DeFi: How Morpho is preparing its transformation

It was exactly a year ago. In the middle of July, France's Morpho announced an $18 million fundraising round, breaking the record for the biggest fundraising round for a student project. The record had previously been held by a certain... Mark Zuckerberg.

Since then, a lot has happened in Web3, particularly with the fall in the markets, but Morpho has continued to develop.

Today, the project specialising in decentralised finance, which has, in the meantime, obtained the innovation of the year award at the Web3 Awards, can boast that it has attracted $860 million in Total Value Locked (TVL) to its protocol.

The French project is now the third-largest player in lending, behind the historical giants of the sector Aave and Compound.

Its team has grown from 6 to 24 people in just a few months and its influence is growing all the time, as we were able to find out by interviewing the players in the ecosystem. 💪

"Morpho is the example that shows it is possible to succeed in DeFi despite the Bear market," points out Cyrille Pastour, co-founder of Swaap, a decentralised market maker. "They have succeeded in implementing an ingenious strategy, which has resulted in rapid development of the protocol and impressive growth in TVL," he insists.

Morpho's value proposition is simple: the application optimises borrowing and lending rates on Aave and Compound, which remain relatively inefficient. For borrowers, rates are often still too high, and vice versa. Morpho is "plugging in" to Aave and Compound to improve this situation.

"At the moment you can borrow USDC on Morpho with a rate of 3.3% and have your collateral remunerated in ETH at 2.3%, whereas Aave offers rates of 3.8% and 1.3% respectively," boasts co-founder Paul Frambot. 💰

"Morpho meets a real market demand," confirms Stanislas Barthélémi, crypto expert for KPMG.

A protocol that doesn't make any money

Despite its success, Morpho has so far generated no revenue. And for good reason, the app doesn't charge any fees 😅.

Morpho Labs, the start-up that develops the protocol, hasn't earned a single penny since its inception, despite seeing hundreds of millions of dollars pass through the system.

This decision is a choice by the team, which is banking on its unbeatable offering - there are no fees - to grow very quickly. "We could earn millions of dollars, but we're more focused on the long term," asserts Paul Frambot. ⏳

"Current DeFi users are not our real target," insists the engineer, who is aiming for institutional users (banks, funds and others) and warns that "eventual" activation of fees should not see the light of day for "several years", while DeFi is more massively adopted.

In this respect, Morpho's model is similar to that of Uniswap, the undisputed leader in Decentralised Exchanges (DEX) since 2018, which also still doesn't charge fees after years of operation.

"Uniswap doesn't need money in the short term. What they want is to go to Wall Street and show them that they are responsible for 50% of volumes in DeFi which would give them a lot of negotiating leverage," insists Paul Frambot, who is close to Hayden Adams, the founder of Uniswap.

Morpho is in a similar position thanks to its 2022 fundraising with several big investors, including the prestigious US venture capital fund a16z. 🤑

Morpho therefore has plenty to look forward to, even if its spending on security is colossal: to carry out all its audits, particularly on security, the project has already spent several million dollars. But the results are in: Morpho has been rated 98/100 by DeFi Safety, a benchmark tool for measuring the security level of a protocol. To date, this is the highest rating awarded by DeFi Safety. 🔬

"Like Swaap, Morpho invests significantly in security and research," emphasises Cyrille Pastour. "These investments are not only beneficial for Morpho, but also for the entire DeFi infrastructure, which will gradually open up to the traditional financial system."

The aim: to overcome Aave's inefficiencies

While Morpho has always presented itself as a means of optimising lending solutions, the project has never hidden its longer-term ambitions: to develop its own tool and no longer go through "partners" like Aave to find liquidity.

🔴 According to our information, this possibility should materialise in the next few weeks.

"We are the first fans of Aave, but the project has its limits and we are innovating to offer other solutions", Paul Frambot insists.

What impact could such a change have on Aave and the other DeFi players? It's hard to say. "The risk for them is of being bypassed, even if Aave's size and reputation make it a leading player," explains Brice Berdah, an expert in decentralised finance and leader of the DeFi France community.

The latter would find it more credible for Morpho to position itself as an aggregator of lending platforms to offer and execute loans on the best market terms from existing solutions.

"That's exactly what Paraswap does, which aggregates all the DEXs to offer the best exchange conditions at a given moment," explains Brice Berdah.

"It's natural to want to take on the sector leader," says Stanislas Barthélémi, for his part, who stresses, however, that one shouldn't have one's eyes bigger than one's stomach. "It's not yet totally established that there is sufficient demand for a new competitor of this kind", the consultant judges. 🤔

Aave is playing the complementary card. For Marc Zeller, in charge of AaveChan, a delegation platform within Aave's governance, "DeFi is used by less than 1% of the finance industry. Morpho is making it more attractive and that's good news for the ecosystem in general".

Contacted by The Big Whale, Aave creator Stani Kulechov declined to comment.

"Decentralised brokers" versus "real protocols"

The Morpho team nevertheless seems to be preparing minds for the coming "battle". Regularly, the project managers point to the average performance of Aave or Compound, which offer less attractive rates, and the relative capital inefficiency of these same platforms; this inefficiency is expressed through the (more or less attractive) ratio between borrowing capacity and the collateral that must be deposited.

In a blog post published on 30 June, Paul Frambot explains, for example, that the main lending platforms would be more like "decentralised brokers" rather than real protocols. 📣

"I define decentralised brokers as DeFi platforms that allow direct financial interactions, but require active human intervention to function properly," explains Paul Frambot.

In particular, he points out that Aave has 1,200 risk parameters that are regularly updated by its governance. These parameters apply to the hundred or so markets offered by Aave and to the 8 blockchains compatible with the protocol.

"This system has a crazy cost that weighs on AAVE token holders", stresses an expert.

"To manage all these parameters successfully, Aave pays the company Gauntle $10 million every year", says Paul Frambot. "Every day, the DAO votes 100% for the new parameters proposed by Gauntlet, even though they are completely closed source," he insists.

"With this system, no one is able to say whether Aave is safe," slips Paul Frambot. 😬

This model is present in most of the big names in DeFi. It requires members of the DAO to monitor and update the data on a near-daily basis.

Thus, it stands in contrast to "real" protocols, which do not require trust in others and "have the potential to form a basis on which financial products can be built", believes Paul Frambot, who thus offers some clues as to how a new version of Morpho might work...

But is it that simple?

"Creating a loan market is not as easy as creating a liquidity pool on Uniswap," tempers Stanislas Barthélémi of KPMG. "You have to check that the liquidation works, that the assets chosen as collateral have collateralisation parameters in line with the liquidity, and that there is concentration and market depth in each asset", he adds.

Will Morpho be able to do this? Answer in a few weeks...