TBW Premium #14: When France attracts the Web3 giants

Speaking of records, France's Morpho has just set a new one for itself: that of the biggest fundraiser for a student project. With this operation, the DeFi protocol, which raised $18 million, dethroned Mark Zuckerberg and Facebook, who raised $12.7 million in 2005. A little excessive? Not necessarily, given Morpho's potential to become a DeFi giant. We explain it all below.

THE BIG NEWS

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👉 France hits on Web giants3

Blockchain.com, Crypto.com, Binance... Most of the world's top crypto companies were in Versailles on Monday for "Choose France", the big annual event aimed at encouraging foreign groups to invest in France. While no investment was announced by any of the sector's heavyweights, the Élysée Palace and its teams took the opportunity to make some good calls. "Web3 has become an industry in its own right, and it was confirmed to us that France wants to play a leading role," explained the head of a major group who attended the event. The stakes are high for the eurozone's 2nd largest economy. In the spring, the Chinese giant Binance announced the creation of an office in Paris with the idea of making it its European headquarters. Others could follow, creating hundreds of jobs. According to several studies (including one by KPMG), the Web3 sector directly employs just over 1,000 people in France.

👉 The unclear future of the Napoleon Group token

What will become of the NPX token? This is one of the questions that has been agitating the crypto community 🇫🇷 since the announcement on 4 July that Napoleon Group, a French investment company specialising in cryptos, had been acquired by CoinShares, one of Europe's leading fund managers in the sector and listed on Nasdaq in Stockholm. As a reminder, Napoleon financed itself in 2018 through an ICO that raised the equivalent of just over €10 million. At the time, investors received a token (the NPX) offering a right to license and exploit trading signals. Except that this token could soon be put aside. Why? Because "the regulator does not look favourably on a listed company incorporating tokens into its operations", explains a spokesperson for the group, which acquired Napoleon in order to benefit from its licences in France and gain access to its strategies and expertise in DeFi and quantitative trading. According to our information, a decision will be taken shortly and announced in September. NPX holders are also denouncing the opacity of Napoleon's historical founders regarding the use of the funds raised in 2018. CoinShares says that all accounts have been audited during a due diligence process and have been validated by an auditor. 

THE BIG STORY

Morpho, the killer app for decentralised finance? 🔥

👉 News. French project Morpho has just raised $18 million‍

👉 Background. While it has seen strong growth, DeFi is still far from effective on rates‍

👉 Why it matters. Morpho has developed a system that makes it possible to offer more attractive rates for lenders and borrowers.

Web3 is a huge ocean where many projects are developing. Some want to offer new services or improve an existing system. Others want to shake up their industry. Morpho falls into the latter category.

Created in 2021, the French project, whose symbol is a butterfly (we'll come back to the importance of the symbol below) is still a little-known player in decentralised finance, more commonly known as 'DeFi'. But for how much longer?

Because the project, which has just raised $18 million from 90 investors including the prestigious US fund Andreessen Horowitz (A16z), has no shortage of ambition. "Decentralised finance is something incredible, but it lacks efficiency, and our aim is precisely to improve it," explains Paul Frambot, co-founder of Morpho Labs, the company that designs the Morpho protocol.

To decipher what Morpho is doing, you first need to understand what "DeFi" is, which is opposed to "centralised" finance, i.e. the so-called traditional system where you have to go through intermediaries, your bank for example, to borrow and save money.

Liquidity pools

In DeFi, there is no trusted third party, but "pools", piscines or bassins in good French. The idea behind these virtual pools is to allow lenders to pool their money (cryptocurrencies) so that borrowers can come in directly to help themselves in exchange for a certain rate.

A SIMPLE example to understand the mechanism: Gregory puts 2 ethers (ETH) in a "pool" where the funds of thousands of other lenders are also present, and Raphaël comes to draw from the pooled pool because he needs cash.

The advantage of this system is that it allows anyone to deposit or borrow money without an intermediary; no need to send an application to the bank. It all happens in a matter of minutes.

The downside, and this is what makes most DeFi apps work, is that you have to deposit a guarantee in cryptocurrencies to ensure that the loan will be covered even if the borrower defaults. 💡

Today, there are several DeFi protocols. The best known are called Aave or Coumpound and manage $6 billion and $3 billion respectively in their "pools". But however effective they may be, these protocols do not offer users optimal rates. Why not? Because the community of lenders (Grégory and his friends) share the interest paid by a single borrower (Raphaël)...

It all depends on the operations, but lenders often benefit from fairly low rates of return - currently around 0.5% - when borrowers pay relatively dearly - around 3%! 🙃 Given that there is no banking intermediary, this difference is hard to justify. This system makes DeFi less attractive than the traditional system. And it is precisely this problem that Morpho intends to solve by bringing borrowers and lenders together via its protocol, to offer better rates...

But how? By using peer-to-peer in liquidity pools.

"Pools are very practical for providing liquidity, but they lack efficiency in redistributing it," explains Paul Frambot, who is still a student at Télécom Paris, one of France's leading engineering schools. "By using peer-to-peer pools, we enable a lender to match up directly with a borrower. It's much more efficient". In other words, the lender will be rewarded at a certain rate (e.g. 1%), while the borrower will repay at a slightly higher rate (1.2% in this example). Morpho recovers the difference between the rates, the "spread", to finance itself.

Morpho-Compound, Morpho-Aave...

To achieve this, Morpho Labs has created a solution that allows users to connect to the liquidity pools of popular protocols such as Compound, Aave or Curve. The company already launched Morpho-Compound in June. It is working on Morpho-Aave, which should be released in the coming weeks. "It's one of our priorities", explains Paul Frambot.

Other DeFi protocols should be integrated soon because the French project is capable of connecting to "any player", he adds.

Like most other DeFi players, Morpho has also created a token, MORPHO, which enables it to decentralise its governance. The token is also used to reward users of the protocol. The first MORPHO tokens will be unlocked in the coming days on the wallets of the most active users. But they will not be transferable, at least initially, in order to avoid mass sales. "Morpho is a long-term project," explains Paul Frambot. "We're building all the layers one by one."

Precisely how far could Morpho go? That's one of the big questions we can ask ourselves. Because the project, if it takes off, could potentially dry up a large part of the liquidity pools, like those at Aave or Compound. "It's a real risk," says one industry insider. "If DeFi users make a rational choice, they will use Morpho-Compound more than Compound," says Paul Frambot. In just a few weeks, Morpho has already raised several tens of millions of dollars.

A situation that does not worry the dominant players, such as Aave. "All Morpho users are currently Aave users," says Marc Zeller, head of developer relations for Aave. At least in the short term. Because in the medium to long term, Morpho intends to do without the liquidity pools of Aave and the others. In fact, that's the whole idea contained in its butterfly-shaped logo.

Morpho is only at the 1st stage of development of the project, of which there are three.

👉 Larva

👉 Chrysalis

👉 Butterfly

For the moment, the protocol is at the "larva" level and needs the "pools" of DeFi players to operate and offer liquidity to lenders and borrowers. Soon enough, however, Morpho will aim to move on to the second stage, that of the 'chrysalis', with the introduction of an order book system enabling different peer-to-peer rates within Morpho. According to our information, this stage is not expected before early 2023.

The final phase, the butterfly phase, corresponds to a system where Morpho would take off and no longer need liquidity pools to operate. Instead of pools, Morpho would use market makers in addition to an order book, i.e. market players who themselves supplement the transactions with their liquidity to take part of the spread. A system that is now widely used on the financial markets... classic.

THE BIG FOCUS

Is the worst of the crisis behind us? 🥵

US inflation yesterday set a new record since 1982. Here are the main points to remember, according to several market sources.

Has US inflation reached its peak?

With the fall in commodity prices that we have been seeing since the beginning of June, we can hope that the 9.1% figure will be one of the last above 9% and that the next publications will no longer surprise investors (the consensus was for 8.8% in June). Wheat, maize, oil and copper have all lost nearly 20% in recent weeks. Barring any unforeseen events, we can expect these falls to be passed on to inflation, which will soon begin to slow. However, we will have to keep a close eye on Russia, which is once again threatening to turn off the gas tap to Europe. Prices could continue to soar on the Old Continent...

Are there any figures to suggest a brightening?

Not for the moment. Growth figures are constantly being revised downwards, inflation is very high, business figures are showing a deterioration in Europe, confidence in US small businesses is at its lowest since 2008... The risk is that we will move from an environment of doubt to depression! And we can't count on the central banks to get things moving again: their priority is to fight inflation, so they won't be able to cut interest rates. For the Fed to change its strategy, the markets would have to fall by another 10-15%.

What consequences for risky assets, including cryptos?

With high inflation, central banks forced to raise interest rates and a deteriorating macro-economy, the coming months look complicated. This explosive cocktail could lead to a capitulation in risky assets, whether in indices or cryptocurrencies. Prudent investors should let the storm pass. After that, we mustn't forget that it's in times of crisis that there are the best deals.