#DappCon22: Day 1 - Morpho, The New Gateway To Decentralized Lending, Paul Frambot

Transcript

all right welcome back everyone uh we're happy to bring up Paul fremble from morpholabs and uh he'll speak about basically Morpho which is a new gateway to decentralized lending so thanks Paul [Applause] great so hi everyone and uh thanks for joining so today I'm going to present mofo and uh it's a new kind of Landing protocol and you learn how as a user of Ave or compound or any other lending protocol you'll be able to earn better rates or pay less on your boring thanks to mofo so first I wanted to go back on a point

which is rather generic that is how and why Defy is supposed to in the end replace traditional Finance so there are 44 000 Banks and Credit Unions around the world right and they all do the same thing right so you have 44 000 times the same algorithms the same uh or security audits men on the same algorithm but isolated so if you look at D5 you have like one algorithm for hd5 primitive so you get the intuition that it's uh the costs are reduced by 44 000 theoretically so you have the intuition that defy

economically makes a ton of sense and in the long run if we try to we succeed in reproducing the efficiency of traditional Finance in the blockchain well inevitably it will thrive so it should take dexes for example so you have uniswap in particular units of V3 that has reached really interesting levels of efficiencies those last months and they even published a report recently where they explained that the depth of the dexes of uniswap is being kind of starting to beat the binance or Kraken or centralized exchange at the moment so that's very interesting to see

that vexes have reached mechanism designs that are competitive with traditional finance and people won't go to D5 instead of C5 because it's not only because it's decentralized but also because it's economically more efficient than traditional Finance and then you look at Lending so you have Ave compound and you look at the rates and you might say hey we're not so close to traditional Finance rate right so this morning it was 0.24 to lend usdc on Ave and well this is not what you expect from the next

Finance Revolution right you expect higher yields defy used to have much higher yields but when you think about it it was mostly due to talking incentive basically incentivizing people to borrow and then those this borrowing demand is creating yield for lenders but yield is going down a little bit because token prices are going down and protocols like AV and compound are cutting their emissions and if you look at compound for example this morning again you have this huge spread between the landing side and the barring side so you have lending API that are very low and borrowing API that

are quite High actually so just look at ether you have like this four percent spreads it's not even a fee we'll talk about it later so dexes are in the way to disrupt traditional Finance they're reaching level of efficiency that are very interesting to the point where people start using unit swap because it's better than binance but landing pools is still a very inefficient model at the moment so the purpose of this talk is really to understand why is that and what can we do about it with Morpho so let's take a step back on lending in general and D5 and look at the very

first models that were introduced for Lending so in the early days really you had those peer-to-peer models some of you may know recognize this logo which was the logo of Eastland so the ancestor of Ave but you had also Dharma for example and the idea was really there is no Landing pool no such thing as a landing pool instead you have a book right where people post The Landing offers and the borrowers come and basically take those offers so as a lender I'm going to propose let's say 10 000 usdc at a two percent API and then I have to wait until a borrower actually comes in deposits some collateral and is

going to take this offer so these sort of you know advantages of such model is basically that you have everything that you lend if you are taken by a borrower is going to be borrowed okay and this model is obviously directly inspired by traditional Finance so those are the algorithms of traditional Finance they were good why not changing so this is what was initially fought in 2017 but obviously you have mainly two big problems for that the first problem is as you might have understood the experience is very eloquent it means that as a lender you're posting some money but you have

to wait for a borrower to actually come and take that offer in order to generate yields so in practice in Eastland for example you would wait for ages before actually getting matched and the second disadvantage is basically that it was gas intensive so as a borrower if I want to borrow large amounts then I have to iterate through every single position that there is on Eastland so borrow the first offer then the second then the third and you know blockchain is not such a scalable environment SO gas wise it was not so efficient so if you were to put Eastland or those peer-to-peer models well they were very

Capital efficient because again everything that you lent was borrowed so Capital efficiency wise it was good but it was very illiquid so users would not earn yield as soon as the deposit which is an important property of of D5 year mechanisms so a few years later actually a few months later the compound Labs team came up with a completely new design which was the landing pool design so the idea is quite simple and actually much more simple than the book of Purity is basically that you have a big pool of liquidity which is a small contract and anyone can supply liquidity into it so if you want

to provide liquidity to compound you just provide liquidity to the pole and as a borrower if you want to borrow liquidity you just take that liquidity from the poor and pay interest into it and the very nice property is that this mechanism has brought is basically that users can withdraw at any time borrow at any time and any amount so let me explain I'm depositing tokens in the compound lending pool instantly the block after I'm generating yields because our active borrowers in this Landing pool and you have this very nice property of since I'm not much peer-to-peer it's a pull is there is liquidity in the pool

then I can withdraw the downside is the interests that are paid by the borrowers are going to be shared across all the pool it means that just a small portion of my capital is going to be utilized so as a lender I'm depositing into the pool but only let's say like 20 25 of my capital is going to be borrowed and this is what is creating the large API spreads that we just talked about earlier and this spread if you wonder why it's caused by it's not a fee taken by compound like compound is not taking a three percent fee uh on if basically it's just the pool model where

you have many many suppliers and very few Borrowers and lenders so the guys earning 0.39 are sharing the interests paid by the few borrowers so there are a few borrowers paying a lot and those interests are shared across all the lenders so you cannot get the idea that this model is not so Capital efficient so if we were to you know Place avian compound in the same graph you could say that they are very liquid that's very nice because you can withdraw when you want okay that's desirable but they're not Capital efficient you get this 0.24 yield on usdc okay not so interesting compared to traditional Finance

now mofo while mofo is a protocol that is exactly the same as compounds or Ave from a user perspective so if you use Morpho it's like you're using compound you supply liquidity you borrow assets um exactly the same way you have the same interface and actually you have the same liquidity available so there is one more protocol for each Landing pool so there is more for compound for compound more for RV for RV and more for landing pool for whatever Landing pool that exists and through more for compound for example you have the same liquidity available

than on compound because morphle compound Taps there directly into compound so more for component is the same liquidity so it means billions of liquidity available but it also means the same parameters so just before we had to talk about risk well mofo is going to copy unchain the risk parameters of compound if it's more for compound or morph Ave is going to have the same collateral factors as Ave the same oracles well so far everything is the same except that we have with more for much better rates and this is true for both sides of the market so lenders are going to earn much more and borrowers are going to pay much less

so if you wanted to position Morpho in this graph well you're as liquid as compound and Ave and you're as efficient as a peer-to-peer model so how does it work in practice well let's take a user Journey so let's say you you want to lend some Capital so I have some if and I want to lend it to mofo so mofo is going to put it to the lending pool so let's say Ave for example and then a borrower comes in and so he's going to deposit some collateral in order to borrow so that's step four and it triggers the borrow button and by triggering the borrow button mofo is

going to extract the liquidity that was deposited by the lender at the first step so extract it from the pool and give it directly to the borrower so what's happening here is that the borrower and the lender are out of the pool they are much peer-to-peer here really the borrower and the lenders since they are out of the pool they don't have to share the interests with the rest of the pool so there is no there isn't this spread that we were mentioning in the beginning so if you take an example uh with this uh image you have like the the spread of compound let's say so uh low Landing API

and very high barring API then Morpho has an epiwoy which is in the middle and this mpy is the same for lenders and Borrowers so the idea is the following so if I am the very first user on mofo well mofo is going to put me on compound so I'm going to experience the rates that is low okay and then a borrower is going to come in and Morpho is going to extract me out of the pool in order to be matched at this mid rate which is more interesting for me but also more interesting for the borough because the borrower is not going to take this 2.5 percent it's going to have Like This 1.2

and then you may ask okay I'm lending my money to a Bara isn't there like counterparty risk or something like that I can't exit my liquidity because it's in the hands of the borough well more for cleverly invented a mechanism to actually fall back in the underlying pool whenever needed so that means that if you want to withdraw your liquidity but the liquidity is taken for the borough well mofo is simply going to put you back to put the borrower back on compounds so that the lender can exit at any time so with this you kind of get the intuition that with a Morpho you get in the worst case scenario the exact same thing that you got on compound so Morpho

compound worst case scenario compounds average case scenario you get the mid rate so it's strictly better same for Ave mofo Ave is going to be an improvement of Ave so we did a white paper describing the vision of the protocol and I would encourage anyone that is interested in mouthful to read this paper just posted the link here if you're interested and maybe just doing a quick recap so that everybody understands well what morph is about it's really as simple as that if you're an I have a user well basically you're not having good efficiency you're not

having good Capital efficiency and more for our way solve that problem so you sure have a user if you move to more far away you have the same liquidity the same liquidation parameters but you'll have better rates same for more for compound with compound etc etc and actually what we've seen is that Morpho is launched two months ago and in less than two months the protocol started adds obviously zero dollars and is now at 130 million uh supplied through the protocol and when you look at the users of Morpho you have many users that actually switch from compound to go to morphle compound or from RV to moreover by Avi because they understood

that they would be strictly better right he will so here is the website to mofo and also we are hiring so if you're interested in joining the team the protocol is quite interesting and complex grass so if you're a good technical person we're happy to to we would be happy to be working with you but we're also recruiting in many jobs like for example marketing and and content so feel free just to Ping us after this talk or or directly through for the link and obviously if you have questions then I'd be happy to answer them uh yeah I see one there so sorry if I did not understand the

Morpho solution if uh the first lender that comes to Morpho goes to uh compound right and then with the first borrower that asks for the same amount of capital it gets extracted and they get a match with the middle point right but if more and more borrowers go to Morpho instead of compound because it's strictly better for them less borrowers will go to compound and Company will have lower apis because they have way lower utilization so in the end if Morpho is not changing the borrowing Market it will extract uh fee

capabilities from compound arabe which are uniform us across all users and instead some few lenders from Morpho the first lenders in Morpho will get way better rate the borrowers in Morpho will get way better rates and all the other lenders will get much lower rates yeah so that's a very interesting point so if you assume that there is a fixed number of borrowers and that they come from compound and they move to Morpho compounds then you have two effects so those users are going to improve their rates at least they will

be better than on compounds and your right is going to lower the utilization rate of compound and since rates are fixed according to utilization rate it may lower the interest rate okay so it's even better for borrowers by the way but anyway um and so two points to this so the first point is well first you have other borrowers than those coming from compound and basically enabling a rate that is in the middle may enable new use cases that were not done before because this race did not happen so what can happen is that you have more borrowers it's not you know a fixed number of borrowers like having a new interest rate that is lower is going to unlock new use cases so more borrowers so bigger utilization rates

overall so that's the first point and the second point is that in the Morpher protocol you have this mid rate and I kind of oversimplified this a little bit so at the moment the rate is said to be in the middle but this formula in the code is upgradable by governance and you could imagine that if at some point The Lending pull up providing so low interest rates that's more for move away from this model and it was designed in such a way that the protocol can you know become more and more independent from the rate model of Ave and compound that's clear so just for for the little story Morpho is a blue butterfly and you

start as a caterpillar living in an apple and progressively you start to become independent and this is what we envision and you tackle exactly one of the points that we're very interested in is mofo is really better than compound so if I'm a company user if I'm rational I will move but then more at some point will take its own independence in order to have a free market of rates rather than being constrained by the rates of the pool that are not determined by the market they're determined by an arbitrary model right so I hope that answers the question a little bit sure thank you I just think maybe it's like a bit like the prisoner dilemma if all the company users move to Morpho Morpho also he sees us to exist but okay

okay thank you uh yes if if every user if everyone moved from compound moves to Morpho how come Morpho continued to work it will so as you mentioned you'll have a part of the users that are match peer-to-peer experiencing a rate and the other that are going to be left on compound where the rate could be potentially a bit lower it will be lower in any case okay thank you any other questions great thank you very much thank you Paul