring curators to submit risk-increasing changes with a minimum delay, during which users can exit and a Guardian or Sentinel can cancel the change.
Additional features listed were role-based access controls, in-kind redemptions allowing withdrawal into underlying market positions, and immutable contracts.
Discretionary vaults, by contrast, give managers more control over asset allocation and strategy, including market making, leverage, and cross-chain deployment. With fewer constraints, depositors place greater trust in the manager’s judgment. Morpho noted that third-party providers support this model and that its open-source codebase can also be used for discretionary vaults.
The proposal identified three focus areas for the industry: regulation reflecting a vault’s actual design and safeguards rather than treating all vaults the same; infrastructure raising security standards with strong access controls; and vaults evolving with more expressive credit markets that introduce variables such as rates, maturity, and new strategies.
Recent liquidations on Morpho
The discussion follows an incident involving approximately $36.39 million in liquidations across Morpho’s PT-reUSD looped positions. Blockchain security firm PeckShieldAlert reported that a sophisticated market manipulation on August 25, 2026, triggered the liquidations.
An anonymous wallet aggressively purchased yield tokens tied to reUSD, temporarily spiking the implied annual percentage yield to around 20 percent before rapidly exiting.
The move exploited the inverse relationship between yield tokens and principal tokens, devaluing PT collateral and forcing automated liquidations of highly leveraged borrowers. The events began as of 8:00 AM UTC that day and drew attention across DeFi circles.
Morpho’s proposal did not reference the liquidations. The Aave founder’s comments focused solely on the vault classification framework. Both the criticism and the Morpho document address how vault designs handle risk, allocation discretion and user protections in onchain lending markets.
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