Morpho: Ushering in DeFi’s Next Era | Paul Frambot

Transcript

so I think the the position that defi should take is to go full speed Bing the infrastructure the book that's going to aggregate all the orders of all those distribution channels and I think by channeling all our energy in this we actually have a fair shot of building a more relevant protocol for people that want to you know plug on top and build great experiences great products hey everyone this episode is brought to you by Unis swap Labs who is launching the largest bug bounty program in the entire history of crypto it's a $15.5 million program this is aiming to be the most rigorously reviewed codebase ever deployed to ethereum so if you want more eligibility on the scope rewards payouts

Etc just click the link in the bottom of the show notes tell them that I sent you you'll be hearing all about Unis swap Labs later in the program hey everyone quick disclaimer before we get into today's episode nothing said on B curve is a recommendation to buy or sell Securities or tokens this podcast is for informational 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 today I joined by Paul fromo of Moro Paul welcome hey thanks for having me all right should I introduce you as uh a being of Morpho or the proud owner of the top of a pair of uh Hayden's unisox

um what do you think well I think at this stage you know the unisox like uh is probably the most important part of my career so so so that's the hook right we wheel them in with the top of the unisox and uh and then we get we pill them on Moro afterwards right I think that's yeah we we we have to stitch them with like morphos Soxs like um and yeah that's going to be like a immutable protocol symbiosis like whatever a Moro pool using uniso oracles or Unis before using a Morpho pool like back stop liquidity or for out of range liquidity something like that I'm getting a Banksy Vibes here and maybe after we've played this whole crypto experiment out the

real store value is going to be this oneof one Moro unisox uh Stitch job that we've got um but all right so well we got a lot of ground to cover today and I want to I want to dig into um frankly like how Moro works from an architecture perspective and why you've made many of the design choices that you have I also want to get your take on just the state of defi today what it's doing well what it needs to improve on but you have this really interesting you know when we were talking about this podcast beforehand this distinction of two different types of protocols in defi today one which looks much more like a managed product and the other which look much more like true um infrastructure right immutable infrastructure and before we get there I

thought maybe it would be helpful for listeners who might be a little bit less familiar with morpho's history to go through the history of Morpho actually as an a user and this sort of peer appear connection layer on top of a and then we can get into the lessons that you learned from that early iteration and how that informed your view on what Mar currently looks like today yeah for sure I I do think morphos history really is important to understand in order to you know understand what we ended up uh and with the the trade-off between like protocols and and decentralized workers that you were outlining so the M stories begin uh with me in University trying to figure out you know uh what problems I want to solve in in Defi and look into like the The Landing space and on a and

on compound you have a a huge gap between the landing rate and the barring rate so it's like 1% to lend on compound and 3% to borrow on compound and so the protocol has this huge spread and you know I I thought that would be a cool problem to solve for and so essentially the reason why compound has this Gap is that you know it's a liquidity protocol that has a ton of liquidity ton of lenders uh the interest rate mechanism is built in such a way that it preserve always a lot of idal liquidity for lenders to exit at any time and for borrowers to be able to borrow at any time and uh the good thing is that you know the protocol is super liquid the downside is that introduces an

inefficiency between the landing and the baring rate so tldr is that you have much more lenders than you have bars and so you know each bar is going to pay all the lenders and they're going to split the interest this is why you know one one bar pays 3% three lenders are each going to earn one and the spread and so this was like the initial problem and so I looked into that and and design a a pure to- pure matching engine that essentially would connect lenders and bars at the mid rate right so they would get two% instead of of uh you know earning one as a lender and instead of paying three as a borrower you know one borrower would pay two to one lender and so we came up with this Moro Optimizer

protocol that was essentially optimized compounds or optimized a that essentially provided the exact same you know product like same risk parameters same liquidity that was available but with better interest ratees and so this is how we bootstrap the mor for brand and the mor for protocol by building on top of a by building on top of compound a strictly better product and that worked quite well like we we we we I think we launched the protocol end of 2022 something like this and in a year we had reached like $1 billion of like deposits in a you know market conditions that were not not so good at the time it was really a defi winter and um we arrived in in you know end of 20 mid mid

2023 end of 2023 even though the protocol had grown a lot um we were quite dissatisfied uh with the future we could see from this protocol first we we could not see a grow much more than than where it was and you know Mor at the time was just a subsection of a could not grow much bigger than than a and second as a protocal bu on top of a you know very deeply intricated with the a protocol we could see how you know the the a pool was run and you know this is where we understand understood like the the distinction so in in an article that I wrote at the time I think I called it like decentralized protocols decentralized Brockers versus protocols

which outlines like the the difference that frankly have GED a lot of like the design choices in in in that we've made in the future so yeah so I guess that's the the story uh around Moro and you know from from from there we build this new protocol that we've been running for a year and today has like close to5 billion dollar of deposits uh yeah I guess I'll stop there for for for the history so super helpful background here and you know I like that it's almost like you sort of reversed you know your current situations you initially built or built Moro as being this optimization layer or this small subsection on top of a and then you know A's done obviously very well for itself it's one of the most successful protocols in defi Etc but you're kind of looking at it and

thinking hm whenever a pushes uh changes out it's very disruptive to anyone that's building on top of it you know maybe there's a little bit of scaling challenges you know on a very very long time Horizon in terms of uh this looks like a very specific this is a great preference this is a very good product for a specific type of investor that has a specific preference but we want to be a little bit broader than that and I think that's where this idea of looking more like a managed product versus something which is kind of this immutable layer of infrastructure entered your your mind so talk a little bit about that distinction and what that means to you yes 100% so so at the time we were the biggest user of a uh biggest lender biggest borrower and and really like the main realization is as you

describe is a is at the end of the day is a fun you deposit your money in the a pool and you know the a team is is going to manage the risk they're going to manage the code uh by managing the code I mean like they're going to perform the grades and they're going to add some features remove some features and you know they they're really acting like like as a broker or as a fund obviously like decentralized with like a community with the a token Etc but still uh you know operating like a managed product right and so this approach is great if you want to Target users directly like people you know that want to land on a they get only one option you know very simple you

just deposit and you sit back there is nothing to do downside being you know this is not a protocol that is built for Builders right like you can build actually tailored use cases with very strong guarantees on the different code that you're going to use and also on the you know risks that you want to be taken Etc you essentially leave the complexity and the manag to The A Team you can take over that right and I think that's a limitation if we're talking about taking over traditional Finance as a whole of course like don't get me wrong I think you know a has been doing great and they still have a lot of gas in the tank if you want my opinion I think they're they're going to continue to grow is just that at some point you know it's pretty obvious that the entire you know

lending deposits of the world won't end up in one single fund that's you know managed by a single team rate it has to be a myriad of those risk reward profiles of compliance profiles of like different kinds of management of governance uh with different you know uh profiles and so the idea here is that as Moro We wanted to build not the managed products but the infrastructure that would allow anyone to build those managed products right and so the morer protocol is a essentially is built around three main technical assumption the one that we should be completely decentralized and by decentralizing I mean as decentralized as etherum so you

know like immutable code essentially that we can't upgrade the code Etc reason being that you know when building on top of a so many times we had problems because they upgraded their code and we were reliant on one specific line of code that they they change right and and that's very very tough to build like very deep Integrations on top of an upgradable protocol so completely decentralized such that the builders on top of the mor for protocol actually own the code right belongs to no one so it belongs like to anyone and and you know they control it in the sense that no one can can modify it the second principle was like you know being completely permissionless anyone can build anyone can deploy their their their their vault and the last one is being primitive which is an essential

slightly harder to understand but essential component in our opinion in order to you know let people Express themselves in know you know in terms of risk management and in terms of like features and not having all of that enshrined in in the protocol and so with those principles in mind we we believe you know we we've built something which is much closer to a unitop right or to an SMTP or an HTTP in the web to world where you have those like you know strict guarantees and you know very clear specification uh to build application internet applications or financial applications uh rather than to have you know this moving pieces that you know C to one specific usual needs and that is highly managed

okay so I've got a couple follow-up questions here for you before we get into what Moro looks like in practice today and who are all the different stakeholders that use the protocol Etc one almost ask a philosophical question of you here how do you balance the the very nice distinct properties of having code that doesn't change so anyone can build on it versus needing to innovate there's a great uh Speech from Moxy Marlin Spike the uh the founder of signal that Chris go of anoma likes to talk about where you know he points out this this critical issue with designing in a decentralized way where if you design in a decentralized way and you don't end up making change then you're ultimately going to get outcompeted by

someone that is updating their software and I think we've seen this play out in crypto in a couple of different places some of the l2s you know which still have upgradeable Keys Etc you know haven't There's real security reasons for not wanting to change that but I also think think hey it'd be nice for us to be able to upgrade our our code here and even something like swap over time you start with V1 and they don't change that code but they move users to V2 V3 V4 Etc so how do you think about you know as a designer of a primitive that wants to make the code immutable how do you balance those two forces right so I think this tradeoff between like osificante that have you know that requires a lot

of trust right and so there is this interesting trade-off between you build something that's immutable that has been here for a while hence you can trust it so it's more valuable yet someone can come in and innovate more and yes H take more risk but eventually there is a good chance that you know provide interest more interesting features and end up building like significant Lindy in such a way that people are happy to actually build on top of but and and you know there's so many examples in like the disruptions of like the the crypto industry that that you know like you could talk about like you know the the Bitcoin debates and and the hard Forex or salana versus ethereum Etc my general take

is even if it provides more Lindy to be like immutable and to never evolve a code base that does not evolve would generally end up dying right which seems you know opposite to the mor strategy right which is like building an immutable protocol I I do think you know this is not the last version of the morph will build others maybe they will be also immutable and and the idea is that you know people will have to transition from one to the other which you know brings another problem to me like the ideal scenario is like okay every time there is a new innovation we ship a new a new code base that that is immutable but then the question is okay

what about State transition yes we we we built a new we did not upgrade we built a new protocol from scratch so we get the benefits of being immutable but we we lose the state well this is where I think aggregation layers are super important to be able to like move the state from one instance to another uh even though it's never completely frictionless I do think you know we're going to need like you know vaults like the one of Moro uh currently to migrate the state from you know the deposits from V1 to like a potential next version uh uh you know same thing with unisab they have a router that routs trades from V2 to V3 when it gets more efficient and to V4 when it will get more efficient not always perfect obviously you still have a bunch of like

dead capital in those instances uh but I do think this is you know as we get more efficiency and more layers of of complexity I think this is the way Protocols are going to be built over time reaggregation plus immutable Primitives yeah I was I found myself thinking as you were as you were describing that actually that maybe this is a problem that ends up solving it itself and potentially it's not even necessarily a problem there there is this very interesting issue of dead capital in crypto where you know when you move users from V1 to V2 to V3 some amount of users stay even when there's a very intentional decision from the protocol to maybe Jack rates up to encourage people to go from V2 to V3 I believe a makes is generates more profit from V2 than in V3 today yes they have

huge fees on V2 and people are not coming like the the the spreads are completely incredible uh and so people are paying like a lot of money there H and still they keep going for reasons I don't know uh it's so funny it's the dead Capital thing maybe over time I think there's evidence that that is less and less over time so maybe markets just get more efficient people are more used to moving from different version to different version and famously you know maker has like there like I don't know how many billions have died that are not invested in like the savings rate of die which gives a huge competitive advantage to maker to actually generate yield from you know this Deb Capital without having to give back the yield so you know this Deb capital I think we'll see more less

and less just because competition will increase but also because the end user will never less and less interact with the the the the Primitive directly but more through you know different aggregation layers that will do the hard work of like transitioning from one instance to the other however it is true that you know current state there is a lot of like dead capital and it's giving a huge advantage to in com players that you know have a ton of liquidity that they can generate a ton of profit from uh so so yeah that's very uh that that's very interesting you know maybe there's I'm just completely speculating here maybe there's some amount of human laziness when it comes to dead Capital which is just there there's some notification around a liquidation threshold or

something like that maybe dead capital is literally dead Capital that's little morbid but that could happen or or you lose your private key or whatever it is or maybe uh you know moving things around would trigger a tax event depending on your jurisdiction so maybe any and all of these these things yeah I I think there you know also strong argument to make that you know something we don't talk too much as an industry but is also a fact that maybe there is also a good part of this Capital that is actually just Capital that can go in any other like stable coins in the case of D because there's like a blacklisting function and for some reason they're susceptible of like being blacklisted and so that you know potentially one of the few USD Delta edging solution that exists uh without having to be

blacklisted right uh and so you know some theories around this have heard as well I don't know if that's true or not but uh um so yeah may maybe it's just that that's super interesting so all right that's a little bit of a mystery for now maybe we can Venture some guesses but I I want to ask about this idea as well last question before we get to you know the description of Mor phone what it looks like today I I want to check your perspective on this idea of primitive and how large the market share for something like B basically one thing that I've been noticing is that now that there are multiple different ecosystems there's ethereum and salana and some new l1s that are that are starting to uh you know become much more impactful than they used to be I think I'm noticing

that app developers are a little B bit less triable than they used to be you've got you know Sky launching on salana these days and it feels like the apps are like I'm going to be where the user is the proximity to the user is my advantage uh etc etc and they're going to try to extract value that way um and then the Primitive it feels like the trade-off that you're making is much more market share like there's the total addressable Market is much larger but maybe the rate that you can take is a little bit lower on that is that roughly the way that you see it as well no that's exactly the way I say it um in the case of learning uh which is like the the theme I I know the best I think value creation comes from two things comes from the management component like

when you lend Capital you know it has to be managed like it can't be like completely immutable like uh risk management that's just not possible because the the principle of risk management is like to adapt from the events of the world in case something bad happens so so it has to be moving Capital so it has to have some form of management if you're you want to be passive anyway so this is almost like a service fee that you know the user will end up paying one way or another the other form of value that is created is just connecting lenders with bars so what that means in practice is just is there liquidity is there bars like the reason people don't use a na Fork is because a nav Fork is not managed by a a na Fork does not have the liquidity of a

those are the two reasons and so those are two very good reasons to pay the fee of a right it's the same thing with Moro except that the fee split in two layers you have the Morpho markets which brings together the lenders and the bars and you have the Morpho vaults which essentially do the risk management right or the risk creation if you want and so as Moro we decide to leave the risk risk management fee the share of the fee that is related to risk management to those Vault creators that are you know 247 you know changing like the the the parameters and the allocation of those vaults uh we don't do any of that work you know I don't have anybody dedicated like you know at at morol laabs to to this work the only thing we do is we

provide just the protocol and we help you know the network being bootstrapped and so the value that is created in Moro you know one could say it's the code but the code you know is open could be forked by anyone that changes few lines and stuff so it's really about the state right so how much liquidity is there in the specific Moro market and uh and you know how much we connect lenders and bars Etc and in my opinion this is the largest share of the PIP by the way like you know I'm I'm very happy that gaunlet is making four million per year like on the morphos stack we have a lot of like Risk creators that you know are making you know extremely decent profit at this stage but I do think that remains the you know the smaller part of the cake

which is like the network effects of like the the the landing Network and and when you're in this position I can have an infinite number of risk creators that each C to specific risk profile to specific jurisdiction with specific compliance to specific apps that have their fee requirement whatever I don't have to hire any of those people like literally we have risk creators in Moro they count maybe for like 50 people working full-time for Mor for you know we we like we don't use any of the the Dow you know profits to pay those people they generate revenue and they they build on top of us right uh however we have this fee switch that you know will be able to charge a fee on a an addressable Market that in the end is much larger as you described so I want

to I want to get your perspective here you use the word network effects talk to me about how you think about Network effects for these pure primitive like protocols and I know you have specific thoughts on connecting this to state so talk to us about your view there so that's a good one I I you know I think this is something I I feel very strongly about like the value in web cre protocols is not in the management because often times it can be modularized or it can be you know is some sort of like consultan consultancy that involves like actual human beings like behind the SE it's not in the code because the world purpose of a blockchain is to open source the to to

make the server side code of an application completely open and verifiable so the code is open the code is a commodity at this stage like all SS business is going to die like there's no point in making a s business in the blockchain just because the code is going to be forked and you know like you you one won't be able to be charging from that right so that's the the the the second observation can't really make you know reasonable revenue from management can't make revenue from the code so the only thing that is left and actually the most interesting one is the fundamental value created by a protocol is bringing together two sides of a multi multi-sided market right so you

have a multi-sided market a supply side a demand side you know in the world they are you know before internet they would connect you know very manually right uh then we have internet and databases and those like you know web two apps would you know enable two sides of a multi seted Market to connect with one another like uber would would you know help connect but you have a bunch of competitors to Uber they all have fragmented databases right and so the value of a blockchain protocol is to actually be this aggregated you know database that is the the largest one to aggregate the supply side than the demand side such that if you use this protocol um you will get the most

efficient pricing you will get the biggest capacity for your needs just because everything happened on this one shared and verifiable database that is like whatever blockchain you're you're you're using and so in that sense the state of a smart contract which is essentially the database of like how much how many how much lenders are are ready to lend and how much borrowers are ready to borrow well the larger this database is the more valuable the access to this database is right and so this is where in my opinion you have uh the most biggest amount of value that is created which translates usually in the fee switch that you know a take then the

protocol can can actually charge right uh and then redistribute to like grow the the value of the network to you know build more stuff and and grow the database even further more Integrations etc etc so yeah so this is how in my opinion state is connected to Value creation and how do you think about the idea of forking and its ability to maybe control the take rate here and I actually maybe this is a contrarian take I I know that there's this there's this common idea that if you charge too high of a take rate then ultimately you're someone's going to Fork your code and just charge users a lower rate I'm wondering so I want to connect that idea with this idea of dead Capital that we talked about and maybe question just exactly how mobile a lot of these

deposits and these this liquidity really is and I also would sort of point to I don't think empirically there have been that many successful examples of forks in cryptos and you can go back to like the sushi swap versus Unis swap was maybe the first very high drama example of this playing out where you would think LPS are super mercenary and they should go based on wherever they're getting the most fees and it didn't really prove out that way and so I would just love to get your thoughts on forking here so so for immutable protocol that don't involve any management my mental model is that the value of the fee that can be charged is the value of the Brand Plus the value of State minus the cost for transition uh and so if it's like super

easy to transition from one contract to another you kind of have the intuition that you know your database is not so valuable your States is not so valuable uh you know and you can factor in a bunch of stuff like what does it mean to be costly from transitioning to another you can factor in user laziness H you can factor in you know aggregation logic you know how how efficient an aggregator can be on the training side or on the supply side or on the demand side you know in the case of unisoft trading is very well reaggregated on the lp side well you know now it's much easier to to to aggregate those deposits usually people Supply to market makers and those market makers are going to do the hard work but back in the day when there was unisoft V2 everybody thought they could

become market makers by just providing liquidity and and you know they end up becoming like this this Deb capital I will say though that it's not always clear to me if those LPS are in the case specifically of Unis swap if those you know I I hear a lot of people saying oh those are like the magic LPS no one knows where they are here and and what they do part of me thinks that the players doing this are actually this is just part of like a bigger strategy whether they're doing M at the same time and this is just like one side of their trade which is losing money but is enabling a bigger side of the trade that is actually generating money I'm just

entirely speculating here but I'm just saying in that case I think there's maybe more to it uh well maybe not we should bring our tin foil hats because this is my favorite question to ask people is who the uni LPS are and I've the same the same Theory actually I've got which is yeah there are these you know ARB shops which you know ARB against and I'm like I could see like that's who's incentivized right to make sure there's liquidity in these pools so yeah you you need sufficient amount like so so the theory is the following that you need sufficient amount of liquidity to be rooted to the pool and you need you know retail order flow to be able to ARB this orderflow so if you're the person that is actually arbing everyone you have a you know and I I did not do

the math obviously but just like there's some kind of alignment here you know being the AR shop and being the the liquidity provider maybe there is a positive payoff here all right so this is the point where anyone who's involved in me and or Unis swap should DM me and tell me why this may or may not make sense but I it's funny CU I have come to the same conclusion here all right everyone listen up like I said at the top of the episode Unis swap Labs is rolling out the red carpet and launching a $15.5 million bug Bounty this is the largest bug bounty in the entire history of crypto to anyone that can find a critical bug with the Unis swap B4 protocol this bug b aims to make it the most rigorously reviewed code base ever deployed to ethereum now the Unis swap

name is basically synonymous with security $2.4 trillion in cumulative volume has passed through Unis swap V2 and V3 without a single hack so Unis swap V4 is dedicated to bringing that same level of security and transparency to the V4 protocol so if you want more information or eligibility or scope or Rewards or payout or any of that good stuff there is a link in the bottom of the show notes a highly recommend that you stop listening right now go to the show notes click the link head over and tell them that I sent you start earning money today all right Paul we made it 30 minutes into this podcast and I still not asked you what Moro does today so I want to transition our very fun tinf foil hat part of this discussion into what does Moro solidly do today tell me about the latest iteration right so Moro

is a decentralized landing and borrowing prodal infrastructure um so there are multiple components to the morphos stack it's built in layers as opposed to like a big monolith that what you traditionally have in lending and the first layer is the moral market right so Mor for markets you can think of them as unisoft markets that we're just talking about except that you know it lets you lend and borrow one asset against one collateral for a given risk right and all of those parameters are completely mutable the code is completely mutable 600 lines of code probably the the code that has been the most addied given the number of lines of code formally verified etc etc so you know you you you can get very confident about the code the same way you could get about like

units of V V2 or V3 and and so this base uh primitive only lets people on one end Provide Capital to generate interest and on the other hand you know bring whatever collateral to to borrow like whatever asset so it could be SCS to borrow usdc or BTC to borrow usdt uh Etc obviously you know that's great from security standpoint uh and that's great from a you know Capital efficiency standpoint you have interesting properties uh you know you can adjust the risk parameters specifically for this specific pair but that looks like a bad protocal right because there's not

much you can do there is zero featured uh liquidity looks fragmented across all those different markets um but you know the world point is that we're going to rebuild all of those missing pieces on top right and that we're not going to force users that are just interested into the Primitive to subscribe to more risk to more management if if they don't want so the second component of the stock is a morph Vault morph volt essentially let lenders uh deposit their usdc into let's say a vault that is run by gaunlet or run by Steakhouse block analytica Etc we have like you know a bunch of different Vault managers and those Vault managers are going to allocate the capital to the different markets so they're going to do

the hard work of like doing the risk management staying up 247 to like actually figure out if an oracle did up or not um they are you know going to monitor like the interest rate across those markets and optimize for that and you know as a passive user you know if you're superactive you can go to the Primitive directly and if you know how to do these things you don't have to pay the management fee just you can just apply liquidly if you don't really know which is like 99% of our users uh you can just provide to one of these volts and and they will do the the the hard work for you and then we you know I won't go through all the layers but we have others uh we have the moro bunders which allows for you know oneclick account abstraction experience and lets you

batch like any forms of of of transactions with the morer protocol uh in one click we have you know future versions of that coming by the way uh quite soon um and so yeah but generally it's B basically built-in layers open for everyone completely permissionless for everyone to build on top of it and actually build their Landing use case and C to like their specific needs uh all benefiting from like a completely immutable stack that Aggregates liquidity like whatever you you build on the mar protocol you can decide to list markets that are already stateful that already have bars that are already generating interest and you can cherry pick the risk profile that you want by just selecting the markets that you want

you don't have to subscribe to the worldall pack if you don't want to you can subscribe to be you know to very risky markets if you wanted to or to like much you know safer markets so the end product is something that looks much very close to a you know some morph volts are much riskier than a some are much safer some have you know different compliance profile you have to have a coinbase attestation in order to access them um Etc so you know much bigger number of use case overall so basically you know to return to our initial conversation if there's one sort of managed product here Moro is infrastructure which connects many different managed products and the the hope would be if we do our job correctly

right that because we're able to you know do differential pricing and provide different risk return profiles Etc then the market size will be very large yes exactly and I would insist on one thing which I I see some Founders not like you know not completely understanding about Moro is this is not uh just a code Library where every instance is disconnected from the other like each morph volt you know you could have like I think was fuse at the time that would you know let you build your own compound protocol to me this is more of a code Library like you go and you deploy your own fork or your own lending Vault okay that's great what's interesting about Morpho is that you can deploy those

Morpho volts and then you have access to all the markets already that are completely unopen unated completely immutable and governed that you can safely connect to if you think that it should be part of your risk profile so people build independent use cases but they will share liquidity to the extent that they share risk so let me let let me put it this way it's as if you could build compound and RV but if you have some Assets in common you would share liquidity the two would share liquidity uh to the extent that they share risk right hope it makes sense it's one of the like more complicated concepts of Moro but talk to me about this idea so Moro from my understanding has one of the simplest code bases in

all of Defi and I'm I'm gonna make an analogy which correct me if I'm right or wrong here but you know I spent a decent amount of time with the Unis swap team just talking about like Hooks and V4 because there's there's a connection to be made there right they provide this base infrastructure which you used to build these hooks on top of and the idea is that there's a brand that's associated with it there's many millions of dollars that goes into the smart contract auditing there's great infrastructures and there's liquidity already right so you might as well just Build Your Hooks on top of of uh Unis swap in all these like Factory contracts Etc instead of building it all your own so talk about for the uninitiated and less technical here why is a simple code base so critical there in terms of

making the protocol safer and is that analogy sort of roughly right with un right so why is simple code base important I think there isn't many important security arguments to be made here but there is also very important design principles uh arguments to be made so on the secist end point which is probably the easiest one to understand um having a protocol that only encapsulates the core action which is bringing together lenders with borrowers let you parush the complexity to additional layers in such a way that a user that does not want to subscribe to some risk that you know is not willing to take or

you know if it do not want to have its fund managed and directly wants to interact with the Primitive it can interact with the smallest number of lines of code possible why is that interesting because smart contract track development is extremely hard to actually get right and you know I I can mention this for a fact I have seen I don't know how many War rooms I had to take part in back in the day where I was you know building on top of like you know a the number of problems in those like very large code bases you know a is 7,000 lines of code like the number of problems they had to fix and go through same for compound is incredible like people have no idea uh the the amount of like management active

management that is required for the thing to function is way far away from the you know decentralized impression that we have that we're just going to supply and the algorithm is going to do itself its thing it's not how it works right when USD CD pegs you have you know people needs to be H and people need to change the code people need to change the parameters people need to play with mul during like entire nights right and hopefully things don't break sometimes they do break you know we've had countless example of that in ending is obviously like the the order um 200 million hacks that happened which frankly you know the order team is great it's not the point it's just like the code base was incredibly you know complex right and so yes you

know when you upgrade your code and and you have it audited only once and the code base is huge or I don't know how many times they had it yes of course something bad is going to happen right um and I mean of course no it's not obvious but it's just like you know extremely tough to secure um the last thing is on on the last reason why you want a simple code base is for one thing that we believe is extremely important which is formal verification um we're big fans of formal verification applied to like defi smart contracts um the general idea is that you have a spec of what you want your protocol to do and you prove mathematically that the code is actually

executing according to that spec right and so you have 100% certainty see that you know your spec is fulfilled um and so we have an entire team doing this internally we have someone that you know has a PHD in that and and you know is is is doing that internally with another person and and we're spending a lot of time and effort in that and that has dictated a lot of like the the the the code principles that we had in in in the protocol and you know that's also one of the reason why the core protocol is not modular and allows for modularity to be built on top but not the core just because you know formal verification often tells you you should probably not let arbitrary lines of code enter your own lines of code right otherwise things

could potentially go wrong so anyway extremely complex uh to secure a D5 protocol much more complex than what people think I think uh so yeah a lot of bugs have happened and and we're productive manually and so we're like if we want to build a financial infrastructure of the future we have to be 100% sure that you know they don't rely on us as humans what's the path to get there minimalism there's no there's no other way like I don't believe in like complex code bases even if you audit them like 30 times like whatever it it it I I wouldn't be confident Paul want to get your take on the idea of who is the perfect user of something like

Moro and this idea of distribution so something that you've been saying by the way that's really resonated with me is that users won't directly interact with Primitives in many instances and it's kind of this B Tob to C model as opposed to the historical model of D5 which is B Toc the idea of B Toc is a user will directly interact with the Primitive and you know I messed around in defi summer and you know the 2020 to 2021 cycle and I got the idea by the end of it I like these protocols were not built for me you know what you had to do to mess around and you know touch the chain was it's like kind of foming into options vaults and I was just thinking to myself I've got no business doing this I have no idea how to make money on an options

well an options Trader but you know you want to mess around and actually see what's out there so you do it you end up inevitably losing money and so one of the ideas that I like this this kind of idea that you've built here is this idea that hey we're going to build this this primitive we're still dealing with financial products here which require quite a bit of expertise so we're going to have this other layer of risk curators or whatever it is that create these investment products that users can just interact with and you know we've talked offline about that being a very attractive architecture especially for finex and some more traditional Financial players that may be coming in this cycle that want to own this infrastructure themselves and are a lot of expertise around curating that but also bring distribution so talk to us a little bit

about about that yes for sure so I guess the general take is we've been improving on ux in defa and I think you know there's a very you know strong market for addressing defi in to Native users that have a wallet and and and everything and you know maybe it's like a $50 billion Market in lending maybe it's 100 I don't think it's multiple trillions of dollars of volume per day like what Trad fi lending is right for just over culturalized Ling and in order to get there you know it's pretty obvious that at least to me it feels not right that as as a team and a

community we should focus on owning the food stack from programming to risk management to you know making the ux simple and actually build a product while you have a ton of different companies you know fintex exchanges Neo banks that are you know Tech native and understand crypto well enough that have like hundreds of millions of customers that have amazing you know products I don't see myself competing with those frankly like you know they they have like you know billions and billions of like you know funding and in capital to actually build like the best financial experiences of in the world and so I think the the position that defi should take is to go full speed being the infrastructure the book that's going to

aggregate all the orders of all those distribution channels and I think by channeling all our energy in this we actually have a fair shot of building a more relevant protocol for people that want to you know plug on top and build great experiences great products uh instead of trying to ourselves like you know trying to build it and compete with like the the the the biggest companies and the best companies that took you know literally decades to build right so I guess that's the general take on like the General Vision on that I will say that from a you know if you're a fintech for example or if you're an exchange or if you're like Neo Bank um you own the distribution a lot but you generally don't own the

financial infrastructure like you rely on trafi like you rely on ETFs um you don't control the pricing of those you don't control the the offering of those so you own the distribution you don't own the manufacturer right uh in some way defi is such an extraordinary way for you to actually shortcut the entire trfi industry and bring all this a flow into infrastructure that you own because it's immutable that you can configure because the protocol is modular and and built- in layers Etc and so to me that's just the master plan to take down like you traditional bance in general is that distribution is going to come on chain distribution is going to adopt those protocols that are

permissionless that are immutable that lets them configure and adapt and C to their use case and product needs and trfi will have no chance but to follow as institutions and to build also onchain products for those fintex and fintex and and you know I'm saying fex but it's just like it's a very broad term for like all those like distribution channel will be the one ruling the game to me like uh in the future we alongside you know defi infrastructure that interconnects all of those in one single aggregated database so here's my mind when you were making that description is I don't I don't know if you've ever read Matt LaVine the Bloomberg newswriter but he has this great analogy of he calls

brokerages investment shops and the idea know the idea is that when you walk into something like Toys R Us right it's a toy shop and you go and you get to pick many different toys and you pick one to buy and then you walk out of the store same concept when you go to brokerage except you know it's online but you sign on to your brokerage and there are all these different investment products which you know the service that The Brokerage is providing is distribution and sales you know for the most part and then you get to pick your investment product and you know log out and walk out of the door and oftentimes the business model it's actually changed a little bit over the years and it depends I'm drastically oversimplifying here but it used to be trading fees now it's not upfront trading fees but they sell your

orderflow uh to Citadel Securities who gets to internal it and occasionally there are things like Kickbacks right on uh you know depending on which fund you recommend moving people to and so you know what I heard you just describe there is they're probably going to be these Trad fight investment shops that come in and you're talking about maybe a fullscale change in the business model here where I would guess a lot of these index funds are insanely commoditized and if you make it really easy to just build you know your own essentially Index Fund or yield product on chain then you can vertically integrate and remove some fees or weird incentives for users does that analogy say yeah no one 100%

um if I was an asset manager right now you know obviously I'm super biased because I'm building a D5 I would be very worried to be first mover in this onchain ecosystem just because as soon as distribution will come on chain I will lose a ton of order oflow coming to my ETFs and my you know different Financial products that I'm I'm I'm offering and in the non-chain world things are ultra competitive you know even more competitive and ETF game is already very competitive like you know we talk about how many trillions like BR work are managing Etc but they don't make so many fees out of it right compared to like the size that they're actually managing

and the competition is going to go even more intense in the blockchain world because like the tech is so easy to replicate and so you know you know the only thing that you know one will be able to differentiate a product with one another is really just the track record and the management and how well the management is done um so that's one another one which I think is going to be very valuable is like you know act actually being able to issue uh private credit like actually doing the very operational work of like going to like those those very like those businesses and issuing loans and before tokenizing them those are the kind of work that the blockchain con commoditize uh but apart from that I do

think it's going to increase competition and for the better for the end user by the way it's just like very good I completely agree with that so I want to actually zoom out for a second and get your take on some just trends that I've seen happening in defi in general this will be a little adjacent to what we were just describing but noticing a little bit of a trend of vertical integration where that used to be I know that's a very dirty word and no one likes to say that they're doing it but you know you kind of see these different these protocols that started out as very they looked very distinct at one point and had different business models you know maker a or uh OB as a bar lend protocol maker is a decentralized stable coin then I think over the years these

different protocols have looked and said hey the underlying competencies and infrastructure behind a stable coin and a lending protocol is super similar right people deposit collateral and spit something out right and and so now you're starting to see A's got a stable coin they've got go you know uh maker has spark you know borrow Len protocol and I'm just curious what you think about the converg in business model and vertical integration here and maybe we can start a little bit closer to home and I'd actually love to get your take on you know fluid there's this you know the instad do project which you can actually route liquidity through lending protocols so they've got the the borrow lend and the Dex which has been integrated and so we could talk about that then just overall this trend of vertical

integration generally um I I I understand you know like projects that want you know they see that there is a profit generating like you know business like with stable coins they would move from lending to to stable coin and vice versa and I'm one of those found like Founders that you know generally are very skeptical of like the of of those strategies you know I understand that you know short term they they can be you know valuable and lucrative for the projects I just think that if you have a very clear Mission which I believe we do have at Moro I I couldn't see myself like divers fine to this point like if it does not help the mission and

and I I I I just think that we're so far away from the orders of magnitude of try that it's like you know like lending is a multi- trillion dollar industry stable Co are multi trillion dollar industry uh Dex is a is a multi trilon dollar industry and I think focus in this scenario is so powerful because it it can you know get you to think long term and and execute faster than anyone else on one specific vertical and own that vertical especially in the world where everything is composable with one another uh instead of like trying to diversify to you know get those shortterm short-term gains um sometimes it can be synergistic so whatever um so

so that's our take you know we've been pretty in extreme on this curve like we just do landing and borrowing we just want to do only that and we want to be the best at that uh I will say that there are interesting examples fluid is a very good example of something that's interesting which is by the way like the most opposite protocol to Morpho that you could TR like in the way it's structured and organized you know we have immutable primitive that Express very simple you know code base very simple risk profile that is fragmented at at the core layer but reaggregated with the free market fluid is extremely complex code base uh you know everything is aggregated and

governed by one single entity uh that controls the liquidity and makes everything fungible not through the free market but through governance right and you know a is a little bit in the middle in in the Spectrum uh we're you know completely the free market guys that you know we believe this is how you know things W be run by by us eventually and and fluid is like okay let's run everything and put everything together and we're going to manage the parameters you know I do think that's an interesting concept that we had not seen before like merging dexes and and and lending I do think it can be done completely differently with just a reaggregation layer between dexes and and lending it just the way fluid has been executing on it has been very good

I question the growth potential and uh you know I wouldn't say the security because I know the in stup team and I know they're very serious Etc is just obviously much riskier than something like Morel right in terms of code base in terms of management Etc then up team is amazing and and you know they I think they do a great job at what they do is just like you know fundamentally it's a very different R profile all right so that's vertical integration I want to get your take on importing yields into defi in general and I you know specifically I be curious to get your take on something like

Athena so Athena's done a phenomenal job right of importing the basically people been about this the you know the cash and carry trade type thing and just funding rates right sex funding rates into Defi and the sex funding rates are extremely different from some of the more native yield generating opportunities in Defi and on the one hand that's great from the perspective right of uh you know someone that wants to harvest that yield as a as a depositor on the other hand it throws things out of whack as well and potentially creates some imbalances so you know how would you describe you know we can talk about Athena specifically but in general my vantage point is that defi has these different conduits which absorbs uh different interest rate markets so you know treasuries is an

interesting example of something that's coming on chain uh you know sex funding rates are the most interesting one because they're so high at the moment but how do you see how do you see that that Trend so first there's a very clear Arbitrage between the centralized exchange perss and like just leverage funding rates in in in in general between D5 and CI right like in C feels like the users are ready to pay a lot right and you know the truth is you know that's where the the biggest like amounts of money in the industry often come from speculation whether it's you know price action this the second you know most Revenue generate I mean the

most like you know yeah Revenue generating is is literally like you know funding rate because people want to leverage on speculation so that the second most natural use case for a speculative industry which crypto still is like to to be frank and so especially for retail interfaces you know oftentimes they tend to like I would not say hide but just like it's not so obvious or not as obvious as in the moror in the nav that you're paying 100% per year in in some cases and so this is where the yield is coming from and and and that in some way Ena has been beautifully being able to toonize and encapsulate and I I have a ton of respect for the

team you know I it's just like it's they've been executing extremely fast on uh not so trivial problem um and they got disintegrated in in defi uh the the toiz yield and just raised the yield of Defi and our Ro just is areb the rates much better than we than we across D and and and C5 uh now of course there's like limitations and KV as to like the way the the eat oranization is done I won't go through that but but uh but yeah so so I I think that's been very interesting it also raised the interest rate by a lot in defi yeah it did and the one one thing

that's been interesting me about rates in crypto in general is that do you have do you have thoughts on how correlated interest rates Market are interest rate markets are in Trad five versus crypto because I I had this you know it felt like last cycle we had these CI lending shops which were a conduit um in between you know interest rates out there in the real world versus what we've got in crypto and it's funny we sort of broke that conduit for a period of time and the story of rates completely flipped on one another if you remember back in 2021 people would say rates in the real real world are so low negative real rates y y inflation look at these high rates in crypto and then it flipped this bare Market where rates got high in the real world and said hey

look at how cheap borrowing rates are in crypto I come borrow more cheaply here so I just love to get your take on in general how correlated these two different markets are very inefficient uh Arbitrage and this is why I like you see NES they're finally bringing a solution to like this huge gap uh between the two so that's number one uh I guess you know my view on interest rate is that in defi is that it should be whatever is the maximum between the treasury bonds rate and uh and the per funding rate um you know obviously eventually I think you know things will be Obed and and the rate will be the

same right now when the market is bullish people are ready to pay like huge amounts of money to borrow which you know raises the interest rate to to Trac levels and the volume is so high that it can take the entire defa industry to like Skyrocket the rates uh so that uh one but when the market is down you know I think with like all the real what asset integration that we saw over the last you know few few the last year I think it will just be worst case scenario like few few bibs below like the treasury rates one topic that comes up a lot in crypto is this idea of a risk-free rate every now and again people talk about this idea do you view

the risk free rate as being just whatever treasuries are spitting out or is it somewhat different in crypto or is there going to be a concept of a risk- free rate in crypto I'm just curious to get thoughts on this um that's a good one by the way I think we should be careful as an industry as calling it like a risk free because I remember at one point people were calling anchor uh the 20% on anchor the risk-free rate in crypto people seriously said that for about six months yeah so agree agreed with you there yeah 100% like um you know most of the the the the products which by the way I respect that tend to have like a r free rate in crypto are actually not like like or at least not comparable to the definition that we have of risk free

rate like in in in in TR five and you know I think it depends on the assets but I think the crypto risk free rate can be fairly defined as for USD coins so what I described earlier which is the max between the funding rate and the treasury ratees for if it's you know usually the staking rate if the market is ultra bearish you know maybe we'll see higher than that but I I don't I don't think that's going to be the case so it's just going to be the staking rate in my opinion um so yeah I I I I don't think that crypto I hope crypto won't have

anything specific that makes it have a different interest rate for a given currency than what we have in trfi um I think what we have right now is just an very unarmed Market uh that's why we have such a high like interest rates and also the risk premium that people associate to crypto is still very high right which makes it like a huge opportunity for the little Capital that does not have this risk premium in mind and so this is why interest rates are not Arbitrage completely all right final question for you here Paul here's something that people have been saying to me at least the entire time I've been in crypto this cycle is the institutional cycle so my question to you now is is this the institutional

cycle and if it's not entirely in your answer which types of Institutions will we see moving to crypto this cycle right so you know for me like the the spectrum is is very wide it goes from like defi to exchanges to like wallets whatever cdy then to CI then to fintex then to neobanks uh then to asset managers and then to Banks right and I think in this order this is where we're going to see like people going more and more onchain right you know I have to say I don't think I don't think banks will come to public blockchain this cycle um is what

I you know what I believe just because of like the regulatory constraints that they have are still very far away from what they should be needing uh in order to actually interact with the Defi and and do interesting things I think we will see Banks you know touch crypto for the first time or touch stable coins for the first time this cycle uh however where I'm more interested in is like everything before Banks like asset managers NE Banks fex Etc I think there's a a good chance for them to join uh this cycle yes and the closer we get like to defi obviously the more chances uh so yeah Paul been super generous with your time uh my friend

thank you so much for coming on and and talking to everyone if folks want to find out more about uh you or Moro or the work you're doing or stay up to date or whatever it is what's the best way for people to do that yeah uh morphe.org is the best place to go excellent all right Paul this was really fun uh we'll have to do it again sometime soon awesome thanks cheers