How Morpho Is Redefining Money Markets | Paul Frambot | S9 E4

Transcript

I think it's it's a new experiment like you know Morphov V2 is unlike anything that has been done in DeFi. We like to take bets and I think that's a a huge one you know to could have like tremendous upside that goes way beyond like the current state of lending today if it succeeds. Quick shout out to today's sponsor Katana. We'll hear more about Katana and their pre-eposit campaign later today. But for now, let's get into the episode. Quick shout out to Permissionless 4 coming this summer to New York June 24th through June 26th. We'll have speakers from all across the industry, including Hayden Adams, Kyle Samani, Guy Young, and more. Get your tickets today by following the link in today's show notes. And make sure to use code Bell10 to save 10% on your purchase. See you there. Hey everyone,

quick disclaimer before we get into today's episode. Nothing said on Bell Curve is a recommendation to buy or sell securities or tokens. This podcast is forformational purposes only, and the views expressed by anyone on the show are solely our opinions, not financial advice. Our guest and I may hold positions in the companies, funds, or projects discussed. All right, everyone. Welcome back to another episode of Bell Curve. Um, thank you for bearing with us here. We had a little hiatus from our last episode here, but joined back my trusty co-host Monet. And, uh, today we're talking to Paul Frambo of Moro. Guys, welcome.

Thanks for having me. Um, this one is going to be a really fun one. Um, Paul, I didn't mention this to you or Monet actually before we recorded, but bell curve is about a two-year-old podcast and actually the very first season that we did was on the need for fixed rate borrow lend in DeFi. Um, so this is a podcast actually two years in the making. I'm happy to see that Morpho is taking the lead here and uh, yeah, really want to spend a bunch of time talking about Morpho V2. Um, so actually we were we were discussing here before we got on that uh so the fixed rate uh borrow lend is kind of the headline of Morpho V2 but that actually wasn't the intent when you guys said about designing that right it was actually more about solving uh some of the issues or improving and iterating on

Morpho v1. So can you just we've done a couple podcasts in the past so we'll link them in the show notes but uh can you just give us a quick overview again of Morpho V1 what the major components are and how did that lead to V2? Sure. So, you know, Morpho is a non-chain lending and borrowing infrastructure uh that lets you know anyone trade their own lending and borrowing use cases on one end to earn yield uh with a specific risk profile or compliance profile and on the other hand to get financing with collateralized loans, right? And uh think of Morpho just as like a permissionless immutable like flexible infrastructure where people can deploy and do what they want with this. And so we we uh the V1 of Morpho was focused on like a variable rate primitive where

essentially you could only create lending and borrowing markets uh that have like a a rate that is controlled by an algorithm saying that uh what we have in uh in the field we call this an interest rate model where essentially the interest rate is dictated by an onchain formula uh that can either be governed uh or you know is just an immutable formula that that uh that controls the the rate and uh what V2 brings to the table is essentially removing that formula, removing the need for the rate to be controlled. And this time the rate is decided by the market.

So you have an active set of participants that can price the risk of the loans and essentially say, hey, I'll I'll borrow this at 4%. Or I'll lend that at two. And you know, we have this amazing network of of creators uh in in Morpho that are essentially like very complex D5 players that have a lot of capital and and can allocate it in complex ways and and until then they were just managing the risk. Now they will be both managing the risk and the rate. Excellent. Um okay so uh before we get into the unique design here I I would love to get a sense. So fixed rate borrow is actually something that has been iterated on uh or tried in crypto at least before. There are solutions

that exist. I think what we did season one we talked to Teddy from notional um you know term um is another attempt at this but we haven't really been able to achieve like anything over like a billion in TVL or really take off. Um, and I remember a couple years ago reading about, you know, people look at the, you know, total addressable market of debt in the US and they look at the amount that's fixed and variable and say, "Hey, look at how much more there's fixed rate lending here." And there's an obvious need for this. But it's still, it never really took off in DeFi. And I'm curious, you know, what was missing? Was it infrastructure needs? Did people not get the model right? Was there something about the market? Why haven't we seen it fully take off? Right. So I think a few things uh on the need side

of things fix is definitely needed. Uh I think especially if we want to you know grow DeFi beyond like crypto users it's not crucial for defi native users and funds that are quite active that you know value a lot flexibility and ability to withdraw and and exit. So liquidity is is actually more important than predictability of the rate for very crypto you know DJN defy users etc. And even in crypto like in exchanges you have a lot of like perpetual you know uh exchanges uh which also don't have like those those kind of like predictability uh but that's very crypto right in traditional finance fix rate is insanely important uh for two kind of users

really institutions and large scale consumer right for example we're you know as you know we probably know we're integrated in the Coinbase app and uh for Coinbase loans and the typology of users users uh that are using Morpho through the Coinbase app is very very very different than the one that's interacting through the app dot you know morpho.org park and those users are, you know, just retail users looking to take a a loan to buy a house, right? Or to spend it on their credit card and and those kind of use cases uh are much, you know, better done with fixed rate and it's actually the number one feedback that we've gotten from this integration from those users is that we need to have like better predictability as like

retail consumers. And now you have institutional finance where fixed income is a huge deal uh for a lot of different reasons and those are the guys like looking at DeFi right now and saying hey we'd love to get involved like we now have the regulatory uh environment to do so but just variable rate is a blocker for us. So those are like the two major needs and why I think time to market for fixed rate is unique right now because those two entities are coming on chain and they see this as a missing piece. Right now there is the question of why haven't we succeeded in doing this before as an ecosystem. I think there are mainly two reasons uh for this.

There's a techn technological reasons and a ecosystem maturity/player complexity reason. Um on the technological side of things we've built fixed rate so far as an ecosystem on top of variable pools. Right? So most of the fixed rate protocols that we've seen in D5 are built on top of morph built on top of a and essentially what they do is they use a morph as some kind of like rate or record and they they often times like try to strip the yield part from like the the the principal part of of of the asset and that and then the yield is traded on an exchange and those are most often yield betting platforms, right? as

opposed to like actual native fixed rate protocols, right? I think more for V2 approach is actually the opposite. We're building a variable rate liquid variable rate like lending protocol that you could have uh you know like today you when you deposit into moro except that behind the scenes there is like a fixed rate primitive that is being used right and this leads to the second reason why fixed rate hasn't been so successful in D5 so far is that managing a portfolio of bonds is non-trivial especially when you have a lot of different use cases like those are like liquidity and rates is like you dimensions that are not easy for consumers to to to always manage. And and the good news with MO is that the

way it's structured, we have this giant gigantic ecosystem of players. We have approximately 25 different curators that have like you know billions of dollars deposited in their vaults that are competent entities uh to do this kind of role and abstract this away for the end user, right? And so they can quote on fixed rate, they can market make on fixed rate etc. which which is not something we had uh a few you know even months ago uh for other fixed rate protocols. So um I I uh am hearing that like basically the curators will kind of solve that UX um UX challenge that's been hamstringing fixed rates uh from the perspective of lenders. Um, but I I also kind of see

that it might be a bit of work, especially for like retail users uh who are wanting to borrow at a predictable rate once they come up to the end of that that uh loan term, however long it is, like what do they do next? Um, do you have an idea of how the the borrower side of of the equation will be kind of like managing that UX and handling that? Sure. I think the best way to understand this is to go through like an example of of how a morpho v2 vault would look like in practice and how borrowers would be borrowing from that. In a in a v2 vault essentially you have uh let's say like the block analytica vault uh of of USDC let's say you have 100 million that is deposited into it. Well, Block Analytica

could do one thing. Could deposit like everything into Moro V1 and have like a 90% utilization curve that guarantees that 10% of the liquidity can, you know, statistically be always redeemable uh by its users. But progressively, what it can do as well, it it can start offering loans to fixed rate borrowers, right? and it could say, "Hey, you know, if you're willing to borrow for, you know, x months or or x days, uh, with, you know, those assets as collateral, we're happy to finance your loan." Um, with the liquidity in our vault. Obviously, Block Analytica would have to, you know, make sure not everybody everything is locked in like a two-year like maturity like loan, but they can essentially build a portfolio and say, "Hey, maybe

out of 100% of the vault, maybe 10% is idle and maybe 20% is like very short-term duration, like a few days uh loans, and maybe 50% of the vault is like uh seven uh you know, 30 days loans, etc., etc." And so the way it looks in practice is that those the volt curators will place those gigantic fixed rate bids and say hey we are we're happy to lend at rate x during duration y and the way moral v2 is structured is not a a pool model but an offer model uh where you can express this intent across a very wide variety of um of terms and of risk and of compliance with the same

liquidity. So the same 100 million that is in the vault can be offered at hundreds and hundreds of risk profiles and compliance profiles at the same time. And so now you take the consumer bar side of things where you have a myriad of opportunities because the creators have priced every single like collateral and they gave a price to Jac etc etc. And so you can come to the interface with your bitcoin or with your like you know uni as collateral whatever and you can see what are the offers that are made by creators and those offers are already more digestible uh than you know uh than anything. So you can you know tap into those orders and essentially do a take order that would

buy some of those um uh yeah that would that would sell some of those bonds essentially. uh then we can talk about rolling and everything, but at the eye level, this is what a fixed rate loan would look like in Morphov V2. This episode is sponsored by Katana. If your assets are sitting idly, they're dead. Katana is built from the ground up to bring your bags back to life. Be early to Katana by joining the pre-eposit campaign before mainet opens at the end of this month. Follow the link in today's show notes to get started. Today's episode is brought to you by Ledger, the global leader in digital asset security. Celebrating 10 years of innovation, Ledger is trusted by 7 million users, secures 20% of the world's digital assets, and remains the most secure hardware wallet for your

crypto and login. Follow the link in this episode's show notes to grab your ledger today. As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. Well, I want to get into the the actual architecture here of Morpho V2. Um, but maybe one last question here on the analog and tradi. uh you know I know that Morpho V2 utilizes an intentbased model um that kind of is an RFQ like system and I've got Hart Lambert's voice uh bouncing around in my head actually describing you know he used to be a bond uh trader and you know he's described that this is actually the market structure for how treasuries um essentially trade as well and you know I'm curious I want to understand a little bit more actually what you said about at the core of it being a fixed

rate primitive versus something that's variable because my understanding is that even in traditional finance where you get a lot of fixed rate um debt still things are at their heart variable but you have these other markets like interest rate swaps which allow you to lock in longer fixed rate securities like a 30-year fixed rate mortgage if you talk to anyone who's not who doesn't live in America that's not an animal that exists in the wild that it's basically you know that sofur plus you know the bank goes out to the interest rate swap market and locks in this very long-term thing and that's actually because you have a bunch of basically dgens that want to take lever bets on interest rates, right? That's why you can make uh that's the financial alchemy that goes into that product. Um and I'm curious, you know, what so help me

understand how that translates here, why it's technically variable and then it gets, you know, morphed into something that is fixed. Yeah. Yeah. So, so at the core, what Moro Moro V2 is is a zero coupon bond like issuance and settlement protocol, right? Mhm. So you say, "Hey, I would like to borrow against those terms." I mint some of those bonds and I try to sell them to people, right? And the price you sell them at is the discount you essentially uh price it at before the end of the term. And at the end of the term, you can redeem it one for for the assets. And so this

primitive if you look at the loan agreement it's a fixed rate term. Uh however to the eyes of a vault depositor you should deposit into block analytica USDC. Well Block Analytica will have hundreds of bonds maybe right they'll buy bonds that are short-term that some that are long-term etc etc and and to the eyes of the users this gets aggregated the liquidity gets aggregated. So you know there is also statistical liquidity that could mimic the one of the interest rate model. Maybe 10% of the vault is always liquid maybe more maybe less depending on the guarantees that are offered by the vault. Uh so you get the liquidity and uh but the rate is variable right because you know maybe some bonds will

expire uh today and some others in a few days etc. And so this is what I mean by variable rates built on top of a fixed rate primitive rate. And you mentioned treasuries, but you know the hope is that one day and I think it's this day not too far, but like you know US treasuries for example and the bank of New York will like actually m those on chain directly on Ethereum, right? And so if you have a vault and you have those Zoro V2 bonds which are for over collateralized uh you know crypto overcolateralized bonds at the moment you could also aggregate those with treasury bonds, right? And so maybe you have like a six months like US treasury or northern European country, I don't know like whatever.

Um and and you aggregate those into a vault which again to the eyes of the user will appear as like a money market fund right which is like variable rate liquid. Does that make sense? It does. It does. Um okay maybe that's a good transition point here into Morpho V2 and maybe if we could you know break the architecture down into there's a markets level to it and then there's a vault level. So we've got a V2 on the markets and a V2 on the vault. whichever order you want to tackle those in, you know, describe, I guess, some of the high level benefits of Morpho V2 and then if we could align those to, you know, where does that belong in the markets and vault improvements. Sure. So maybe talk let's talk about V1 first. So

the way Moro V1 is organized is you have vaults for depositors that are curated by a curator. So you deposit your USDC in a vault and then the curator of the vault is going to allocate it to immutable lending markets, right? in those markets in Morph V1 are variable rate lending whose rate is dictated by like an interest rate model like form a formula essentially and uh those are cryptoback loans and a market could be like CBBTC to borrow USDC or ST to borrow USDC uh those would be two lending markets uh yeah lending markets and then the curator would plug on top and distribute uh aggregate those and distribute liquidity to each of those.

Morpho V2 is a very similar structure where V2 works exactly like V1. Uh the main difference there are a couple like uh differences but like the main difference is that those v are now able to allocate to more for v1 uh more for v2 markets and maybe you know if in the future v2 markets have improvements or if there is a v3 I don't know uh then they can will be also able to allocate into those right there are a couple of nice features on on volv2 that we're introducing like um you know on on rules and caps But whatever it's not so important. So volume v2 same as world v1 except now those are general aggregators. They can aggregate market

v1 market v2 and potentially v3. Now what are market v2? Well market v2 is essentially uh you know at the high level you could think of it as a lending order book right. I don't think that's the right way to think about it a bit more precisely. It's essentially a protocol that allows you to trade zero coupon bonds for over collateralized lending, right? And so in practice uh this is intent based as opposed to uh pool based. What do we mean by this? In morpho v1 you have to allocate liquidity in the pool and wait for borrowers. And that's the case for all DeFi frankly except for you know a few intentbased protocols like you know unis swap and

and others uh on the taking side of things but until today it was you deposit your liquidity in a pool that allows specific borrowers to come in. Do they have like the bitcoin collateral uh with the the right threshold? In Moro V2, you promise your liquidity and you make an offer offchain that you sign and you say, "Hey, uh, I have 1 million in my vault and I'd be fine lending it to this opportunity to this, you know, collateral, but also maybe to this collateral." And you can make a very long list, right? So the unicity of Morpho V2's design is that liquidity can be promised at multiple risk profiles at

the same time at multiple chains at the same time at multiple compliances at the same time. I give you an example. You have liquidity on Ethereum. You could say, "Hey, I'm happy to settle on base, but also I'm happy to settle on arbitrage." Right? Here's my liquidity. whenever you take my offer, you know, we'll bridge the liquidity just in time with the bridge that I specified and you'll be able to take a loan there. You know, you have the same parallel with compliance and the same parallel with risk. So anyway, and so the the way more moro v2 like markets are structured is a bond bonds trading protocol that is intent based as opposed to to to pull based.

Awesome. Um, all right. I've got a lot of follow-up questions here. uh why so there's a couple of different designs you could have looked at I guess in there's like the intent sort of RFQbased system there literally our approach is in my understanding like a limit order book uh built on maybe like a uni v4 hook or something like that then there's also auctions based so can you kind of walk through what are the trade-offs of each of these approaches right I think for us um the most important challenge you have in lending especially if you are going the path of morpho which is a free market driven approach is fragmentation, right?

Like uh in Morpho V1 we have a lot of different markets, right? And and V managers allocate to a specific market, but then the problem they have is like okay, what if the borrowers is going to come from another market, right? And so we have this concept called the public allocator that allows you to promise liquidity on multiple markets at the same time. But the problem is that the rate is variable, right? So if you move liquidity around, it could spike the rates, etc., etc. And that's has been just a fundamental limit of of variable uh lending uh protocols. Uh and so we thought about fix rate and then the big question was like hey what is the uh system that allows us to promise liquidity at multiple places at the same

time and this you know you have multiple ways we could have approached this like you know error few auctions etc. But really the very simple thing on top of which you could build more complex pricing systems is just you have liquidity. You make an offer and you say I'm happy to. So it's it's literally like a message that you sign and that you broadcast in a mele and in this message you say hey I have $1 million. I'm happy to lend it against like BTC right and whoever is the borrower that sees that can take it. And so there is no such thing such market structure that is like

you know similar or has a name to this uh already. It's just like a simple data availability layer of some sort where you just like broadcast your intent about what you're ready to lend and borrow and at what price. And when you take all those offers together, they're just a gigantic order book, right? That has many dimension dimensions being like the the oracles like the collateral etc etc. And so essentially what you're placing here is limit orders. So those are orders with limit prices like limit rates and that's are on multiple dimensions of the order book. Your offer commits liquidity. Just think of it this way. You have one order book for each lending market. Say like Bitcoin to

borrow USDC. If to borrow USDC, your offer is a limit order on multiple order books at the same time, right? And this is like a concept that does not exist like currently like I I do believe we're like sort of like the first to approach uh lending through this lens. Uh, and so so I wouldn't have like a comparable or or name for it. Maybe you should come up with one by the way. Yeah, it's super interesting. I think um it it does feel like a bit new that you can kind of lend against or like make offers against all these different markets at once. Um, and it it it in a way it sort of addresses a challenge for curation in in Morpho V1 where you're

all sort of forced into coalesing around a few different types of markets. Like if you look at V1 markets, um, all the curators tend to be working with a single like LTV option for the pools because um it's just a lot more efficient for everyone to be kind of making, you know, liquidity in the same markets. Um but then when you look at you know other sort of RFQ based markets in in trady something like uh the US treasury market there's like a divergence between uh on their run treasuries and off therun treasuries where like basically the most liquid um sort of newer issued ones tend to have most of the trading interest and they

have a lot better liquidity. Um, so I'm wondering if do you anticipate that there might still be like similar pressures for V2 where um like maybe the maturity dates that people trade in will get standardized or that the sort of loans that people are making will get trans standardized just because it's better to be having all of our trading interest in a fewer number of products. It's a very good question. I think that's the curse of modularity, you know, in general is is fragmentation. uh and so you have to come up with ways to limit modularity and coordinate the ecosystem around few things that make sense,

right? For example, and so one example of this north star maybe. Yeah. And one example of that would be like duration versus maturities, right? like uh when when you say like a a 30-day loan, it's very unlikely that people will coordinate. Like if you're make an offer for a 30-day loan and someone takes that offer, you know, today at like 3:36 p.m., it's very unlikely that someone is going to have the exact same like duration, you know, in mind, right? And so this is a typical example of like if you offer the full freedom on duration then it's very tough to aggregate markets and this is why we prefer terms

as opposed to durations where you know in morpho v2 you don't specify how many days you want uh to trade for but you specify an end date right so for example end of week or end of month or end of day etc which are like the kind of tricks that help coordinate the market the meool as well like you know the way it's done is that at the protocol we we we don't impose like we want to have the flexibility for people to actually be able to trade with the terms that they want but you know maybe at the meool level we'll have restrictions where you know it's really not useful for the world to have like you know one basis point difference in your LLTV right and creating and fragmenting the market etc right and so there are a couple of

things you can do and I think you know the theory is that you know the market should aggregate over time around like the most relevant uh bones. Truth is sometimes you you always need to push the market in like certain direction and help it aggregate faster. Um so yeah, we it's one of the big area of thinking that we have right now is like at what level do we constrain modularity? Should it be at the protocol level? Should it just be at the app level, right? and just say, "Hey, you can't create a new market with like a crazy stupid like LTV at the 10 decimals," for example.

Yeah. So, you mentioned tick size, and that kind of got me thinking a little bit. Um there's other sort of um uh there's other sort of like uh ways that order book or RFQ systems in Tradfi uh sort of design themselves to like avoid uh abusive behavior that ends up making liquidity worse and kind of like just spoils the market for everyone. So like one thing is generally when there's tick sizes so you can't just do like a millionth of a percent better offer than someone else. And then when you make an offer, you're kind of like at the back of the book for that tick. So, whoever made the offer first uh gets filled first. Um and it's and it's an incentive

for people to put liquidity and keep it there instead of, you know, just trying to like join that tick right at the end and sort of uh like siphon off uh orders from someone else who is actually providing liquidity more actively. Do you have like an idea of of like how that sort of like order book management works? No, 100% like you know fat tick size plus FIFO like as as you describe to me is a very good incentive not to have like just dark pools and people that you know constrain their liquidity and just in time will provide it uh whenever they see the the opportunity. I think it's one of the big areas of topics as well uh for trading research in general on chain is just pre-trade transparency like uh you know it's

unclear if the optimal situation for example in the case of unis swap is like everybody has their closed orders on unis swap x and they don't disclose it right and nobody's in the pools at if if we look at like the max efficiency like everybody's like super optimizing uh etc which you know frankly can be a problem and end up in worse outcomes for for everybody that is that is that is trading. And so our philosophy around this has been like you know it's our role to progressively unleash modularity as opposed to like come in with like you know 10 decimal precision like uh to create flexibility but rather it's if there is one role that governance can

play this is the one right is just like progressively unleash like modularity uh in the ecosystem so that it's it is thoughtfully used as opposed to like everybody does its own thing and the market does not coordinate uh etc. Shout out to today's sponsor Katana. Katana is a DeFi first chain built for deep liquidity and high yield. No empty emissions, just real yield and sequencer fees routed back to DeFi users. Incubated by Polygon Labs and GSR. Katana is launching with notable ecosystem of primitives, assets, and partners like Morpho, Chainlink, and more. Be early to Katana by joining the pre-eposit campaign before mainet opens at the end of this month. Follow the link in today's show notes to get

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Do your own research. So, you know what that made me think of a little bit, uh, Paul? I'm curious this question for you later, but maybe we can address it now. Um I'm curious what the MEV implications are of this design, especially when it comes uh to things like crosschain settlement. Like you know what Monae was just getting at there, your place where you are in the order book. Um this is a a really interesting issue for you know protocols like unis swap where you have JIT liquidity so just in time and um you can either view that as you're stealing fees from LPS or uh and people me researchers have flip-flopped on this you're actually providing better execution uh for traders. And so, you know, I'm curious, you know, how you would think about the trade-off there. Obviously, from the curator standpoint, you know,

you want some sort of preferential place, but obviously users just care about best execution and probably getting the lowest spread there. So, I'm curious how you think about that. Then maybe we can get into I'm curious whenever I see something like you can open a loan on uh base but get liquidated on Ethereum, I'm like, how does the ME what are the ME implicate? Yeah, we should chat about this because uh okay, so maybe on the MV part, there are few MV implications uh much fewer than on like a unis swap for example. Um I think overall because when you when you trade it's like instant profit that you can you know automatically steal for from

someone. In lending there is this idea that you enter more of a longer term contract and you can actually lose money in the deal. It's not as easy as like copy trading other people and you know being faster because you could like decently lose a lot of money doing so and those are like no if you enter a bond you can you know not immediately resell it for example etc. And so you better be very careful about like how you copy trade and and and in general. So the the the MV implications are are much lighter in in lending like autobox where there is no high frequency really like the way we think of I mean initially they won't be too high frequency initially the way we think about it is just like curators will have

a ton of liquidity and they will place huge bids like on many different you know markets and then borrowers can come in and tap into that liquidity. It's as simple as this right. Uh obviously over time players will complexify. They will start to like you know make smaller orders at better rates and you will see progressively like a a gigantic order book forming. But I don't think we need the full like you know high frequency auto book for lending just because of like the frequency of the need and of the trades. It's just very different than than in trading for the crosschain component. Uh to be clear this is not something like you have your collateral on one chain and you take a loan on the other every morpho v2 is permissionless

and immutable like uh entirely and it does not enshrine any bridges uh nothing of this so it's it's very similar code than than than morph for blue actually except does not have the interest rate model part um the key thing is that when you make an offer and you say hey I'm willing to you know lend USDC uh at terms ADC you have to specify a call back right and this call back is a piece of code that will be executed by the borrower to source the funds right so what does that mean it means that you know when you are promising this liquidity the borrower sees oh someone is offering like bitcoin uh is offering

me to borrow with my bitcoin their USDC and maybe their USDC is productive somewhere Maybe it's on morpho v1, right? And so when I tra when I take this trade, I'm going to execute the call back, it's going to withdraw from morpho v1 and transfer me the money, right? Which if you're familiar with morph optimizer is the exact behavior of morph optimizer, but that's another story. I won't get into that right now. Uh but essentially, you execute a call back that's going to source the fonts. But the fonts can be in an arbitrary place, right? It could be in your wallet idle waiting for a match. It could be on the lending pool waiting for a match or it could be on another chain in which case the call back is a bridge and you know I'll simplify a little bit here but

essentially the taker executes the bridge code which is going to source the funds and bring them just in time right and the callback specifies the bridge not the protocol. So we as a protocol I mean we like the protocol as a protocol uh does not enshrine any bridge. There is no governance deciding or changing the bridges all the time which is you know probably something you would see in other like monolithic lending design approaches. In the morpher approach you know bridge is just another component of risk and people have to assess it and when they take it like there is an execution risk that is just in time but there is no like long-term risk of the protocol. And so when the funds are sourced then the settlement happens on one chain and the collateral and the

loan assets are on this chain at the moment where the trade happens. There is no such thing as like splitting the collateral on one chain to borrow on the other. Does that make sense? It's actually the first time I explain it. So it does. No, it does. Um okay, I'm just going to keep pressing ahead. I've got a million more questions. So you described the difference in user profile on Coinbase uh versus Morpho V1 instance and I would be curious do you have any sort of expect I know Morpho V2 isn't live yet but do you have any expectation around what the term preferences you expect to look like? Like I think in you know I'm remembering back to this original uh DeFi season that we did and you know people were talking about

30-year fixed rate mortgages on chain and I'm kind of wondering if maybe the demand around V2 is really around looping and so these the funding requirements here are closer to 30 days or maybe 90 days max and there's obviously a a on the demand side preference of what are these what what are what's actually getting funded here but then there's also I think one of the challenges historically around fixed rate borrow lend has been on the uh the lending side as well and how long people are willing to lock capital up for especially if uh a loan goes bad and you can see your you know um capital drop very quickly. So yeah, I'm guess I'm curious like I'm kind of asking you to speculate here but where do you see this market shaking out in terms of preferences? No, I I think it's really

depending on like how cryptonatives like DeFi native slash complex you are like you know if you interview your users in the D5 space I think the max I've heard is probably 90 days it's always lower almost like one month you know few days one day even a few hours for some people um and so I would expect like the DeFi like you know D5 funds and D5 users right now to be more in the range of like from one day to like 30 days, 60 days is is my expectations. Three months being the max. Um and what's interesting is that it's very different from the um consumers uh of like uh you know

large scale consumers where here you can have like different kinds of loans. If it's like a loan for like a big project in your life, obviously it's going to be much longer for like a mortgage or like whatever. You also have like this is more like credit related but like all the buy now pay laterers that are also like you know shorter terms. Uh but yeah so I think unfortunately there's going to be a split between like you know the people that want like the shorter terms that are like more cryptonative or more complex users and like the large consumers uh application that would require longer terms. But that brings back to like the term versus duration question. The good news is that if you have a two-year loan that's like end of

year, you know, maybe or one year one year loan that is end of year, well, it becomes a six months duration bond, you know, in June and you know, one month, you know, in December, it's like a one month's model and in more for primary markets and secondary markets are merged together, meaning that if you want to enter a loan that is one month, you could all you could simply enter a one-year loan that started 11 months ago, a one-year bond that started the development whatever that's a technical detail but uh but there is a big question of like how do you have liquidity work together between two worlds that at first glance look separated in terms of like you know financing needs

so I hearing you talk I kind of brought up a follow-up for me a little bit so um one thing that you see in certain types of consumer loans in traditional finance like um for mortgages is actually it's really common is uh they have these 30-year loans um or you know long-term loans um they're at some fixed rate that they lock in based on whatever the then current you know interest rate markets are looking like. Um, but if the interest rate markets then go up in the future, you know, the user is very happy. They have a low rate loan.

They're paying less than they could have. Uh, if the market rates go down, however, then they suddenly have this incentive where, you know, if I refinance my house or if I do some other sort of action, um, I can get out of this loan, which is no longer a good deal, and get into a better loan. Um, and I'm wondering, do you see like potentially like a similar uh like risk or like a dynamic that might happen for longer term morpho loans? Like if you're a borrower and you're paying some very high rate, maybe you let yourself get liquidated or maybe you take some other sort of action to try and welch on the loan. Is that something that um you anticipate or maybe it's you don't think it'll be a major factor? It's it's a good question. We don't like so first I should say that we thought Morpho V2 as

a short-term fixed rate protocol initially so we haven't you know speced things out for like 30-year bonds and and you know those kind of use cases and you know our you know high level analysis that would work well with such bonds but I you know the vision here is really to replace the interest rate model and you do this with short-term bonds uh that are aggregated together with people that are professional and can trade with those uh less so with like very long-term mortgages that are more like pure pure fashion like deals that is very bespoke to the individual that is you know talking to with like whatever banker etc etc. Uh in more v2 you you can you know you can refinance uh and you can you know move from uh one

loan to the other. Uh it's possible it's ideal if you have some like secondary liquidity uh for the given loan that you are looking to repay and um yeah and you have you know we'll see how the market reacts but maybe there'll be also arbitrageers like you know allowing you to exit early at a discount or or or those kind of things but I have to say like we haven't optimized the use case for you know multiple year bonds I will say though that morph to the way it's structured can work with multiple kinds of bonds. We're starting with a collateralized crypto

bonds. Uh but in the future it could welcome other kind of bonds right. So if we find that there is a very cool use case around like uh 20 you know year mortgages uh specifically we could reuse the exact same market infrastructure just change like the bonds protocol and you know moro vault v2 are general so they could be able to allocate liquidity to those bonds as well if that makes sense. I I one I want to uh talk about what this means for curators specifically here as well. U but actually just to build on Monaet's point. So even if it's not you're refying a 20-year mortgage. I could imagine let's say I'm running some sort of looping strategy and I lock in my uh 30-day rate um but rates go down and it's like I want to refy this rate.

Is there the ability to do that even in the shorter term? Right. So if assuming there is no secondary liquidity at all, you have to repay full the amount that you were supposed to pay with interest in order to to be able to get the full extent of your collateral back. Right. Right. In practice though, it's very likely that someone is going to be happy to take a better rate, right, out of this. So if you're very alone and there is no active liquidity, you you won't be able to to live like uh at a better rate, right? Yeah. However, if the rate truly went down, you're probably going to have people taking the arbitrage on the other end, right? And you know, if I am an active curator and I see this

happening and I see this as an opportunity to beat the market in terms of rates, I will offer you secondary liquidity, right? Because you'll be, you know, h instead of paying like 10%, maybe you'll be happy to pay nine, whatever. Uh I I'll take that nine if the market rates are at five, right? Or something like this. And this is the world benefit of having an active set of curators that are, you know, essentially looking to maximize their profit is they're going to take those arbitrageages and they're going to offer the secondary liquidity where it's needed. And to me, that's the crucial missing piece that you don't have in fixed rate protocols of the early days uh specifically or you would have to build everything in protocol. So it would be like very heavy in governance and complexity etc etc which is obviously not the way we like to build

things at Mar. So it's on you then Monae to offer that uh secondary liquidity but whenever there is a problem it's like for curating this episode is sponsored by Catria. Catria is the first zero knowledge rollup to enhance the capabilities of Bitcoin block space, enabling Bitcoin applications and unlocking Bitcoin's full potential as a programmable financial platform. With Catria, developers can now tap into Bitcoin's liquidity to build scalable payment systems, privacy solutions, and more. Citria is currently in its test net phase and is approaching its mainet launch. To learn more about Citria, follow the link in today's show notes.

As always, investments in blockchain technology involve risk. Terms and conditions apply. Do your own research. Actually, kind of a question though to both of you. I I mean, I'm I'm very curious and Monae, maybe uh you know, if you could uh switch hats here between uh you know, Bell Curve co-host and uh BA Labs curator. You know, I'm very curious what this does to the curator market here and what this opens up in terms of design space. It sort of seems like this is another lever to play with um and a way to differentiate. Um, and I'm just, you know, curious maybe Monae from the side of, you know, what this opens up to you guys in terms of strategies, but also just how you see the market changing here. Like generally when you make things more complex, uh, you end up concentrating. So I'm just curious

about, yeah, maybe in the weeds of what this actually means for curators, but then how you see the market evolving. Yeah. Um, I guess, uh, so one thing that I've seen for for curators on Morphob1 is that, um, a lot of the a lot of the vaults look fairly similar to each other. Um, and there will be like sort of different risk tiers. Um, so you know, curators like sometimes we'll have multiple tiers of USDC where we'll have like sort of a higher risk and a lower risk version. It's pretty common with like Steakhouse Gauntlet. A lot of the other big curators will have different tiers, but across those, you know, the lowrisk vault, everyone's low-risisk vault looks fairly similar. There's like

sort of a same relatively small, you know, uh set of pools that we're all lending into. The exact split of assets between each one is going to be a bit different, but it's it's um the products are quite similar, and we're kind of competing purely on uh brands and sort of distribution and and different factors like that. Um, but I think once once V2 comes around, it's really going to like just completely explode out the design space where um you're not only going to have different types of collateral like tail risks that you're uh lending against, but it'll be a lot easier to, you know, have higher or lower leverage that you'll be able to lend against. Um, you can start serving

different durations. So, you know, maybe most of it is going to be, you know, a month or less, but some vault curators will be able to say, you know, we're willing to take on a different, you know, maybe up to 3 months or 6 months. Um, and that'll really change kind of the, uh, the return profile, but also the risk profile of the vaults. So I think um the actual vault itself um all these these vaults that you know curators uh like us are offering is going to be much more differentiated or at least it will have the capacity to be be much more differentiated. Um so I think that'll be really interesting. Um now on the user side I think it also creates some interesting challenges where um now there's like so much more

information to take in about what what vaults you're you're uh putting your funds into. So I think um you know analytics like we also you know at BA we work on a lot of analytics products to help people understand lending products. Um there's going to be so much more to do there to to like help users surface you know what are these different options? What's the trade-off with going with BA versus steakhouse versus uh Gauntlet or you know whoever else is curating here? Yeah, I would definitely second this. Like I think when we launched Marov V1, one of the you know biggest concern we had was like is anyone going to be wanting to be a curator like at the time the term did not even exist, right? Like uh we we sort of coined this like a year and a

half ago and so I was like it has to be simple, right? because I mean quote unquote simple it has to like we should not allow for too many dimensions of freedom because otherwise like no one is going to do it is like uh and so you know a year and a half in I'm very pleasantly surpris surprised that everybody wants to become a curator and and compete in this but that also means that we probably have been a slightly too conservative in terms of like the the dimensions that we of freedom that we allow and now I think it's a perfect timing to actually enable a whole new area uh for creators. Uh especially now that we've proven that the creator model works and that you know it can make actually very good businesses. Uh and so

now we'll be people are sort of like have the trust and the incentive to actually put in the resources necessary to make fix happen. So actually that's a kind of brings up an interesting point Paul which is in general in all of these markets be it cow swap on the solver side or across on the uh you know their RFQ sort of solve it there are lots of markets now which have adapted this intentbased model which I I really like um but it it has been a constant surprise to me that you haven't seen more um actors pop up to be solvers builders, curators, etc. Um, and I don't have a great explanation for for

why that is, but I'm outside of maybe just the the dollars aren't there today. Like my understanding is on the big Morpho V1 vaults, it's extremely competitive with many, you know, curators even foregoing most of their fees for the big pools. So I'm just I'm curious you know how do you see this mark like if you have an explanation for this why it might be different on in a borrow lend capacity versus say in like a you know a cross intent bridging capacity or what do you think it's a good question uh I okay I I think what's interesting in lending is that what we are asking curators at the end of the day is to price risk right and to look for new risk and give it a good price, right?

And this is interestingly not something you can compete to death on because risk is by essence something that can't be fully automated. What do I mean by this is like predict did I preventing risk is essentially predicting the future and there is no such algorithm that predicts the future completely right. So there is always like an operational part to it which essentially as a curator you will start you know uh being more and more like giving price to more and more exotic things especially in a context where there is no liquidity fragmentation and more for it's not even a concept liquidity is not fragment

because it's promised on multiple places at the same time and you could promise it to hundreds and hundreds of collateral. So now you can take the coin geko market page and you can look for all of those assets and you can start pricing things right and you can start pricing oracles or like give give a price to the risk of oracles give a price etc. And this and so you start with over collateralized lending but you could imagine even a world where you can start you know okay thinking about what are the bonds in which I can have trust in beyond liquidatable collateral right and what if this guy has like a an identity and you know he he is able to prove that he has some reputation well you know

maybe it's not a trustless loan but you can at least give it a price and so you can constantly look for new risk And this dynamic to my knowledge is much less automatable than what something you would have for trading for example. But you know I'm not an expert in like a cross solving and and all of those things. So I don't know to which extent I can do a parallel with this. But my sense is that there is like fundamental difference in the creator game where you have this constant push to look for new issuance of loans. Uh which is tough in a pool model because it fragments liquidity. But in the Moro V2 uh uh playbook, you essentially can control the the price you give to this risk. And this does not fragment liquidity. And so

this is a game changer to explore things that go way beyond current aized lending and could go as far as likeized lending and stuff. Yeah, super interesting. I think there's there's a ton of opportunity to like sort of widen out the the um sort of opportunity set for curators. Um, one thing that I I'm thinking about as you know at BA as kind of our curation business, but also just as like a user and um observer um is we've seen like a bit of um of PVP aspect between curators in in Morpho V1.

Uh you know, as an example, like when certain pools will have the market conditions change and they become a bit more risky, so everyone would prefer to have their money out of the pool. um there's like a rush for the exit and whoever is able to have infrastructure that executes to get their funds out first um they get their funds out they have no risk and then the other person's kind of holding the bag. Um it feels like maybe there is going to be a similar uh or maybe even more intense uh set of PVP aspects between curators and V2. So they'll be competing not only on you know these risk related factors like if you know if the collateral gets riskier they want to sell all of those

those zero coupon bonds as fast as they can but also on rates uh you know undercutting each other. Um, so like how how do you see the sort of PvP aspect of curation evolving and is that something that will be problematic or or maybe it'll be like really healthy and and getting sort of new new skill sets in the game? I think currently it's not super healthy because the dimensions are very like there's not much to play with beyond withdrawing and supplying, right? So you can't even give your opinion on risk that easily. You could but not that easily. Whereas Morph V2 is a game of opinions. Like you could say, hey, you

know, I'm willing to give this price to like this asset or whatever. And you know, in some cases like an oracle goes bad. And we've seen this in Moro like um in um in Moro V1 with like for example like USD0 oracles in in some markets where in the Moro V2 context people would have priced this and I'm sure curators would have priced this very differently. And so now, because the competition and the PVP quote unquote, is across so many dimensions, at least you have room to do a smarter strategy than just like I have the fastest execution to get the out whenever something is like, you know, fishy. Even though you don't fully understand like

what's going on, you you prefer just withdrawing. Whereas here you could decide to stay but propose a much you know stronger like a much higher rate or even you could propose you could pro offer exit liquidity to creators that are not fine taking that risk because they haven't analyzed this deeply enough by proposing your own rate to this trade right and maybe you do this with your high-risk vaults and not with your lowrisk vault you know those kind of dynamics where essentially we facilitate as much as possible coincidence of intense uh of sorry of um yeah of intense uh because we allow for this expressivity. Um so I actually think it's going to be super healthy. Uh but it's it's a it's a game that's hard to

predict. Like this is our conviction. Uh but we'll see how it goes. Like I think it's it's a new experiment like you know morph is unlike anything that has been done in DeFi. We like to take bets and I think that's a a huge one is you know to could have like tremendous upside that goes way beyond like the current state of lending today if it succeeds. Um and you know we we've done you know by the way every single iteration of morpho was like a new bet in itself. Right. So so we're no stranger to this and we're we're happy to take it. Love it. Um, all right, Paul, we got a couple of um maybe zooming out of the weeds here. Um, and I wanted to ask some bigger uh themes of the season type questions for you. And

you know, one thing I'm curious to get your take on here um is on this kind of push towards more vertically integrated design. So I'm very curious to get your thoughts on a uh exchange and borrow lend platform like Fluid, right, who kind of uses their I forget the exact word, but kind of for better lack of a better term rehypothecate some of that liquidity from their borrow lend vaults uh to provide liquidity on the exchange. Um and I think they faced a little bit of criticism around uh the lever and kind of like the decreased markouts um and their strategy there. But I'm just curious, there does seem to be a natural relationship in between at least spot volumes and borrow lend, right? Like that's kind of the most direct driver if you look at those two charts um overlaid on top of each other. And so I'm curious

if you ever think of vertical vertical integration as a strategy here, right? So you know this definitely it's become increasingly clear that defy design has an axis between like the more controlled the more like monolithic versus the more free market driven right and so on one end you have the fluids of the world where everything you know or av4 where everything is all the liquidity is fully controlled uh and you know the big advantage of this is like it's extremely flexible to coordinate the market, right? Because you decide everything and you run this as if you would run like a hedge fund essentially

and liquidity is shared across everything, you know, even the DEX, even the lending protocol, etc., etc. So, you can get to very interesting like capital efficiencies, right? The downside of this is that because everything is controlled by one entity that enforces and have authority over everything is in our view scalability, right? is like you will never be able to discover like especially in a world where you have like millions and millions of tokens that are coming on chain and you know billions of credit opportunities for each individuals. I really hardly see like a centralized governance address all those loans and all those trading opportunities in one single part of liquidity in a way that's centrally managed right I even think of it as

highly dangerous uh if it's scarce right not as it is as it is right now and so you really have like this uh uh splits and you know we obviously take the opposite route which is like the free market route and I think the biggest like thing you can oppose to the free market route is fragmentation is like how how do you coordinate layers? How do you um you know avoid liquidity fragmentation etc. And this is something we've been thinking a lot about and this is probably to me the key innovation of Morpho V2 is beyond everything is just like the fact that it's offer based and you can offer your liquidity into multiple markets at the same time. And

what that means essentially is that there is no liquidity fragmentation anymore and you have like the full benefits of a monolithic design but in the free in the free market approach right and so obviously it's not mean charge so I won't be able to like tweak to the extent that I want like every single parameter uh but I'd rather let the free market do that uh so I don't know if that captures like the essence of the question let me know if if no that does that does um and sorry I'm zooming a little bit because I know we're short on time here, but I want to get through these. Uh, so I'm I'm curious, Paul, your stance on the demand for stable coins versus other uh maybe especially like L1 style tokens, right?

I think when we saw the early instances of like the skies and the obies of the world, there was really like kind of onchain basically borrow, you know, die or, you know, USDC against your ETH. And now it seems like the demand is almost entirely driven purely by stable coins. And we've seen Treasury, you know, release that report that said there's going to be $2 trillion worth of stables on chain by, you know, 2028. And it seems like that's just really dominated the market here. So, you know, I would love to get any perspectives that you have in in terms of this inflow of stable coins and what that means for, you know, like where how you see the demand sort of shake out between stables versus other assets.

So, when you said versus other assets, that would be like Saul, Eve, BTC. Is that the other assets you're referring to? Yep. Like let's say the major well you know I I guess I would answer this through the lens of like utility like u I think because of the nature of ETH there will be like less demand for lending and borrowing just because like if you think of ETH as like okay like the the internet bond for example or like the oil like I feel like is probably the new narrative. I mean not the new narrative but the the what the community is starting to really around more and more again. Um I think it's very natural that it has much less of a

financing use case than you know cash to buy stuff. uh and even as collateral like I think it's very capped like the use case we could have out of this and you know for bitcoin it's it's a you know bigger potential time if you think of bitcoin as like the reserve of uh of value but for stable coins I could only see this growing over time and to be essentially almost just this because like almost and if you look at transf like it's very rare that the loan asset is not like an instrument that is used to pay stuff and like it's not cash essentially, right? And so

where I I think we'll see a lot of diversity is like on the trust/colateral side of things like what is backing the bond is it a crypto asset is it more like a risk an identity a legal contract or like whatever this I think we'll see more and more innovation but I think the loan asset frankly how it like moving away from stable coins I think we're just going to lean fully into that. Um, okay. Final closing question or Monae, let me know if you have anything else, but um, I'm cur so this was a big question that frankly I've thought very different about since we did it two years ago, but we're very interested in this idea of building an onchain yield curve. Um, and historically the way that people thought about that was actually the ETH stake rate. Um, right? So, whatever you could earn from staking

Ethereum was kind of your risk-free rate, right, so to speak. And then you kind of ladder on you know either credit risk or uh you know duration or whatever it was and build a yield curve on chain. And you know when I look at what you're doing here with fixed rate lending you know you can kind of interpolate based on okay 30 you know 60 90 six months you can actually build that yield curve here via Morpho. And so I'm curious just how you think about uh a yield curve on chain and where it's going to come from. And then if you could end with do you think that there's eventually going to be convergence in between the yield curve that we see offchain um in like the treasury market and crypto right so yeah 100% I think the yield

curve will appear as like you know with all the data points like of all the loans on morpho I think it will have a similar shape I I really don't see how fundamentally the infrastructure should change this like and you know I think my answer to the second part of the question is that you know I think ultra is going to move on chain at this point. It's like you know it's pretty clear that every like every single player that is not even in finance has like a road map to go on chain right and everybody sees this as a future and I hardly see how I really think of blockchain as like revolutionizing like purely the infrastructure and the computing

mechanics as opposed to the financial mechanics in themselves. And don't get me wrong, like obviously we'll have a ton of like financial innovation because of the openness etc. But I think it's less fundamental to blockchain technology. And I I can't think of an argument why the yield curve, you know, in a few years from now should be different in DeFi than in trfy because stratfire will be on chain, right? So maybe it's like it takes slightly different shape because we have more efficiency whatsoever. But but yeah, I I I think it would be the same is my gut gut reaction to this.

Awesome. All right, Paul. Uh this has been really fun. Thanks for going a couple minutes over with us here. Um, but congratulations on everything with uh, you two and yeah, we'll have to do it again sometime soon. Sure. All right. Cheers, guys. Cheers. [Music]