Although decentralised finance (DeFi) holds out a great deal of promise for changing the financial system, it still shows few connections with the traditional world and remains confined to 100% crypto use. "And sometimes even in a very inefficient way", ironises a French banker.
"Many institutional investors are still reluctant to adopt the infrastructure proposed by DeFi. One of the reasons is the lack of traceability and identification tools for counterparties likely to interact with them", explains Denis Alexandre, who worked in risk management at Société Générale.
French start-up Morpho Labs, which is behind the decentralised lending and borrowing protocol Morpho, intends to address this problem by offering any financial player the opportunity to create its own markets and with its own rules, while benefiting from the efficiency of Ethereum blockchain technology.
Although relatively new (2021), Morpho Labs has built up a strong reputation thanks to its $18 million fundraising round in 2022. It is the biggest deal ever raised by a project conceived by students, beating Facebook's record. The project has attracted high-profile investors, such as US venture capital fund Andreessen Horowitz (a16z).
Until today, Morpho was content to plug into major lending protocols such as Aave and Compound in order to optimise their rates. "But we quickly reached the limits of the system ", explains Paul Frambot, CEO of Morpho Labs.
Morpho Blue meets a clearly identified need
In early January, the start-up unveiled a new iteration of its project with "Morpho Blue", a protocol that operates completely independently and is claimed to offer the best efficiency on the market. Its strong point: a permissionless infrastructure that allows anyone to launch liquidity pools or markets. Another advantage is that Morpho has launched MetaMorpho, a component that will be responsible for redirecting users to pools or markets that match their risk management or compliance requirements.
"These aspects should meet the needs of banks or asset managers because they will be able to limit access to certain regulated participants, while benefiting from the efficiency of decentralised finance (DeFi)," adds Paul Frambot.
This proposal is different from Aave, the historic player in DeFi lending and borrowing, which today totals the most assets under management with $9 billion. The protocol launched by Stani Kulechov in 2017 functions as a large pool of liquidity on which anyone can deposit or borrow. It's very efficient, but it doesn't meet the compliance standards of financial players.
Aave too limited for institutions?
"From our discussions with the giants of traditional finance, they are not comfortable with the idea of leaving fund management to a decentralised autonomous organisation (DAO)," confides Paul Frambot. "They also fear that their funds will be mixed with those of players whose identity they don't know," adds Paul Frambot.
"It's a bold gamble, to say the least," explains Marc Zeller, head of Aave Chan Initiative (ACI), an important structure in Aave's governance. "To say that Aave is not scalable over the long term for compliance reasons is nonsense. Institutional investors are primarily interested in having sufficient liquidity and attractive interest rates. We have the means to adapt to their demand for compliance with offers that are tailor-made for them," he concludes.
For the moment, the institutional version of Aave (Aave Arc), launched in 2022, has not yet met its public. Will Morpho Blue be able to do better?
Growth before revenue
Since the launch of Morpho Blue, start-up Morpho Labs has recorded some success by attracting crypto risk management specialist Gauntlet to join its ecosystem. This 'take' is significant in that the New York-based company had been working with Aave for four years and was one of its long-standing partners. Morpho Blue was also the first to launch a pool capable of hosting PayPal's stablecoin, PYUSD.
In just under two months, the protocol has totalled more than $160 million in deposited assets. A great success, but one from which the protocol - and the Morpho Labs company - are still deriving little or no revenue.
A strategy assumed by Paul Frambot. "Our priority is to build the largest network of users who will bring liquidity and get into the habit of using us," he says.
According to our information, the company is sufficiently capitalised and could easily raise new funds, before having to set up a fee system. "We're in a growth phase, and that's where we're putting our efforts," concludes Paul Frambot.
