Rating action: Exponential Explains the Downgrading of Angle USDA

Summary:
• According to Exponential, the primary concern stems from the significant dependency on an external protocol, Morpho Blue.

Exponential, an investment platform for crypto holders, recently downgraded their DAI rating. Today, they have revisited and downgraded the rating of the USDA stablecoin, which moves the Angle USD Fee Sharing pool from Lowest risk to Low risk. This decision reflects Exponential’s reassessment of the risks associated with Angle’s collateral backing for USDA. The primary concern stems from the significant dependency on an external protocol, Morpho Blue, where a large amount of USDA reserves is deposited.

Rationale

The downgrade follows Exponential’s reassessment of Angle’s collateral backing. Currently, about $17 million or over 50% of USDA’s collateral backing is deposited in Morpho Blue, an immutable money market with isolated lending pools. As the protocol launched only in January this year, Morpho is less battle-tested, adding to the potential risks. This introduces a single point of failure; if Morpho were to be hacked or otherwise compromised, a substantial portion of USDA’s backing could be jeopardized.

Angle has experienced a similar situation before with the Euler hack on March 13th, 2023. During that incident, $17.6 million of Angle’s USDC reserves were affected due to the hack on Euler. Despite the immediate response from Angle to mitigate the impact (and the funds ultimately being recovered), the event highlighted the risks associated with relying on external protocols for collateral management.

According to Exponential, this dependency on an external protocol inherently increases the risk to USDA. Despite Morpho’s strong security measures, the DeFi space is continually evolving, and new vulnerabilities can emerge. By relying heavily on Morpho, Angle cedes a level of control over its collateral. The potential loss from such an exploit would impact the stability of USDA and ultimately hurt liquidity providers.

Factors that could lead to an upgrade

• Reducing dependency on Morpho Blue by diversifying collateral across multiple, independent protocols would enhance security and stability.

Factors that could lead to a downgrade

• Increasing dependency on Morpho Blue or similar external protocols without adequate risk mitigation strategies could exacerbate existing risks.
• Any exploits at Morpho Blue or other protocols that impact USDA’s collateral backing.

Methodology

The methodology applied in this rating action is based on Exponential’s analysis of DeFi protocol risks, including lending design, collateral quality, and governance dynamics. For further information on the rating methodologies, please see the company’s risk framework.