Morpho Just Removed DeFi's Most Important Number

Transcript

Bank Nation, we got Paul from Morpho back on the podcast talking about a new thing out of the world of Morpho called Morpho Midnight. We're going to talk about it and everything else that's going on in the world of Morpho and Vault broadly. Paul, welcome back onto the show. >> Hey, thanks for having me again. >> Paul, what is Morpho Midnight? >> Yeah, Morpho Midnight is basically the next version of Morpho uh after Morpho Blue. So morpho we're infrastructure that allow people to earn interest on one end and get some financing on the other end. So we give you a stack that allows you to create some lending markets right in more for blue you could select one collateral a loan asset an oracle and you had this like variable rate open term lending experience that was like uh pretty convenient and pretty

passive to to get into. uh and we've done this for the last two years but but you know what we realized as we were talking to more and more institutions that one thing was lacking it was uh control over the interest rate right whether you're a consumer you know a retail user of a large app like you know Robin Hood or Coinbase you want predictability on your rate like you want you know you want to know what how much you're going to pay but most importantly if you're a large institution you would you want control on the rate because you want to price the risk accurately, right? You you it's actually not a thing in in traditional finance to have your interest rate rely on like arbitrary formulas or or

arbitrary governance like it is the case in DeFi. And so basically the combination of those two feedbacks made it obvious that the future of of D5 financing um had to move away from the so-called interest rate model that we have today that basically dictates what the rate is going to be to a much more you know traditional way which are zero coupon obligation. So long go of saying more for midnight is like a fixed rate fixed term lending and borrowing infrastructure that allows you to build lending and borrowing markets that have a term and has a fixed rate. And this is to me this seems like Morpho is building uh financial infrastructure that is very ubiquitous in trad and you know in

Morpho and also DeFi broadly we kind of built the things that made sense for us to build in the first place uh like a morpho morpho you know morpho blue uh things that don't really mesh well with tradi but do mesh well for retail participants. The AMM for example is just a retail friendly phenomenon and morphaboo is like the same thing. It's just like ah like retail actually doesn't really care about stable interest rates. They just you know they're okay to be uh exposed to the market of whatever the market wants to pay them in that moment and it can flex up it can flex down and that's just like not true for institutions. And so based off of your customer feedback

from talking to institutions, I'm like I'm sure they were like we are looking for the form factor that we are familiar with. Please build it and that's what Morphoblue is. >> Yes. I think pretty much I like the way you you explained that is in the early days of DeFi um basically you had multiple constraints. gas was high and also the set of users that was interacting with the chains was basically users with their MetaMask wallet that had a little bit of money and they were in no way financial experts, right? So basically the protocols initially had to internalize a lot of the complexity in order to provide a passive experience to users and they could not rely on any other

intermediaries to do that. Right? So this is why the early versions of unis swap for example is passive both on the LP side and on the trader side right you do can do passive LPS on unis v2 and and passive trading this is why compounds or or or a manage the risk for you they manage the rate for you they manage everything for you right but as the ecosystem grows and like the complexity of the players you know they're more and more complex and understand they want more control right and so as a D5 protocol you have an interest in modularizing some parts of your your code and on of the responsibilities that you have and leave it to the market because the market will price it better and it will scale much more because

they'll be able to discover much more use cases. So what does that mean in practice? In the case of Uniswap, they turn unisoft v2 into unisop v3 that you know externalize the LP a like some of the LP management a little bit more and and so it's not easy to passively LP on UNISB free. It's still easy to take but in UNISB4 it's actually hard to take and it's actually hard to LP directly at the smart contract level because like D5 is like in layers now. you have a wide set of you know you have those mev bots or like market makers uh that are going to run the different auctions in unis swapex whatever uh that basically overall provides the market efficiency that is closer to trfy uh infrastructure uh and lending followed the same thing

which is it started with the very passive thing that manage both the risk and the rate for you and then morph blueue we came in like morph blue is harder to use than it is to use a right because you have to choose beyond like this like you know 2,000 markets, 1,000 vaults like you know it's hard and so you rely on those curators to basically simplify the experience. you have one extra layer and and midnight goes one step further in that direction and says hey you know what the protocol should not manage the risk but it should also not manage the right and the ecosystem participants should do it anyway long way of saying that DeFi is layering and that's a good thing in my opinion it's just going to provide us much more flexibility and much more market efficiency and it will give the serious

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actually want exposure to. One platform, one account, multiple markets, crypto, equities, commodities, and more. All accessible with USDT. Bitcap, trade smarter. Start trading today through the link in the show notes. This is not investment advice. The thing that I want to to know is that when when we discovered crypto or discovered DeFi, there are some DeFi primitives that just felt really elegant because it gave some numbers in the some parameters and it gave it up to the market, right? And so we learned that Ether Delta, the first order book exchange on Ethereum, is like not the way that we're going to build that. And what came after Ether Delta, Uniswap, and Uniswap created XY equals K. And it worked well with blockchains.

It resonated with the construction of blockchains and the, you know, the inputs and the outputs were all determined by the market. And it felt very elegant. It felt very DeFi native. it was intuitive to, you know, financial first- timerrs like myself who who learned finance through crypto and it all worked and that was like the early era of 2021 DeFi and beyond. And now we have things like Morpho Midnight coming online and you know what are the what are the four ingredients of a Morpho Midnight loan? You have the loan token, the collateral asset, a maturity date, and then permissions for any sort of uh permissioning system that uh a vault manager would want to want to create.

And this is all it doesn't feel defi resonant. It feels very much like uh tradi asking for product features and then morpho midnight building them. But that's my bias as a like a individual DeFi like onchain enthusiast. And I want to know the question I have is like is fixedterm fixed rate uh lending borrowing and lending is that also a logical conclusion for finance or is that just kind of how finance we we built finance top down? Do you get what I'm saying?

>> Oh yeah it's a great question. Uh I love that question because I have a strong perspective on this. I so first I would so the answer is I think yes. I think fixed rate fixed term is the right primitive for financing. >> It is a true primitive. >> It is the true and it's the only true primitive and it's a deep deep conviction that I have because if you have variable rate >> what does it vary on right? What is the function >> and the function the answer to that is that it's arbitrary. You rely on something to say what is the rate which makes it not a primitive. A primitive does not rely on anything for its existence. Right? uh whereas a fixed rate fixed market the primitive is a

zero coupon you know obligation uh which is an extremely simple construct much simpler than the mess that a lending pool is because a lending pool is a mess right it's a it's a very simple construct which you know you could describe in even simpler parameters than than um than x xy equal k is basically the idea that you have this like object that you can trade that at the maturity will you know be valued at one and the interest rate is determined by the discount that you have compared to um to to to to one and so this object is extremely simple and I think you know I I like to believe this is the right primitive because it does not depend on anything and the reason we could not get

there in the first place is that we needed to manage the rate uh uh for for people uh which once you have this layer of curators that are able to handle the complexity on behalf of simpler users then it does not make sense uh anymore to to internalize this by by by by by the protocol. >> Maybe if I'm hearing your answer correctly, um you know, a aside from all the other reasons why why it failed, one reason why Ether Delta failed was because there just weren't enough people trading on it. It was dog [ __ ] UX in addition to that. And maybe the best thing, the best mechanism in that moment of time was actually unis swap x* yals k because that matched the amount of participants that we had on chain in that moment. And there was um Dharma was

a startup that I remember back in 2017 and it was actually doing Morpho Midnight. It was doing fixedterm fixed rate loans, peer-to-peer style loans, no central contract unlike a unlike uh more >> and and even a hadland before which looked like Dharma to some to some extent that was >> so we've actually tried this before but it never worked back then and I think your answer is well we had not nearly enough market participants in the level of sophistication and liquidity in order to bootstrap that whole thing.

>> I think that's mostly right. I think there's a few reasons, three reasons I think the design. So, okay, first thing is like gas at the time would not allow you to, you know, do crazy stuff, right? Um, the second is the most important which is the liquidity and by liquidity I mean the collection of participants that all together make markets active and easy to enter and leave without moving the price too much. Uh, you did not have that at all uh uh back then, right? Um, and so of course like a product like Compound when when it came out that you know provides you that simple user experience was a much broader product market fit because the market at the time was like basically us with our MetaMask wallet right and and we knew nothing about it. Now our our

users like you know Apollo is like the largest private credit fund in in the world. They're you know in you know investing in in Morpho. Those guys are the most complex portfolio manager in the entire world. like they don't need someone to tell them, hey, my you know, DAO is gonna set the rate for you. They hate that, right? And and you know, I I've pitched to like all the largest traditional financial institutions in the world. And like pretty much half of them are like this interest rate model thing is the most stupid thing we've ever seen. Which why why do why do they think it's stupid? because they don't like from their perspective as portfolio managers they want to control their their like for a given risk they want to be able to control their right and their

terms and and the DeFi construct does not let you does not make you owner of your terms you you basically the terms that you have are dictated either by a formula in the case of Morphoblue or a governance in the case of a basically to their eyes it's a retail product it's basically like a is the asset manager and you deposit money into it and they choose the risk profile for you, right? And so and and so this like basically they don't they're and from their perspective they're the good asset managers. They don't want to rely on anybody doing that for them, right?

Which by the way is different than trading. I think DeFi trading and DeFi lending has a very different trajectory and I think UNISOP has been able to get to much cleaner primitive sooner because it's lower dimension like lending involves risk and risk is multi-dimensional which you know requires some management and and everything if you want to to handle it properly. Um but but yeah and I think the third reason is that frankly when you look at Eastland and Dharma it's like has the designs have a lot of problems right? uh uh uh in general, you know, you mentioned the UX of of of um of is delta and and and everything is is just like there's a lot of thought that goes into Midnight that for example, you

know, you don't have liquidity fragmentation in Midnight. Like you can like post one liquidity across 10,000 markets that are isolated and your liquidity will be available to borrow in all of those markets at the same time. Those are like key features that are truly zero to once in terms of of like liquidity etc. that you know yeah basically would would make that work. >> Can we go through the actual just construction of a morpho midnight market? You talked about it a little bit and I kind of gave the four ingredients but I want I want to hear from you maybe you can explain from bottom up like the the building blocks that go into a morpho midnight market and then once we have that market and we have many markets how do those kind of compose together too? But let's start from the

bottom and we can go higher. >> Sure. Let's let's construct the wolf fang. So the cooperative is actually not so different from morph for blue. You have collateral assets, you have a loan asset, you have an oracle to price those collaterals and those loan assets. >> Um and instead of having an interest rate model, instead you have a term, right? And so and an interest rate model is the utilization curve, right? That's the same thing, right? And that's the thing that the uh institutions are like I don't want somebody else to tell me what that curve is. I want to set that for myself.

>> Yes. Exactly. Exactly. Is is basically in Moro Blue you the market had a formula that dictates the race based on the amount of liquidity like supply and demand that was in the market. In the case of Moro Midnight we externalize that and we say hey you know what the market is going to price the interest rate. The market is going to set what it is right. Um, and that's true in our perspective. That's true techn like like we as Moro are computer scientists. We're not finance people. We want every financial component to be removed from the infrastructure. And that's what midnight truly achieved in a way that we were never be able to to do it. So anyway, basically a moro midnight market should think of as a zero coupon bond

that can be traded in in in order or like a zero coupon like obligations. It's not exactly a bond but uh an an obligation that can be traded uh and the price of that obligation until the term dictates the amount of interest rate uh that you will have uh just like a a traditional like zero coupon obligation basically. Um so that's the core primitive. Now in order to access those those those those obligations uh it's a bit like morph blue. Morphob you have thousands of markets. Morpho Midnight you have thousands of like you know uh uh obligations. So you probably want to make sure like to route through all those like different markets. You

probably want to use a vault right and this vault is basically going to be in charge of allocating across the different markets that it's interested in. when you're a vault and you deposit into morphol blue you just have to select the risk right like the risk parameters but you don't really choose the rate at which you invest right whereas in midnight you can say hey here's the risk I'm willing to take I'm willing to lend to a bitcoin back loan market and this time you can say hey I'm willing to lend at like 5% and not below 5% right and not only you can do that but you can also manage the liquidity so you can manage the rate but also theid And you can say hey you know what I'm happy I don't care if I have my money

right now I can lock it for 6 months in which case I can achieve higher capital utilization or you want to say hey I really want a lot of liquidity in which case you can you can also do that. So to the eyes of the user, it looks the vault looks like uh Moru blue vault, >> right? >> Uh but behind the scenes, the curator when you use more for midnight behind the scenes, they're going to basically uh buy those obligations uh and and you should think of the vault as like aggregating those those different obligations, >> right? Aggregating the different obligations, but still below the hood are the two market participants that are new. So this is a new behavior from the both the borrower and the lender because the borrower is borrowing for a fixed

term. The lender is >> is lending for a fixed term and so that that part of the whole uh supply chain it needs to get bootstrapped by the whole midnight angle uh product arm, right? Yes, it it it has to be bootstrapped by the midnight product arm. From a user perspective, you probably still want to be passive like the users in the comments app and the Robin Hood app, they still want to be, you know, passive to some extent. So this is why vaults are still important and they will basically roll the different obligations on your behalf, etc. It's actually part of it's like we have like dex aggregators and this is a little bit like morpho midnight uh like I don't know what you call these things that the

individual market for a morpho midnight market >> obligations these are aggregated and so like if I'm a if I'm a depositor looking for yield and I want like you know I just want to get utilization on my USDC then morpho blue will allocate across Morpho Midnight according to like my intent if you will. >> Yes. Uh I think I think that's right. But you as a as a user of the vault, you would never see any of that. Like you know, the trader is gonna uh >> but it gets but that's helping you bootstrap liquidity on the midnight side because like there is USDC or whatever available to immediately come and fill in uh borrowing requests.

>> Yes, exactly. And this is the this the sort of like you know part of the strategy strategy of the launch of of of of Midnight is that Midnight has billions of dollars already accessible. If we turn on the switch of like vaults being able to allocate, it's a parameter in the code of morphaults is that we can basically say now all the morphols that have all those billions of dollars of liquidity, they can allocate into midnight. We are conscious this is uh you know a a big decision like there's a lot of of of liquidity involved. So we really want to take our time. We want the launch of more midnight to be as slow as possible. We want ecosystem participants, market makers, lenders, bars to get familiars with the code,

integrate into their API. We want to take our time. Define has been rough like for the last, you know, six months. Uh and then once we feel confident about the state of the market, you know, we can vote for uh basically the the the vaults to allocate into midnight and that will bring like, you know, menig scale uh 10 figure scale pretty pretty pretty easily. I suppose building the mechanism, the primitive of fixed rate fixedterm loans, that's one thing and it's nice to have that onchain as a feature, but the uniquely DeFi thing is the fact that there's also Moro Blue right next door that you're able to flip the switch and then these things, you know, 1 plus 1 equals 3 and there's some synergies here. I guess that that part

is uniquely enabled by DeFi. Definitely. I think there's a million things that are uniquely enabled by by DeFi. I think the first thing is you know I like to sum up all the advantage of of crypto by one word which is openness. Uh because the system the infrastructure is open basically have two concrete benefits. The first one is you have better pricing because of very open and fierce competition. Right? When you think about it like um when Coinbase users are coming to uh more for chain to borrow, they have tens of thousands of lenders that are competing to give their users the best rate possible. And

because the infra is open, it's like completely global, right? And so as a result, uh the the DeFi borrow product of Coinbase delivers much better rates than what you would get if you were to use a centralized desk for the same financing opportunity. And that's like the key killer use case is that the spread between the lending rate and the borrowing rate is going to be crushed in a crypto environment because everything is so open. Uh so that's the first benefit of openness. And the second benefit is obviously accessibility like the code is open source, everything is readable. So you just have it's much easier to integrate like we we integrate in pretty much every single fintech in this world, right? And and it's like the same pieces of code that are being

reused times and times over again. So it's like the compounding effects of open source of open infrastructure are extremely strong. They're extremely hard to activate. You know, as we know this industry is like like a lot of inertia to activate. But I can tell you like like as we think about adoption and liquidity and network effects is just this thing is incredibly snowballing. >> Let's talk about the the secondary market activity that happens after a midnight uh sorry what did you call it again? Uh the >> obligation. We could say market. >> Obligation. Market. Yeah. the the obligation, but I want to know like why you call it the obligation because you're talking about it when a midnight morpho midnight market is created. We've created an obligation and that's a token, right? And that's the zero coupon

bond equivalent. >> Yeah, exactly. So, it's a zero coupon obligation that basically you should think of like um an object that that is traded and so the market trades the object which is the obligation. >> That's like terminology but whatever, >> right? And so like the idea like maybe correct me if I get these details wrong but the idea is that if you are offering 5% yearly on a one-year loan then this obligation is issued and it's worth 95. >> Exactly. But then it will it will settle it will resolve in one year at $1 and then this thing can be traded between market participants on elsewhere or elsewhere from Morpho uh and it can be

traded and that kind of creates creates a market a marketplace. >> How do you market happens on Morpho so you can't like I mean you could trade it elsewhere if you wanted to but there's really no reason to because all the liquidity will be aggregated at the Moro market level. So you how how will that market emerge? Will that be like an order book? >> Yes, it is. It is like an order book. It is like an order book. Um it is like an order book where basically um you know curators can come in and put make offers like so in in more for midnight you can make make bar offers, take bar offers, uh make land offers and take land offers. You have really four types of orders. So as a as a land maker, you can

offer your liquidity to to bars at a at at a given rate, right? And and so when it gets taken by a bar, you basically are are are uh entering the loan. And now the two participants can decide to exit if they want to, in which case they can take existing offers or they can make offers themselves to exit, right? But it's important that the primary and the secondary market are in the same construct right like the protocol makes almost no difference uh between the two which means that you know if for example you are uh there is like this end of year maturity that is happening that you're in well maybe you know if you want to live one month before the end of

the year maybe you'll be able to match with someone that is here just because they wanted a one month maturity loan right and and those are like the same markets basically. And so the the reason why I have some sort of like retailoriented aversion to fixed rate fixed term marketplaces is because an individual like contract or agreement or like uh market obligation is not the market. And the reason why I I call things like unis swaps x yals k or a's model is because there it is the market. It's just like aggregated a bunch of people. And so like when two parties come together and they agree on fixed rate fixed term loans. I'm like well that's so top down

that's that that's how do you know that's even what the market going rate is? But I think what happens here is that when a ton of these things are created then in aggregate the market emerges because so there's so many individual building blocks producing it. >> No I I actually think you have both of those effects in midnight. So if if I'm reading your question correctly for a given obligation you can have it's an end toend relationship just like on UNISOP or on a it's not like an OTC you could do OTC transaction if you wanted to uh uh through the the the the midnet construct but if you take like the the BTC USDC market and end of the year it functions exactly the same as as a morph blue pool or an a pool etc. It's like

the given obligations are funible the same way your a tokens are funible, right? So it is a market for a given obligation. Now on top of that because you have so many obligations, you also have transversal network effects thanks to like multimarket offers, callbacks. We can talk about this. Um um but but yeah, does that make sense? >> Yeah, I think so. Um the thing that I I'm interested to see emerge is uh some sort of like um interest rate curve on assets. Now I think like the dominant asset inside of Morpho Midnight is going to be stable coins and dollars just

because that's just the world that we live in. But there's going to be interest rates emerging on like non-crypto asset or nonstable coins like ETH and Bitcoin. And so maybe you can talk about that. you're smiling and you're nodding your head somewhat enthusiastically. So maybe maybe talk about like how interest rates or like bond markets emerged for for like things like Bitcoin and ETH. Yeah. You know, the reason I'm I'm laughing is because we released Midnight and then literally 10 hours later you had already like five or six threads on like the rate curve even though you know the protocol was just launching there was like 100k of liquidity or something and people were already drawing the the the rate curves >> doing on the rate curve. Yeah. And I was like, guys, it's still very small

market. Like, you know, anyone could manipulate that. Uh, but still, I think it's cool, right? And I think it's it's true that you're going to have brand new data points that, you know, you frankly you don't have in in in DeFi or even in finance, you know, uh, for for some of this like as we tokenize assets, etc. So, I'm I'm very excited about this. I will say it's more uh like I don't think it has so much business value for Moro in the short term. So it's like I need to like it's a bit like a nerd like interest for me. Um but um but yeah I think I think as the market participants get more complex we will offer uh price discovery on on a lot of different assets um and they're like native interest rate. What

I'm most excited about is actually not the price discovery of the rate of the given stable coin but more of the underlying trust assumption. What do I mean by this is that when you come to Morph as a borrower to borrow something, you have to prove yourself, right? To get the financing. So, usually you come with a big stash of Bitcoin or a big stash of collateral. But Midnight lets you extend this to more than that if you want to. So, there's a module in the protocol that lets you express why you should be trusted. So, that could be collateral, but that could also be your identity or that could be your, you know, receivables, whatever. And then the creators will be able to see this and they'll price it, right? and and that it goes to an article I wrote like

a year ago approximately that's called the price of trust which you know obviously I wrote in the context of midnight and and and basically this is what I'm excited about is like more for midnight as a machine to price trust assumptions and why you should be trustworthy or creditw worthy uh in general and anyway so as a borrower I could I could give extra reasons as to why I am trustworthy and some can be very like hard-coded onchain cryptonative like collateral. But it could also just be like I have this business and we make this much money and here are the documents to prove that.

But it's up to you to believe that or not. Exactly. Exactly. And this is the exciting part. You don't even need collateral at all. Like you could I I could come to the midnight market right now and say, "Hey, you know, I'm Paul. I'm like the CEO of this thing and I I sign it. you know, I prove it in some capacity with a proving mechanism that has some trust factor. Um, and I'm I'm I'm requesting 100K. I'm I'm sure people will lend to me, right? They'll probably lend at a terrible rate, but their price is the price that you'll have to how who would determine the rate. You would say like, "Hey, lend me 100,000."

>> Whoever is willing to take the risk and here's the key thing. when you externalize risk and you externalize right from obviously like you know we've been you know you know this better than I do like it's been like six years since we talk about like under collateralized loans and we've always been asking how is my D5 protocol going to underwrite uh under collateraliz like the answer is it does not like a piece of code is not here to to give credit to people like credit is complex however maybe the largest private credit funds in the world know how to underwrite those things right and they'll give it a price right and so the key things the key elements that you need to have in place in order to unlock the next pockets of loans and under collateralized credit etc is actually like externalizing the

rate and externalizing the risk such that the market can price any type of risk and maybe what you prove about yourself is like a little bit like you know fancier and not that trustworthy but then the market will price it and say oh actually your your statement like about your company I don't believe that I I don't think that's a good document right so they they'll press but maybe it is right and so they'll they'll give you a right according to that >> right because like somebody come in could come in and say hey we represent Apple we we are Apple here are our S1s and then it could be fraud >> of course >> and it's not it's not for Morpho midnight to ascertain whether that's fraud or not but that all of that information is made on chain like it's

just like public >> additations so this is this is a module and by the way I should say we're not focusing on that for now we're focusing it's something that's possible in the protocol But for now we're starting with the very borrowing I mean not borrowing but like over collateralized crypto loans etc. But that's something >> we'll be able to share more in time about is is the protocol lets you express onchain trust signals about yourself right whatever that means could be an oracle like we don't say how it's a very general module it's basically >> it's just like a memo field is it just yeah it's like an empty module and and you can basically say hey um here is my uh whatever zk proof of whatever like you know and then the curators will assess

this and when we'll price it, right? Um and I think, by the way, I think this is the answer to collateral loans. I think this will come I see how that would work. It is, right? That's exciting, right? >> Absolutely. >> Yeah. Um >> because it's like what you what you're also doing is like if somebody like Apple, the company Apple for example, wanted to get a line of credit, it's it's on them to provide enough material to create trust in the market. And so they they need to get their lawyers to sign off on something like they need to make a public statement about this like yes, this is actually us. This is actually what we're committing to. And then the people probably supplying money to that market are like, well, if Apple doesn't follow through on that, I'm

going to sue them >> because I'm going to take them to a court. But that's again outside of anything onchain. >> Exactly. The value of onchain is is the matching. It's the open matching with N lenders with N bars which achieves better price uh discovery and and better better efficiency which lowers the cost of capital for an Apple or for whoever frankly right it's not restricted to Apple like if you want to a home mortgage you could you basically it lets Morford lets you run global auctions on every single lender and when you get your home mortgage like you're going to instead of doing like a just going to your bank and and obey to whatever interest rate they give you you're going to run an auction on 10,000 different banks

Uh right >> now in practice we are going to help facilitate this like obviously we're not responsible for the enforcement of any of that but we can come up with a language for people to express why they are trustworthy and and if we you know a good language good abstraction will allow for good capital formation and and facilitate so that's our role right in in in in all of this but I think overall this is the solution to like extending beyond the set of class that we have took us a lot of time to realize. I'm not going to lie. Like, but I think this is really the the key of of this.

>> The other thing that is exciting about that is that if that works, that starts to get identity to emerge on chain because you're going you're going to want addresses and their credit history and who they are and their like history of repayment and all of a sudden like identity emerges out of that. >> 100%. I think I think Morph Midnight is going to be the first PMF of the identity layer. the identity uh layer had a a PMF problem because there was no business case but now the business case is going to be very clear is that your cost of capital is going to be a few bips lower if you provide that identity primitive hence there's like a like clear value that you can achieve by having your identity on chain >> what assets do you expect to do well in Morphob midnight uh obviously like

stable coins are just so prolific and I would expect stable coin yield and stable coin borrowing with basic collateral like bitcoin and ether which is the status quo to also continue but like Will there will there be new types of assets that will hit resonance with Morpho Midnight? >> Yes. And I think first I should mention as you said that stable coins is the major focus for us. Uh like in general one interesting statistic is that 92% of Morpho is loans are stable coins. Uh whereas the average for lending protocols is like around 50% or 60%. So there's still a lot of like east leverage lending etc etc. We're actually the largest USDC like like D5 protocol on on EVM by quite far now. Uh and because we focus so much on on just like

because we think stable coin markets are the one that will eventually grow uh the most. Uh that being said, there's a lot of value uh it's a smaller market, but there's a lot of value for allowing people to lend assets uh and to short assets, whether that is ETH, Bitcoin, tokenized stocks, uh at some points like SEC lending, for example, securities lending in general is is a big big use case in TRFI and so eventually Moro Midnight should allow for this with the right compliance guards. Um and and yeah, and so I'd say I am excited because I think it's going to be a huge use case uh eventually if you look at Tatine numbers, but I'm even more

excited about like stable coin lending in general. What new entities do you think will be able to come on chain uh because of Moro Midnight? either like any sort of like partners that you have lined up to actually make markets happen on Morpho Midnight or or just like what's the next most approximate Wall Street institution who's like oh finally they figured the crypto bros have figured out fixed term fixed rate interest now I can go play on chain like who do you think that is all the large ones that have a crypto arm if they haven't touched midnight already they will in the next 24 months right and I'm not saying this just like you know like like we we literally talked to all of them. We actually built PC's with a

bunch of them and and some of them they're not at PC stage anymore. They're actually like launching entire businesses. So, which by the way is like a true interesting moment for the institutional adoption of cryptos like moving out of PC's. Um but yeah I think you know the order of things has always been like wallets first then exchanges then fintex then neo bankanks then asset managers and then the actual banks uh is the order of the adoption and then for each of those buckets you look at the most aggressive players and they will move in first right um and and then they will force the the bigger players that are usually the most conservative in the category to to lean in eventually and Yeah.

>> How does this fit into the whole neo bank neo brokerage revolution that we're kind of watching on Ethereum? So like last year about this time there was this whole whole movement and like attention on neo banks like oh without wi with stable coins with such a proliferate growth of stable coins and easy to build wallets these days it's easy to make a neo bank and like etherfi kind of led that. Now we're getting into like neo brokerages. Well now there's tokenized stocks on chain. Uh, now with Tony Stocks, it's easy to make a NEO brokerage, a brokerage without actually being a broker dealer. I kind of see Morpho Midnight and and Morpho Blue generally as being like, well, don't you want margin? And if you have all of these assets on chain, like can't Morpho the platform, create margin accounts for all of these things?

>> Yeah, 100%. Um, like you know, Morpho is infrastructure for all those like players to connect to global networks to offer good yield products or loan products, right? Um, so it's like an absolutely essential piece like if you want to offer some form of financial app, you have loans, you have yield, otherwise you're just not a good financial app, right? It's going to be hard to defend without um without that. And and I will say though, I think it's an interesting revolution. I will say anybody that has distribution now will think about financializing their user base. I don't even know if financializing is a word, but basically I think I think yeah, I'm French, so I

sometimes I I use words. I'm like not 100% sure, but I think anybody that has a surface of interaction with a large set of users will end up with user accounts that are powered by self-custodial wallets like a a dynamic, a turnkey or a privy and and and from there they will be able to access global networks on on onchain which will allow like a Twitter or like you know frankly whatever app uh that has distribution to or let the user users earn interest on their balances or like now you have Yuber that has you know Yuber cash and they will let you earn interest through chains like on this or Airbnb or like whatever. Um so I think it's you could

see it both ways is like oh it's going to be great for neo banks but also everybody's going to become your banks including those that are not professional neo banks and they have the edge of having distribution uh from their other adjacent activity. Uh basically, >> yeah, you definitely saw that um this pattern that you're talking about kind of emerging like a decade ago with McDonald and Starbucks where like Starbucks you were like you can deposit they they had something like >> hundreds of millions of outstanding obligations to their own customers who had loaded up their like Starbucks wallet with like $50 and then Starbucks is like collecting all the yield on that. Uh and so like we saw ear early tremors of that. I remember talking about that a lot in 2021 and now now

what you're saying is like well if anyone has any sort of distribution you can turn it you can turn your app into a Venmo with yield so easily. >> Yes, I think that's right. I think that's incredibly easy now. And that's also comes down to the point I was making about openness and accessibility is like literally tragibility can build on your bank like very easily thanks to basically like you know like DeFi where you can just like if you embed like a a self-custodial wallet it's like so easy >> and I think we reached this inflection point not so long ago by the way I think it's like a three threemon thing where it became the easiest way to build like a financial app is on cryptos like there's uh it's easiest it's easier I don't

think we have the quality of the financial products yet except in some areas like payments or or yield sometimes uh but um but eventually it will just get better and better talk about uh capital efficiency because institutions are going to come onchain they're going to put their money on chain if and only if it is more capitalally efficient for them to do so and that's kind of always been the long promise of crypto is just your capital goes further in crypto how does morpho midnight fit into this equation Yes, capital efficiency ultimately is going to be everything. I think the cost of capital for loans being better on chain is going to be the largest the biggest gravity pull for the next wave

of adoption. And again, I'm super biased because I'm building a protocol, but I really think it is. I really think financing is the cornerstone of finance. uh and as the name hints at uh and and I really think financing is also some of the markets today in stratify that is uncompetitive and and that gives a huge net interest margin to the financial system which we should account for like 200 300 bips on the entire economy and and because on onchain rails everything is open. If you have an infrastructure that lets you set the price, then you have open competition. And if you have open competition, you compress the net

interest margin, which is both the reason we're going to be hated and loved because that's going to create an immense amount of disruption. >> And by threaten a bunch of business models, but then we also save other people a bunch of money. >> Exactly. And you know, it's like the story of tech is like disrupting uh industries. Took us a lot of time to disrupt finance because it's like It's a much slower industry for regulations reasons, for so trust reasons, etc. But we're we're there now. And I can tell you those like those banks and asset managers, they take this problem seriously. Like they really understand that the way they were making money is going to disappear uh because of the openness of the chain.

And basically, you can take two postures. either you prevent this from happening or you fully lean in. Uh and because if you're first then you have the opportunity to disrupt yourself and disrupt others before they do. Uh and the reality of the game theory is that you should fully lean in because some others are already started to fully lean in. And and and yeah, you don't have the choice, right? And I think actually DeFi has much more leverage on Treadfi now than than people may think. It's like this is not a choice thing for them. like they they have to because some of their competitors are already leaning in.

>> Say someone uh took some shroud and Freud in watching banks get unbundled. I would expect that this would be a very big uh moment along that journey cuz like something that you said is like collapsing the net interest margin. Well, you're just talking about collapsing how banks make money and giving and putting it back at the margins. And so like you know there's been a bunch of things that we've invented in crypto that have created like this whole like bankless movement technologically speaking like one bankless money bitcoin and east stable coins like the money of actual real banks uh and then this is is just like also just taking kind of the back end of

banks and allowing it to get expressed on chain. And so like in 2026, we finally have fixed rate fixed room loans. Uh that is kind of where banks get a lot of their yield and supply a lot of um just make a lot of their a lot of their money. And so I would suppose if somebody had a podcast called Bank list, they would be thrilled about this. I did actually did not make the connection about what I was doing about like the the the sort of like what we're saying in in in the name of the podcast. I think I think I think that's right. I think it's not be just just because fixed rate fixed term is a big part of the banking industry that it's interesting. It's also because now it's market define interest rate. This is more than being fixed rate fixed term is

because now it's a market place. This is how this is the purest expression of we're going to have competitive cost of capital. This is it. We have an open market for for for for trust. And by the way, this is this is why I this is why I do Moro in general is one way to think about this net interest margin is so I I like to think of borrowers as as people that have ambitions to realize something in the world and and and they need capital to achieve it, right? And they need the lenders which are the people that the the believers that the people that that trust them to achieve stuff, right? And I think of this as a very noble activity. Finance does not look

always the most noble activity. It looks like the only industry that moves value around without like creating value and yet tax a cat, right? It seems sounds very attractive, but when you paint a picture of like, okay, people have ambitions, they want to realize them, people believe in them, and so they transmit capital. It seems like a very important thing to do. Yet the cost that is beared on like the at the infrastructure level that connects the two layers is very high. And it's like the 300 bips that we've been we've been talking about on the entire economy. I think of Morph's mission is basically collapsing the cost of trust like collapsing the cost at which humans have to believe in one another and trusting one another. And you achieve this by

providing open rails in which people can compete uh to offer the best possible terms to their counterparts. And frankly, I this is why I work in crypto and what I get excited about all of those things that the promise is like absolutely exhilarating in my perspective. >> How much TVL do you think Morpho Midnight will have by the end of 2027 >> one and a half years. So okay, I think everything is highly dependent on when we unlock the business cases for TRFI because you know if you look at the TAM today like crypto backloans is like what a $60 billion market. It's great. I think Midnight is going to eventually

eat a lot of that uh and and will be the largely dominant player over like you know anybody else including Marful Blue. Um, but that's still in the order of magnitude of tens of billions, right? And that's probably going to take a few years to get there anyway. What I'm excited about is what are the new addressable markets that were going to be unlocked by midnight. What are those like because the order of magnitude can very quickly change if you on board new types of of asset curators or asset managers in the network. that basically handle handle trillions of dollars, right? So, not saying obviously midnight will be trillions of dollars by 2027.

Those are timelines I don't fully control myself. But I think I think I think I hope it will be more than $10 billion that would be uh uh like I hope he would have outgrown more for blue. uh if that's not the case, I would be very disappointed to be frank and I would not be surprised if we've crossed like the hundred billion dollar uh mark then uh because it you know frankly it like took two years to morph blue to reach like 10 10 billion. So so I think that's not unreasonable to to think in those orders of magnitude.

Yeah. >> Yeah. Yeah. I did a podcast with the blockchain capital guys and uh they said $2 trillion is like conservative by 2030 >> and for more excuse me for stable coins for stable coins two$2 trillion of stable coins on chain by 2030 and I think that implies some sort of explosion in credit markets credit borrowing and lending markets as well because it's so fundamental and foundational to finance at large. >> Yeah, I I agree with that. And to be fair, I'm very bad at quantifying predictions. I I've turned out to be pretty good in DeFi at defining like directions and you know at the high level, but quantifying how much and when is like you know depends a lot on you know maybe clarity not passing or

clarity passing. It will influence a lot or like things that are not in my control. Some exciting news. We are launching a new podcast to help people figure out the crypto cycle, how to navigate it. The best crypto cycle investor I know, his name is Michael Nato. He runs the DeFi Report. This is the guy that sent me a sell alert before the 1010 price drop happened. His cycle analysis has been absolutely on point. I've been following him for years. And this year, we started recording weekly podcast episodes. Each one we get into his portfolio, what he's holding, the market structure, entry targets, fair market value of Bitcoin and Ether, and where we are in the cycle. There's new episodes that are released every Wednesday. They're 30 minutes, they're short, they're punchy. I think this crypto cycle is harder to navigate than most. So, let's do it together. Go

subscribe to this podcast. Search the DeFi Report wherever you get your podcast. YouTube, Apple, Spotify, or find a link in the show notes. There's a new episode waiting for you now. Hey Banklist Nation, it's David. If you're hearing this, that's because you are listening to the free Bank list podcast feed. Did you know that there is a premium Bank list RSS feed? The premium feed has extra interviews that I do for my own personal research and just deeper questions that I want answered about the crypto industry. Questions that I want to answer so I can be more informed as an investor both at Banks Ventures and also just in my own personal portfolio too. Also, there are no ads, which means if you listen to the premium feed instead of the free feed, you'll get about 20 hours of your life back every year because you choose to support

Banklist directly. So, if you're interested in getting extra content all while skipping the ads or you just appreciate what we do here and want us to keep doing it, we'd appreciate it if you signed up for Banklist Premium and there is a link in the show notes to get started. Cheers to a good 2026. I want to get your take on Hesser Pers's statements recently. uh she released some statements last week that I'd summarize them as like respectful to the sector, the vault sector, because it's grown pretty large while highlighting some key concerns that she has about the sector growing any larger. More specifically, she said that vaults may be investment companies or investment contracts and she also said that lending strategies may create notes that are securities. What what was your reaction when you read Hester's statements?

>> Yeah, so first I wasn't surprised. I actually last week I spent the entire week in in Washington uh meeting multiple times with the SEC with the CFTC with the different senators and staffers etc. So we're in like close contact with with with uh all of those regulators. I think generally I'm thankful of the thoughtfulness that goes into I I I don't know if you read the full post but seems very reasonable to me like when you read it you're like hey some of those vaults may be uh uh investment uh uh companies right and there's a bunch of vault stack out there's a bunch of different types of vaults and some of them are fully non-custodial like fully immutable where you can't change the risk parameters

within the bounds of a time lock and some others are frankly just Fireblocks wallet, right? You just deposit into the Fireblocks wallet and then this Fireblock wallet gets to manage everything and there's a world spectrum and yes, you know, I'm ready to believe that, you know, uh, some of it is like investment, you know, comp companies, right? And some of it may not be, right? And so I think it's a very thoughtful statement to make like, you know, to her point like if it looks like uh something then it probably is that something. Um and you know I encourage curators and you know just generally space actors to engage with the SEC. Uh I think they've been very open uh in in my opinion uh over the last you know uh months as we

know. Um so so yeah I think them acknowledging the spectrum of vaults was like the most important piece for me is that they truly understand uh that there is like a whole like spectrum of like non-custodiality control agency that a curator would have uh on the port and same for lending protocols like a lending protocol can have a lot of agency on how the risk parameters are set or no agency like like it's the case for morph. Yeah, she she said this line about vaults. This description is purposefully broad and generic. As with many new developments in crypto, this term does not have a specific widely understood definition. And only someone who's been paying attention to crypto for like five plus years would be able to like have that realization that

sometimes we come up with words and the word itself is just like over purposefully broad and generic. For example, the word token itself like some tokens are literally securities and others are just like a receipt token, a utility. Yeah, just doesn't actually explain anything. >> Did you go for it? Sorry. I was just gonna say, frankly, that's, you know, when I came up with the word curator, >> I that was also on purpose, right? I had no idea what this role was going to be about, right? Like, uh, and is that, you know, closer to NASA manager? Well, not really because it's non-custo and they can't really manage assets. But at the same time, there are some parts of the activity that resembles that, but like is that, you know, necessarily manager

activities, etc. And so I think you know the safe bet is like it's a new thing so you create a new word and then eventually you know as we as we discuss with regulators and figure out like we draw the line on on what should be like um um an investment like contract in that case or or or not regulated under the SEC. then you can maybe do a second iteration on the vocabulary you use in order to have maybe an extra adjective like a network token or a securities token uh in order to clarify the verbiage.

>> Did you listen to my interview with Andrew Hong ago? >> So you know you know Andrew and and his company heard >> no I'm not familiar. uh he they he does like AI enabled um inspect source of vaults. And so this vault deposits into that vault which deposits into these vaults. And so he he like has a startup that kind of like shows you a sort of topology of all the intertwining permutations, the frankly scary level of intertwiningness in a lot of the vaults.

Uh, and so him and I were t him and I were talking about just like the vault industry and it was we were talking about the risks of said vaults and we came down to the end of the podcast and this was after he's like scaring me with all the different you know combator com combinations of different vaults out there and just like if you you think you are innocently supplying your USC to get 6% in this vault but then it explodes into 17 more vaults and like the the problem the problem statement that we kind of came up with is like no one in the vault space is taking liability because Morpho doesn't want liability because you guys just want to be a neutral tech platform and the curators don't want liability because no one wants liability. But like

our our our the conclusion that we came down to is like somebody in the vault vertical needs to take the liability and become registered and compliant with you know the threeletter agencies four letter agencies so that they can you know I don't know what the correct term is uh maybe Hesser had it in the uh in her her paper just like investment manager or whatever but somebody needs to take on a regulated >> duty so that this thing can be a little bit more compliant and the risk is managed but then these people are taking more upside so this whole thing can grow 100 times bigger. That was kind of like my takeaway. I I think that's a that's a an interesting thought. I think there are basically three different actors.

You have the distributor, the curator and the infrastructure, right? And the the vault infrastructure and the market infrastructure if you separate those you know as morpho I think we think of our responsibility as like want to provide code that is you know safe and and you know audited and uh etc. Uh and also we want to provide a controlled environment for the curator. Like for example, a morpho vault can't deposit into other vaults. A morph vault can only deposit into morpho markets. And it guarantees the user and the responsibility that we have is that it guarantees the user that a vault curator can only add more markets within the period of a time lock. And during that time lock it's

important to understand that users can withdraw whether the stable coins if the vault is liquid or the position in kind. No morpho vault curator uh that has the correct you know parameters can can steal your money without you having the right to withdraw right it's important to understand because like if for you know I give you an extreme example if like tomorrow North Korea like hacks a morphol that has the proper configs like um in place where basically you're going to have a few days to exit the vault right until the time lock goes down and that's non-custodiality right so that's a guarantee and a a responsibility that that more for as as a technology

platform as the uh yeah then you have the curator and you have the distributor. The distributor surely has a responsibility because they choose everything right and they they only going to offer one option for the user and so they need to disclose as much as possible uh the the the risk to the user and you know I'm not I'm the one to say if they should take like legal responsibility or not etc. And then for the curator, I think similar except it highly depends on the vault stack, right? If you have full discretion on where the asset goes, then it's hard to think that if you're in control, then you're not liable, right? Like it's it's at least in my perspective, right? Um but I think, you know, I I take all of

this with a um a grain of salt because there's a lot of nuances in every vault stack, in every configuration, etc. that I'm not always aware of. That's at least my my basic like mental model. >> I think I'm I think I'm aligned with that. Uh I'm I'm trying to get down to the bottom of this. And so I'm I'm doing this episode with you about Midnight, but then also I'm I'm doing an episode with uh the the Upshift and the beta people and also with uh the stake people because I I want to answer the kind of answer the question who should have more legal liability in this vertical. Not that I think having legal liability is noble, although sometimes it is appropriate, but also that's how this thing gets bigger and safer at scale.

And so like who should have reliability in how that looks? I'm sure I mean I'm sure Hester is on the case here. She uh maybe I should just wait for her. Uh but the curator feels the closest to having the most amount because they're the ones like deciding how much risk and what that risk is. And they also need to have more upside too. They need to have a little bit more skin in the game. And so I want that to be a more loaded encumbered job that has more upside. That's kind of like my first intuition, but I'm sure that there's plenty of cases where like that doesn't quite make sense either. Yeah, I I I think that's that's probably my intuition as well with the caveat that it's highly dependent on the vault product and the vault infrastructure itself because you

could imagine vault infrastructure that are so non-custodial where like the reliance on the curator is is purely operational and not managerial and some other vaults where you expect them to manage and if this is the expectation from the user then maybe it should be right uh uh that way. So I think it's it's all about the implicit contract that you have with the end user and how their money is going to be protected and how much do they expect reliance on you to to protect your your money. I think is plays an important role here. >> Cool. Paul, I'm excited to see Morpho Midnight grow. I'm sure you are very happy to get it out the door and then that one day will come where you flip on the switch and Morpho Blue and Morpho

Midnight will be uh intertwined and that will also be exciting. But for now, we will watch Morpho Midnight grow a little bit more organically and uh we're excited to to get more institutions on chain thanks uh thanks to this primitive. So, thanks for coming on the show and telling me about it. >> Thanks, David. Bango, you guys know the deal. Crypto is risky, but not cryp not risky enough. You can lose what you put in, but the institutions are here and so we're going even more westward. It's not for everyone, but we are glad you're with us on the bankless journey. Thanks a lot.