Borrower defaults are managed through Morpho’s overcollateralisation and liquidation mechanisms: • Overcollateralisation: Borrowers on Morpho are required to deposit collateral worth more than the loan they take. For example, if a borrower wants to borrow $100, they might need to deposit $150 in another supported digital asset. • Liquidation Process: • If the value of the collateral falls below a certain threshold (eg. 80%) due to market fluctuations, the protocol automatically enables any third-party (i.e Liquidators) to trigger a liquidation of the borrower’s collateral. • The collateral is then sold to repay the borrowed amount, ensuring lenders are compensated. • Liquidators are incentivised though a small commission to detect and liquidate positions of borrowers with bad debt. • Risk of Loss: While these mechanisms minimize risk, extreme market events or smart contract vulnerabilities could lead to partial losses. However, such occurrences are rare, and Morpho’s track record demonstrates strong reliability in protecting lender funds.