Aave as an entity manages all the risk and also covers any loss. Aave needs deep expertise on all coins and the dynamic of their corresponding markets. You trust the brand, Aave, and they did a very good job of shielding users from risk.
Does it scale?
It has limits, as many different assets, crypto native and non crypto native ones come into existence. It's a jungle, and how should one entity have deep expertise about all assets?
Aave chose their risk parameters always on the safe side, and if they don't have the expertise, they don't list assets. Having risk parameters on the safe side also lowers the capital efficiency.
Morpho has dedicated, independent risk managers, which manage metamorpho vault and and create or attached markets to it, if it fits their risk profile. Risk managers can be specialized in markets and if you know markets well, you can choose more risky parameters for your markets, which makes it more capital efficient.
The pure Morpho way, would be that they only manage the protocol, maybe with a costume white label front end, where the risk managers use the infrastructure, but any hiccups do not affect the Morpho brand.
Now Morphos brand suffers from spill over of quality issues from one of the risk managers.
Does it scale?
It may scale better than Aave, but has reputation risk for Morpho, even if they are not risk manager. And: In an easy markets, users may flock to the risk manager who takes more risk, the same risk manager who are whipped out if the markets are in turmoil.
What out of questions: Aave and Morpho are both highly professional teams, Aave is battle tested over more than one cycle, while Morpho and risk managers on Morpho are still in the learning phase.
Curve has a lending market too, but Curve has always chosen the path to try to solve issues with technical solutions.
The benefit of soft-liquidation for users allows us to set conservative LTV values, because we don't compete to be the most capital efficient markets, but compensate users with the benefits of soft-liquidation which helps save their position in rough markets.
As tweet:
https://twitter.com/martinkrung/status/1783092537353248972