Paul Frambot: Morpho Labs – Peer-to-Peer DeFi Lending Protocol #480

Transcript

welcome to the epicenter the show which talks about the Technologies projects and people driving decentralization and the blockchain revolution I'm sebastankuccio and I'm here today with fedica Ernst today we're speaking with who is CEO of more for labs more for labs is building the Morpher protocol which is a D5 protocol that allows you to improve your borrow and lend apy on uh on lending protocols so before we talk to Paul I'd like to tell you about our sponsors this week Omni is your new favorite multi-chain wallet Omni supports more than 25 protocols so you can access all of your access to your assets in one place but what's really special about Omni is what you can do inside the wallet if you want to get yield Omni allows you to get the best

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yeah happy to have you here I'm super excited to to join today as I mentioned before I've been you know listening for a percenter for as long as I was into crypto so very excited to be here today super nice so how long exactly is that Paul tell us about your your background and what do you have to be for more for yeah definitely I think uh majority in crypto began when I was in high school like basically you know it was pure technical interest into blockchain at first so it was more into consensus algorithms and and Bitcoin in in 2015-16 I I went into my studies studied computer science and math uh did a lot of work into like blockchain technology

and how those consensus alcoholism could scale um and ended up being interested specifically in ethereum and more the you know application layers smart contracts and and then D5 and and D5 was really to me uh it's such an interesting use case of blockchain technology that I I could not do anything else but work into that space so I just thought I'd put some research efforts there and yeah this is how you know step by step I came to to play around with protocols and I mean play around theoretically I mean like playing with the concepts of the protocol I never really used defy uh in in my previous you know before going

into waffle uh and and then I I started designing protocols like like mofo and came to do more for lab students develop the more for protocol so that's how I I got into this basically how come you never use uh D5 beforehand despite the fact uh that you were quite knowledgeable about about it so basically what was missing for you to actually go you know head first into it I think it was as simple as gas costs uh you know at the time I was like and I never invested in in crypto uh specifically because I was too young to do so at the time like I I did not pass my my 18 years old and and and basically when I I went into crypto like I could

see you know uh all those girls uh exploding but they could not participate which was quite frustrating uh but then when when time comes to play around with with D5 uh I was like gas price was completely outbidding my my student portfolio basically so that's probably the reason why um but you know in practice I was more interested in Reading white peppers and and you know trying to make sense of what you know udice hope was doing and what why it's different from from traditional Finance what it brings to traditional Finance what could it you know what value it could bring to the world in general I think it's not a question we we as sufficiently often especially in defense like what what is the specific added

value that we bring to the end user like if defy scales to to billions of users but yeah I was it was more intellectual interest I would say um than you know playing around so I remember uh when you guys were just getting started and you uh you gave a talk at the Kiln office and I think it was probably one of the first talks you gave and uh you know explaining the concept of Morpho and you know one of the things that uh I thought was just like wild about your your story and the story of the team is that when Morpho launched you guys are all still in school uh and in fact uh I think the idea for

Morpho uh came from uh one of your professors can you maybe just retell that story and uh yeah how the how the idea come to be and that Journey yeah definitely I think so back in I would say 2020 um I had really two passions like the first one was blockchain technology and the second one was entrepreneurship and so you know in entrepreneurship we often tell you like you have to get some sort of unfair Advantage such that you have something that you that make you you know different from others and make you stand out and this is how you become successful in entrepreneurship and with

that in mind I really love blockchain so it made sense to to do blockchain stuff and I decided to so my goal at the time was pretty ambitious it was like I want to be the most knowledgeable entrepreneur about blockchain about the technical specifics about blockchain in France and so I decided to take every single course uh on like theoretical course on blockchain and D5 in Paris that existed so I had like you know maybe 10 or 11 courses on top of my existing courses at University that I would take and I came to to meet some of the best researchers in that space in in Paris and uh and together we formed the think tank and in that think tank we we

basically met every you know twice every every week and basically you know just chat and discuss about mechanisms what we can do better about them and and I would say like Morpho is a construction a collective construction of so many different ideas that all came together uh and that the premise of it was during this Fame tank and like we had so many people saying hey like okay compound is doing the things this way why not are they doing this this way and what are the technical limitations to be able to have you know better 100 Capital efficiency while still being liquid this kind of questions and we ended up with the premise of Morpho and then I said

okay like let's get serious about this confronted more for labs and and really regrouped a team of uh focal funders that as you mentioned were students at the time which was quite funny but I mean somehow you know spending 10 years 20 years in investment Banks can sort of you know probably constrain your brains too much such that you would not think of you know doing things in D5 the same way a student with no experience in in traditional Finance I mean no professional experience would do this is this is how we started and actually until

six months ago uh I was still going to school and I just finished my my hand of study internship a few few months ago and uh and I'm yet to get my diploma by the way but that's that's another story yeah that's incredible and and uh you guys um you know I think what's also been really uh interesting about your journey is that um that like you guys have built this protocol and you uh just a few months ago closed a very impressive funding round with some pretty top tier VCS um how did that come to be and what was the what was the uh the kind of Journey to getting you know a6cz and all these uh all these investors on board

yeah I think it's a good question so maybe first just like to mention that it was during market conditions that were quite favorable of course it does not do everything but like that's probably not something that would be as easily doable I don't mean it was easy it was hard to do but uh it was maybe even harder in those market conditions obviously but basically I mean at the time we just had the concepts but it was such a zero to one in terms of mechanism design and in terms of like how the team internally at Morpho Labs is conceptualizing and thinking about D5 is like maybe we'll have the chance to talk about it it was radically different from what other

Protocols are doing in terms of you know lending but also in terms of taxes Etc so we really wanted to be very very Innovative and at the same time so we had very very Innovative mechanisms and at the same time we had products that made so much sense right again we'll probably talk about it but it was a pure Improvement of something that already had a huge Market fit and probably the biggest Market fit in holy defy at the time which was basically collateralized lending on Ave and compounds and mofo is literally like a pure improvements of that and so this is where like hey like this thing

is working it has a huge Market this is AVID compound but mofo is here to have like fresh new Concepts they think about things differently but on top of that they provide a product that is same risk parameters same liquidity and has better rates so that couldn't that could not fail and I mean this is what they said to them when investing at least uh but I think this is like pretty much the story it was the rounds last round of funding that we did is mainly composed of American visas which I think is worth mentioning because uh we struggled in Europe before being successful in the US it's like the story somehow had more fit with the US visas like European visas was like were probably you know

maybe not as as well as from the American ones but I just thought it was interesting to see how of a gap that was between their reaction uh in the US versus in Europe uh so yeah probably something I don't know some some sort of it's I I don't really explain it to be honest but cool so we've talked a bit about um the setting um let's dig into the protocol um maybe before we kind of uh get into the weeds in a nutshell you already said that basically it's a it's a protocol that centers around um lending and borrowing and it strictly improves on compound and up or at least that's what you claim um so can you

um talk about what the protocol does in a nutshell yeah absolutely so Morpho is a learning protocol so basically you land and borrow crypto assets uh on mofo the same way you would do on the other compound order whatever Landing protocol other collateralized Landing protocol that exists in in DFI so basically when you're Landing there is a bar that comes that puts some collateral to work and and borrow your money and it's a very low risk low rewards profile because every loan that is taken is secured by some collateral so in case the collateral cannot be you know backing the fluid alone then the

liquidation happened and so in every case the lender should uh if liquidations are working well uh be able to have some sort of risk-free uh yeah yields and um so in terms of product this is what it is and now what what's different from avian compound is actually that mofo is built on top of oven compound so if you have compound you have an instance of Morpho called Morpho compounds that is working on top of compounds same thing for Avi there is RV protocol and there is more forever protocol that is built on top of Ave and basically what is that so is because morph is going to optimize Ave and is

going to optimize compound so the question is what do we have to optimize and if you go to Ivy website or to compound website if you look at the rates you you quickly realize that you have a huge spread between the learning and the borrowing rates like one percent to land or three percent to borrow and um basically the reason why that spread is is because those protocols the weather work deeply needs to have a ton of idle liquidity in them that is not put to work and that is going to induce the spread so it's it's let's say Capital inefficiency we can dig into

that maybe if necessary but uh without getting into the details they have you know this is materialized by the spreads which Morpho is going to optimize by just taking the midrite for example and say hey instead of landing at one using more forever you'll be landing at two and instead of borrowing a free you'll be borrowing at two on more far away so that's the overall concept you get better rates and you preserve all the the risk parameters that you had on average so you get the same collateral factors and and sort of these sort of things and you get access to the same liquidity which is like billions of dollars on an array how do you manage to actually get the

apy um down from the borrow apy from compounding up from the Lend apy from compound yes that's a good question so in order to understand that we have to explain how the mechanism Works in in Irving so basically on Ave or compound basically let's set a pool because they're working very very similarly um you you have basically many lenders all supplying to the same pool of capital and you have very few Borrowers and those borrowers are paying three and those lenders are earning one and the reason why that is is because the numerous lenders are going to share the

earnings generated by the few borrowers so the three is going to be divided into multiple ones given across all the pool so you know yields generated by Borrowers is diluted across all the board and so the reason why Morpho is more Capital efficient is basically saying hey you're our Landing producer you are borrowing from from from ivy for example you're learning from Ave well basically you could be landing and borrowing it too like I mean the concept is simple like I'm landing at two percent someone theoretically could take my my loan my my deposit for for two percent of a borrowing API and this is what Mofford does mofo is

building a peer-to-peer matching engine that is built on top of the landing pool that enables Landing for users to be much peer-to-peer Whenever there is an opportunity to increase their rates if they're A lender or to decrease their rate if they are a borrower so it's a small Improvement it represents basically what it means is instead of having a diluted share of that Capital that is put to work that gets older Capital that is put to work which results in an increase of like plus 0.5 plus one percent of poi which is reasonable in in those market conditions to be honest how have people dealt with this spread before Morpho was were there any other Solutions or like other attempts to try to

um reduce this spread I mean you guys are doing it by matching borrowers and lenders directly you know sort of peer-to-peer way are there other approaches that one can uh can Implement here to to have a better um efficiency of capital and when doing Lending yeah absolutely there's many different ways that could work we went for a very specific implementation um Buffalo one of the reason why nobody went for something I would say more for similar is because actually this spread was hidden by liquidity mining so

as of contacts in 200 20 21 22 Landing protocols spend a lot of money Distributing tokens to their users and you had a one percent you know usdc API you're three percent borrowing API and usdc but on each side of the market you would get distributed two percent in which case you get a much better employee and this spreads I would say virtually or artificially is disappearing and probably the reason why no one came you know for a solution like more for before is because they were doubtful about the fact that rewards was ever going to stop a day or not and and we really started the innovation of of

mofo by betting that you know rewards are we're not going to stand like forever right it's just basically Protocols are losing money emitting rewards so so they could not do that forever which they stopped pretty much the the day we we launched uh we launched more for so so that would be one of the reasons why uh second reason why would probably be the complexity of it it's not so easy to do obviously but does not mean like no one would have ever done it especially if we we managed to do it to do it but yeah I would say those are the two biggest fraction to actually make it okay so um I want to talk about how it works on a

nitty-gritty level before I go to like the economics of it does it work for you Paul absolutely fantastic so let's talk about the matching engine so basically say I want to post a position to lend some Capital what do I do do I post a message or do I already I mean do I have to pay gas for my transaction yes absolutely so the matching engine is fully Unchained so basically mofo is a smart contract it's completely Unchained and it's a small contract plugged on top of Ave or compounds uh where users instead of interacting with Avi directly and using the supply borrow withdrawal

replay functions of of the problem they would be using the supply borrower with raw repay functions of of mofo and that Morpho is going to let's say as a lender let's have the very first person to land on on mofo I'm going to deposit 100 die I'm going to be put in the list okay or any kind of data structure and my liquidity is going to be put on the pool so I'm yielding at one percent which is the API of the product and there is no counterparty to match me so basically like there is uh uh there was no other way just mofo pursue into the pool but you are in the list and and now a borrower comes in

and when the borrower comes in uh is gonna say hey I want to borrow one sorry deposits some ease as collateral and it's going to borrow 100 die and mofo is going to look into this data structure so let's say it's a cube to simplify and you say okay the first member of that queue he's posting liquidity on on Ave let's withdraw this liquidity from Ave in order to give it directly to the borrower and this is how you know broadly the matching engine works okay so um when I post something to the queue um it's immediately matched against our compound and if there's a counterparty

within Morpho um I am matched against the counterparty and basically the over collateralization of the lending pool on our compound that kind of results in the um in the heat being split several ways between different lenders goes to the sole lender that is now matched peer-to-peer that kind of a good summary yes I think it's it's it's a nice way to to think about it yes how do you how do you stop people from um submitting lots of small orders that the borrower will then have to pay gas for matching yes that's an excellent question and

that's actually the reason why you can do for uh a first in first out model as I was describing and actually you have different ways you can solve the problem um one way would be okay let's just do a pull inside a pool and this way you don't need any cue and it's just you know open with a higher utilization of the capital and so but that works but at the same time for different reasons it's not optimal in terms of capital efficiency so the queue does not work because basically someone can as you mentioned Supply One cents like one thousand times and basically DDOS the uh the matching

engine so you have to come up with different ideas one of the most simple one and this is the one that we we started with is basically to sort a part of the list so in the blockchain environment you have a limited complexity that you have available in order to do operations otherwise gas would basically explode and so we came up with what we call a semicity list where basically it's crucial we just have a heap so basically a data structure uh uh that is able to get us the the biggest users across like the uh top 10 and then the rest is official so

basically when I Loop into the matching engine I'll get to you know if I'm borrowing I'll be matched first with the biggest lender second with the second biggest lender etc etc so I'm sure that I'm going to get liquidity out of it and I won't be DDOS and then I went I go into the fifo and so this is kind of uh you know uh the simplest implementation and that's uh you know solve the specification of the problem that we were given in the first place and this is the one we decided to to implement uh but yeah there's other more complex and interesting way to solve the problem uh that we've been working on as well okay so basically uh larger lenders at

lower rates are prioritized if I understand um correctly um and then basically my question uh kind of that follows from that if they're later comes a better lender or borrower to the to Morpho is everything else reshuffled no it is not in the current implementation of morphoid is no so basically if you get matched no one can unmatch you even though they propose a better rate for example actually in mofo you can't really propose a rate there is one peer-to-peer joy for everybody but you can you know this is a limit of the design right it would be better of course if everybody was able to you know be more competitive

about their rights and every time I repropos something that is better everything gets free shuffled such that the market is more efficient but the limits here and the reason why we decided not to go for this kind of solution is simply gas costs it's like doing it on layer one uh maybe it's doable on other chains or on layer to like like there's a strand or or you know ZK sync or this kind of things but on layer one it's very hard to you know come up with a uh I would say constant time algorithm that all those kind of matching and peer-to-peer so that was probably the reason why we uh we decided not to have this reshuffling mechanism even though it's a it's a good

Improvement to have obviously if you don't take gaskets into consideration um so when you um when you uh lend in a tradition like Ave or compound um your liquidity is being posted up to and it basically collateralizing uh all of the loans that that are that are being taken out by borrowers as you said earlier there is uh so much more liquidity that is covering so it's it's Capital deficient but that means that as a as a borrower I can come in and out of that market uh and and I I can sort of always be borrowing assets

um across this pool of collateral what what happens as so as a lender if I'm matched with a borrower and now that borrower wants to take their collateral out how is my loan now being collateralized uh knowing that it's this like peer-to-peer thing rather than boring against this massive pool of collateral yeah that's a an excellent question and that's probably the first Cornerstone to the the mofo protocol and how all this mechanism you know unwraps so I'm going to attempt this as simply as possible please you know feel free to ask me intermediate questions if you if you need but basically let's get the

intuition for an example first so if we come back to this example where Alice was providing 100 die and Bob provided one eth in order to borrow 100 mofo basically What's Happening Here is that Alice uh her 100 die is going to get into the pockets of Bob and Bob can basically you know since the the all the collateral is much prettier Bob can just you know turn off his his machine go offline and do whatever he wants with with the 100 die and at this point in time let's say Alice is alone there is no die like more food has access to nodai so how could she be you know able to

withdraw and and this is what more for solves it's like how do you have 100 Capital efficiency without you know uh while staying liquid and so what happens here when Alice is going to click the withdrop button is the following so Alice triggers the withdrawal function and mofo is going first to unmatch Alice and Bob say Okay Alice and Bob I'm not even I'm not match anymore because Alice is about to withdraw so mofo needs to reconnect Bob with someone and Bob is going to be reconnected with the pool itself so what's happening here is that mofo is going to take a loan of 100 die

on The Bull with the east of Bob and give that 100 die to Alice such that Alice can withdraw at any time so basically yes we have 100 Capital efficiency there is no die but since the borrower that is you know taking all the dye has put some collateral then this collateral can be used to be actually borrowing on compounds and unmatch the position such that Alice can withdraw at any time I hope that was clear I can go into you know different explanations of that so basically then what's happening is that compound or Ave is acting as a backup

mechanism you know and so you fall back to you fall back to compound or Ave rates if there's no uh lender or sorry if there's no yeah if there's no lender uh to back your position exactly yeah I think it's it's interesting and maybe I did not mention sufficiently clearly in the beginning it's important to mention that mostly not always offers the Purity POI which is in in the middle it offers the peer-to-peer Pi if a match is found from the borrower and the lender side and if if a company a counterparty leaves or if there is no counterparty available then there is a fallback to the underlying pool so basically in terms of products

it's a landing protocol that provides the same risk parameters the same liquidity and at least the same rates as Ave right worst case scenario you get the other yields from a borrower or from A lender perspective and in average you'll be a match peer-to-peer and enjoy a better rate so if you look at um Avan compound the reason um why um the borrow and lend apis are different from one another is to ensure there is sufficient exit liquidity right because basically the user experience if you want to withdraw your funds from a pool and you can't because it's still borrowed and you can't force repayment

unless it's unless the loan is underwater and you can't withdraw your funds and basically what what will happen then is that the rates are adjusted until it is economically unviable to kind of keep paying the interest on those loans and so on but it's it's it's a we it's a bad situation for the lender because you're under the impression that in principle you can exit at any time and that's why that's why uh the raids are so different because basically they have to make the pool bigger so that basically in like 99.5 of uh cases uh everyone who wants to exit can exit the

pool um as Marvel you're kind of piggybacking off of that mechanism so basically you're using the other and compound exit liquidity um and kind of take the most um lucrative ideas the Lend and borrowed years of large um of large lenders and borrowers because those are prioritized of large lenders um uh and kind of skim that off the top so um I assume I assume you guys uh are done contact with Urban compound how do they feel about this yes I think it's it's an excellent

question and this is the question I get asked all the time is I mean this is true that's uh mofo the way it's designed is taking volume from Ave and and from Compound on the borrowing and the learning side and uh mofo is you know it's it's a bit of a weird relationship because it's uh a bit competitive in the sense that we're taking Market cherries but on the other end uh mofo is you know bringing new rates I mean rates that are not artificial like actual efficiency uh that is enabled into defy rates that were not possible before and so this is

interesting because uh basically we're unlocking new use cases new usage where basically lenders would not come at one percent but they would come at two and thanks to mofo they're now coming and and Ave is getting the uh a little bit of a share of that through the fullback barring volume of the fullback lending volume and if you look at compound for example I don't know if that's still the case but at least for many months this year mofo was the biggest bar of compound and that's very interesting because actually compounds does not have so many organic bars when you look at this the the data of compound most borrowers and compound which is the most important

thing for compound because they bring the money in is actually artificial borrowers farming countrywards most of the time not always but most of the time and so more for actually proved to be the biggest borrower to the biggest money bringer to the to the compound protocol so you know I I don't want to hide the fact that Morpho is competitive it is to some extent but it's also growing the pie for everybody and I think like Roberts from from compounds and and study from from Ave got this right and uh you know I had the chance to to talk to Roberts uh I'd like to DM him about this a few times and I think you know he and he he and instantly expressed sometimes themselves

about it very briefly but I think this is the right way to think about it I I hope that was clear as a as an explanation yeah that's clear do you have any um actual data about how many of um the uh the users your vampire attacking away from compounding oven how many you are actually organically bringing to the table I I add the data but I should definitely I think that's interesting and I think you know the market will decide in the end and in any case Morpho is inevitable so we'll have to deal with it anyway whatever the result is

we've kind of glossed over the fact that in Ching borrowers to lenders directly you're also taking rewards from the pool so basically not only are you taking share but you're also making the rewards on the pool smaller than they otherwise would be right yeah so maybe you can add a little bit of reflection on that is um users so first mofo if a user is put on the put if no counterparts is matched then the user is put on the pool and is earning rewards mofo is not taking any cuts on that and it's just giving it back to the user and uh and so so my phone just gave the comp rewards to to

the to the lender or the borrower that did not find a match if the user is matched then the user is out of compound and experiencing a better rate a better native rate like a native you know in if for example and in which case the lender or the borrower is actually removed from the pool so there's more rewards remaining for the rest of the pool I don't know if that's clear well yes but the the removed from the pool because 100 of the the the money they're lending is borrowed so basically if that were to be I mean I mean this is I don't think this computes what do you mean no I I think says there is a borrower coming so and extracting A

lender or the opposite from the pool in which case those users that were previously earning rewards are not earning rewards anymore and mufflers are not earning the country words if they're a match predictions I I totally understand that part but um so basically to me the question is the borrower that comes in a new um would that borrower otherwise have gone to Avo or compound um or what they have just refrained from taking a loan so basically if they had refrain from taking a loan I totally get your line of argument but basically I'm skeptical um that people who actually come to Morpho wouldn't otherwise have defaulted to going to other or compound oh yeah I think like uh you're right

like it depends on the use case like there's some places where you only want to Edge yourself or to borrow if the rates is lower and in some cases where you would have gone anyway to have it because like whatever the race you you want to borrow and in which case you go to more in which case this is the vampire side of things but there is a not vampire side of things where uh you can only offer to borrow at one percent or you just have a use case at one percent in which case you come to uh to mofo and there is the fullback of that uh if there is no match that is found or only a part of the match that is found that is fall back into to have a for the Burnside sure absolutely if you're

priced out your price out I told I totally get that um let's let's talk about um the preferential treatment of um larger lenders right so basically on compound and other everyone kind of um gets the same rewards in proportion to how how much money they put up whereas um for for for uh mofo whales are matched first because of you know gas efficiencies because everything is um on chain it's and it's not uh it's not a pool mechanism um what happens to small lenders is it even is it even feasible or attractive for them to actually come to Morpho yes that's an excellent question so

maybe first something that I want to underline is that it's a default like it it it's a it's a difficult of the mechanism that we had to sort users is because we had we were so constrained uh about ethereum that we had to sort about the user but you know ideally we would not want any preferential treatment on on the size of the notes now this is solved by having uh small lenders regrouping together in a single smart contract which happens usually like usually you know end users are not interacting with more they are interacting with protocols that are themselves interacting with mofo it means in which case they can have like

you know bigger size and have more chances to be matched altogether so that's one thing and uh yeah I don't want to teach too much about what we're doing but uh like the problem is solvable okay and what happens if um someone from this larger um this this kind of this uh pool of people who kind of just got together to kind of co-invest and more for oh um what happens if one of them wants out how do you get them out oh you basically one lender so to the eyes of Morpho this world uh is just a normal user and so they can withdraw a

share of like on mofo you can withdraw share of what you have so basically you can do fractional withdrawal yes okay cool that's super good um so when uh uh when you guys take a borrowed position on Ave or compound like you mentioned earlier that you were one of the largest borrowers on on compound um you're you're earning uh uh uh compound like comp rewards for that uh can you talk a little bit about what those tokens are used for and I think like more broadly I'd like to understand the tokenomics of Morpho because as a Morpho uh user you're also earning more more for tokens and so what's the

interplay here between that and you know broader uh tokenomics and how they work yeah I think we're very like minimalist in terms of token design and what we want to achieve uh visit again like we really want to you know every proposal that we're going to make on the Dow to have an evolution of the token is is going to be very minimalist and we we want that every step that we take makes sense is actually useful for the protocol and its users so coming back to your question is the comp tokens are all redistributed to uh compounds to the mofo compound users so if I'm landing and my position somehow you know abstractly is is ended

up on the pool then I'm earning those rewards and morph is going to account for those and is going to give them back to you so there is no cut or whatsoever that is taken by mofo like this is not the idea and so that's one thing uh that this this the second thing about the moth targets is that on top of that whether you're a match whether you're not match you'll always get more for tokens distributed to to your learner and and borrowed positions and those documents are not transferable for the moment at least and basically the idea here and the motivation is is not you know to increase the API I'm a firm non-believer on

yield powered by by governance tokens however it's here to decentralize the protocol like in my opinion it makes sense to have daos and protocols governed by investors contributors and users like it's uh in my opinion a good equilibrium to have the three of those that can have a say in the governance in the long term so that was important to us to you know uh kickstart in some way some sort of uh liquidity mining program as it is done on Marvel and there is also this good effect of bootstrapping right in in the the very you know the the first millions that we had I think more for now is

almost at half a billion uh but the first millions that we had was like 100 of it not 100 but like maybe 99 of it was analyzed like have we interpreted it as liquidity mining right which is not the case now It's like because we had Fair volumes we were able to you know discuss more Integrations and I think this is the way token should be used I want to talk about the governance um in a little bit of mofo Dao I have one last question for the protocol uh sorry to kind of uh dig deep here so um obviously a cool part of um learning protocols is uh liquidation so if a

position is under water um and the borrower is matched with a lender and typically you could anyone can kind of liquidate that position and uh and take a cut off um of the collateral um so I mean I assume I I think it's exactly the same on Marvel but obviously sometimes it goes wrong so basically sometimes there's I mean there's some risk involved so sometimes prices crash too fast so no one actually liquidates because gas costs are too high or something and um on compound and other obviously this is a communalized risk because basically this is just uh an unrepaid debt from from the poor so

basically this uh loss gets redistributed to all uh lenders and what happens on more more for if a um if there's a liquidation failure does the person who's matched with the person uh with um the borrower that has that mishap happen um actually you know do they end up empty-handed yeah that's that's an excellent question uh so we often say pure to pure matching because it helps conceptualize the mechanism of mofo but in mofo actually you never matched with this a single Contour party it's just the states it's like I'm in a peer-to-peer and hence

state or I'm not in a peer-to-peer in the United States and so there is it feels like okay there is one country party which I'm bearing the risk of uh but this is not the case like the way it works is like when you have your money that is put in the pool then you bear the risk of that debt under the the product okay so if I have interests and bad apps you're also interesting about it it's your your position is much peer-to-peer you have uh shared loss so first uh something that I want to mention is that uh you have the same collateral factors the same oracles Etc as on average so there is no

specific parameter that would you know uh but yeah I think that's important to mention but now if we put in the scenario where for some reason Liquidators are not able to liquidate then the loss is shares require all more for users okay so it's not specific to one counterparty but it's a smaller subset as the other protocol is that does that answer the question yeah that answers the question uh perfectly so kind of it's like a gated community within the uh within the other okay um yeah no I I think I understand that I think this also solves the question that I had on the regulatory side because basically the reason why um protocols like oven compound are huge

largely unregulated is because you always just deal with a smart contract whereas if you have a direct counterparty um this kind of um this kind of preferential treatment usually goes away in most jurisdictions so kind of actually matching people peer-to-peer also comes with um legal downsides yes absolutely and I think this is why you know they they really hate to talk about lending protocol and and they prefer talking about you know liquidity pulls or you know you don't land you supply liquidity or you deposit liquidity uh but yeah here it's a peer-to-peer state but at the same time

I want people to understand so I say put up your matching but but yeah that's it's clearly a mutualized state yeah I'd like to jump to to using the product uh because I um you know yeah like yesterday I uh you know looked at my insta app and I was like oh here my my Ave positions are not yet on Morpho and and uh you know maybe I should just move them over there and benefit from better um better rates um so what one question I had was when you're using Morpho or like when you say that you use this this uh phrasing of like um enhanced uh like an enhanced position where you're where you basically like

you know more I feel it's sort of like this Progressive enhancement of like a lending pool to uh a peer-to-peer but you always fall back as a user is it made obvious that you're lending position is um either um matched on Morpho or uh or you've Fallen back to compound is that like clear to the user and also the rate that you're getting yes it's uh it's a good question I think it's hard to have a good user experience with such a complex you know uh mechanism I would say uh but basically on the compound and other you have those C tokens that are basically not so

useful except for user experience there's no technical interest in having a c token or eye tokens it's just a representation of something yes when you have eight tokens you you see the token yields like in your portfolio you you know how much it's worth and it's you know a very you user-friendly uh Behavior on mofo not all positions are treated equally and because of that you don't have like a a DRC 20 for example you you could have in some World some sort of nft there we did think that that was an even worse user experience to have an nft and that people might throw it out you know not knowing what it was so we're like okay maybe that's not a good

way to go and um and so basically this is a work the front-end has to do so when you go to Instagram for example they do it extremely well uh you they tell you like what is your average and if you go to morphers like uh interfaces where as well the one developed by muscle Labs the one developed by mutative team like we have many many different front ends and usually what they're going to do is going to say Hey you have 100 interior pure 100 in in pool okay so it's like half half so we're going to make an average of your of your rates and such that the user does not feel the complexity okay does

that make sense yeah so your position can be half or there can be one proportion of your portion of your position that's uh backed by like a peer-to-peer loan and Morpho and the other uh would be backed by uh some um some position on compound or are they exactly yeah and and it's the work of the front end to average that and make it seamless such that you have an average API and why is it that there are like two separate like Morpho compound and Morpho Ave why uh wouldn't you just be utilizing the liquidity in both of those pools and sort of finding ways to optimize like so basically like finding the better rate uh depending on the

assets you're boring against uh for the user and sort of just you you know adding the ability to add any sort of liquidity um pool underlying like one more Pro interface or a contract I think two reasons the first one is complexity many many protocols have tried you know aggregating uh learning protocols and they mostly all have failed to some extent as and probably the reason why is because not every protocol share the same risk and they're not the same the sense that they take different collateral factors

approaches so it's easier for the landing side of things you can say hey like uh we will select the the pull with the the more interesting API but if you start also aggregating borrower positions at the same time then it becomes you know a bit hard because you have to decide on risk it's like you have to decide which collateral Factor I'm going to use like am I going to use the collateral factor of Ave of compounds or the most conservative of the two and as soon as you say I'm going to use the most conservative of the two you're not an improvement anymore you're just a different product and so in terms of product decision it was it was basically a product decision that I took was okay I want to be an improvement of something I I want to be able to to to to to to

improve something that I know for sure has a market and so that's why we decided to separate in order to have like no trade-off however like this is definitely room for for you know more complex mechanisms where you could aggregate those different protocols in a more advanced way I would say um okay so there's there's like a lot of complexity and aggregating different liquidity pools that that doesn't exist say with like aggregating you know like there's so many D5 yield like a defy Dex aggregators that and that thing that problem has been like mostly solved I think yeah yeah definitely I think it's it's a matter of you know risk reward uh rather than just rewards uh and so it's

for that reason it's it's an additional Dimension and you have to take into account in the aggregation process and then compound and Avi were not made to to to share the liquidity with the partner so uh when you can borrow on the one you can borrow on the other so it's it's very hard to have this sort of aggregated it's visible but it's it's complex so we thought like as a first step you know our first protocol should be something fairly simple this is why the matching engine has a lot of room for improvement this is why uh we're not aggregating but maybe in the future we'll be able to release more more advanced versions I under I totally understand where you're coming from and basically as a D5 user you kind of you want to be very

specific about which protocols you're fine with um so basically at least you'd actually have to disclose to the user um which protocols you kind of mix by default and have to have have them uh allow them to opt out of that and so on so I actually do think that especially since everything is on jail this is probably too much overhead for not um all that much reward yeah definitely I think there's room for you know actual D5 middlewares like you know you're in finance full Finance Etc to actually you know mix at least the lending side of things and makes

different strategies or rebalance and stuff like that but this is like a different user kind we really want it to be as low level as possible and just be you know as close to A Primitive as we could be and yeah that's probably the reason why we went that route you also get natural rebalancing anyways right so basically it's not like no one's making the markets it's I mean there's tons of bots out there that kind of try to get the yields to uh commensurate numbers yeah exactly and actually maybe one one last thing to mention about that topic because I think it's interesting is uh rates are not so well arbitraged and the reason why they're not arbitrary is that

because uh it's not because bats are lazy or butts have not been coded buds have been coded it's just that they don't have the same appreciation of risk on every single protocol and that yeah you have a premium in like you know the reputation of a protocol Etc and this is like so complex to factor in a smart contract obviously what's talk about the integration so we already talked about insta dap uh that was announced uh like last year um and what's cool about that is that if you have like an Ave position you you essentially don't have to unwind that position you can just have it uh be refinanced by Morpho I haven't done that yet but I think I'm I think I'm gonna

hit the button on that pretty soon um but uh yeah what what other uh Integrations um uh do you have to like improve the usability uh and and sort of like uh people's ability to use Morpho yeah I think we have a bench like uh we are talking to you know you have two kind of Integrations like protocol Integrations and you know more data analytics integration so we're talking to a bunch of websites to get more fun approximately everywhere uh and you have a lot of uh funds as well integrating with mofo and doing their complex Quant stuff like hedging and and stuff like

that but we have as well protocols like uh Vault stablecoin or origin US dollar stablecoin that are using their their collateral and they put their collateral to work on the Morpho protocol and they say hey like uh we want better yield for our stablecon users or saving rate or whatever we are going to use um we're going to use uh this and so yes we have like for example D5 hedge that can help you you know hedge your position systematically uh when you're managing units of B3 positions uh we have spool that I was mentioning a bit uh before which enables you to diversify your your D5 portfolio uh we we really

have a bunch of those and and many coming in the pipeliner as well uh but you know to be fair and I think that's a good ending note as well is that I I feel like there is a ceiling to that course as well it's like okay we're like I think we're top free lending protocol at the moment with like 500 million or close to 500 million in deposits on ethereum uh but um I do feel like you know those are just D5 Integrations for D5 things that are often powered by D5 tokens and I feel like there's a lack of you know actual real world connected use case in all this and I think that's

going to be a challenge for us to reconnect somehow more for to those real usage and you know take D5 to the next level cool so let's kind of shift gears a little bit and talk about the Morpho business model how do you guys make money you know other than raising money from American VCS that's that's a good way but uh no I of course joking here some more for labs is um is a software and development company making money by doing contributions to Dao uh and so ideally like the ideal you

know way of making money for us is basically proposing things to the more for Dao that are going to you know be proved hopefully and that we are paid by The Tao uh to produce This research and enhance the protocol the same way other companies is doing it the same way BGG Labs is doing it where are they for example that raises the question of how mofo makes monarchy and so the answer is uh mofo in its current form is able to take a cut on the Improvement that is made from AVI or from compounds so it's basically

you're making one percent apy on on Ave 1.5 on on mofo have it then mofo is able to take let's say 20 of that Improvement in taking 0.1 percent of the volume that is matched so it's just a cut of the improvements there is nothing like that is actually lost and this is theoretical so it's implemented but it's not turned on So currently the protocol is not making money so how I mean basically if it's just a fee that's turned on um how do you guard yourselves against me just you know taking your code and it and kind of uh lowering that 2.1 and how how do you make sure this

there's actual um uh there's extra structural um value in the protocol itself in the user base and this doesn't actually end in a race to the bottom yeah that's a an excellent question that I think every D5 contributor should present about in some way or another um so you have different ways to make this happen uh one obvious way is to have a busl license which is the case of Aviv free company for Indians I'll be free um this is not the case of Morpho mofo GPL copy left license so you can you can Fork it if you wish to do it and basically

the reason why uh I think we wanted to go that route is we believe in as systems grow more and more complex we believe in network effects you know being able to retain users even if it's at the cost of like a 0.1 fee uh and the reason why that is especially true for complex systems is that uh security and you know the trust in the Dow and the contributors themselves can be valuable for users like okay there is a brand behind it and when you look at Landing rates it's actually interesting to see that for example Ave is capturing a ton of the landing volume even though

they're not offering you know as beneficial rewards as as compound for example and some analyze it I'm not saying this is what's happening but I'm just saying that some analyze it as basically the network effect of Ave where people trust more Ave the brands and everything and so you have you know quantitative questions here is that how much does that represent in practice and how much like uh this network effect is going to retain value and how how big the fee could uh could be Etc but I think you know in the end uh we have not built something that is yet to revolutionalize the world and this

that is legitimate in really extracting a lot of value out of it I think the current thinking is for us yes uh live thanks to uh fundraising not turning on a fee because there is legal also legal no considerations on that and work as much as possible to build something that has you know even greater traction and where it's actually you know worth taking a great attraction they're also create a network effect so I think we we're not we're we're more thinking about you know designing things that you know we're able to get a sufficient traction such that we should legitimate to turn on a fee or actually to propose to turn on

the fee but I think that's not even the case at the moment I hope it answers uh I went a bit far but I hope it answers the question uh the initial question at least no no it answers the question so I actually I also see the stickiness of of um D5 applications I think it's um uh it's a really difficult topic um so what actually makes something sticky clearly it's not just the best price or the best security it's kind of like it's user Behavior question and it's not 100 clear to me what exactly actually entails the stickiness um yeah I think there's a lot of you know it all comes back to trust at some

point which is a bit weird but that's how it is and I do think the example of compound and Avis is a good example like I literally talking to users I literally had many calls with people saying hey I'm never going to put a penny on compounds and I'm like okay I'm in company has been here for for a long time but and in you know it's it's the network effect here is is is really playing a role I think it is is Major in terms of uh you know how to retain users and also there are some products where by Design because you have more volume your products is working better it's with the case of curve in that case so tell us about the roadmap and uh

what's uh coming for Morpho I know that a lot of this is governed through governance but uh what are you most excited about yes I think like you know uh everything that will will be decided will be decided through governance and we'll be and will be voted Etc uh when it comes to mofo labs and the research that we're doing on lending in general uh I would say like we've been thinking a lot about what makes sense what does not make sense in in decentralized lending and I'm going to disappoint you a little bit but as of now we prefer you know uh keeping things close to the chest for the moment in the sense that we really like to

release things that we we are very sure that they are very neat and clean at least scientifically uh so we would rather you know not ease anything for six months and then release a big paper that we've been working on for more than a year uh rather than you know try to figure out road maps Etc because like it's a constantly evolving space I'm quite doubtful about road maps in in general I think you know we are a team of 20 a bit more than 20 we're mostly researchers so what we're doing is is research and what I can say though is that so far we have not something sufficiently cleans and and that we're convinced self to to to tease or release

anything in the public and also I have uh or the team of researchers that that are really you know firmly against the fact that we should tease these kind of things because for them it's science and that we should not be teasing science and I respect that a lot so I I comply to to the standards of the company uh and I just don't teach things okay then maybe let me kind of zoom out a bit um what are your personal hopes for the ecosystem for 2023 so my personal hopes are rationalizing so a lot more D5 I think 2022 and the evidence you know are grim and you know I obviously I don't wish this

would have happened uh to a lot of people that suffered from it but on the other hand it's it has good aspects in the sense that uh we are rationalizing the mechanisms we're designing I think a lot of time has been lost in token design while we should have focused on mechanism design for example that's a personal take not the take of more flowers but I think like uh you know it's we've seen mechanisms that are impressively relying on target incentives that inherently do not create value and I'm hoping that 2023 is going to once and for all you know at least largely diminished the impact of those

uh those those mechanisms in in the space and how you know how talents are sometimes you know working on those designs while they could be working on on more some some you know more interesting Primitives for example uh so I think this is my first hope uh I also think that this is the perfect year for building uh I'm very excited about what's going on like I talk to teams uh and they are all building something very exciting like I'm really excited to see like the the different announcements on Twitter that are going to be made in the next few months uh and I would say My Last Hope is that we uh regulations do not say you know to to fast decisions on

on the topic of defy I think one very important key thing for for 2023 is that they they take the stance of you know regulating apps rather than protocols it's it's a very deep you know uh I think this is the way they should behave and it if they don't again personal take that if they don't I feel like uh this could endanger largely the system and finally I hope for more institutional you know starting playing around defy this does not like a good start for 2023 because like with the ftx7s and everything people do not feel you know inclined to get into D5 again any soon but I'm hoping that with you know cleaner mechanisms you know

protocols that have been sufficient for us like um especially thinking of businesses say for example uh that are safe now sorry uh is uh I think once we have you know sufficiently battle tested Primitives like this or uni swap we can start thinking about onboarding like the next order of magnitude of users and I'm really hoping one of those companies you know go big in some on some release to actually connect us to the rest of the world and yeah I have a lot of Hope in those industry leaders and I hope that more forward also you know be part of those very soon which is it is in a good way to do so actually cool thank you so much for coming on

Paul that was very interesting yeah definitely I think probably one of the most interesting and you know in-depth First cast I've ever been in so it was a pleasure sharing that moment with you guys