Paul Frambot (Morpho Labs): "We need to rebuild DeFi from scratch".

Morpho Labs is based in France, but you've been in the US for three weeks. Why?

To put Morpho on the map! We recently passed the $1 billion mark in total value locked up on the protocol, which puts us among the biggest players, but a lot of investors don't know what we do, especially in the United States.

After three weeks, how do you see things?

It's pretty impressive to see the energy there is in the United States. I have meetings every day. The aim is also to forge links with potential partners.

You've just launched Morpho Blue, which is a new phase of Morpho. Can you explain to us exactly what it is?

Morpho Blue represents a radical change in our approach. We've been working with Morpho Optimizer for almost two years, but we've reached the limits of the system.

What does that mean?

Morpho Optimizer was designed to improve the Compound and Aave protocols. We are on top of the liquidity pools and enable better rates. The problem is that Compound and Aave, which are two of the main lending protocols, only account for $6 billion in total, which is still a considerable ceiling for us, and indeed the whole sector more generally.

Why don't these protocols manage to develop further?

Because they do everything. They manage both the machine, which enables loans to be made, and the entire risk policy, which poses problems in terms of trust, efficiency and scalability. Take Aave, it's a DAO with token holders who will update the protocol's 700 risk parameters.

Except that it turns out that this risk management via a DAO is the big bottleneck for lending in DeFi. It's a bottleneck on trust and scalability. The more financial assets and volumes you want to support, the more you are blocked, because there are more and more risk parameters to manage. It's a non-virtuous circle.

Today, traditional finance represents trillions of dollars, and I can't see these volumes at all passing through one or two protocols like Aave and Compound with decentralised governance forums.... It's just unimaginable.

How is Morpho Blue changing the game?

Morpho Blue is not an onchain financial product. Our vision is simple: we see finance as the Internet. What we want to do is Web3, i.e. a true Internet of value that Bitcoin began to initiate.

To understand what we want to do, you need to understand how the Internet was built: The Internet was created on open and decentralised protocols, on which we have rebuilt complexity according to needs and uses.

Do you have any examples to help you understand better?

One of the best examples is SMTP (Simple Mail Transfer Protocol). This protocol has a specific purpose, which is to enable e-mails to be sent - that's its only use. Then, on top of it, people built Gmail France for French regulation, Gmail US for American regulation.

SMTP is the basic protocol used by Gmail, Hotmail, Yahoo! and other players. Each is an overlay with its own specific features depending on the regulations and needs specific to each player and each country...

Let's take another example: the Internet Protocol (IP), which is now the most important protocol on the planet. Before there was IP, there were other protocols, which were more specific, for very particular use cases: Apple Talk or Net Bias.

These protocols were better than IP. They offered more functionality, but when IP arrived, the Internet was really able to develop because the protocol made it possible to connect everyone, so everyone gradually switched to IP. And subsequently, everything that was missing from IP was rebuilt on top of it.

Today, a basic protocol like IP is missing from DeFi, and that's what we're doing with Morpho Blue. Our aim is to rebuild the entire DeFi on top of Morpho Blue.

How does it work in concrete terms?

The Morpho Blue protocol is 600 lines of code that allow you to do one simple thing: lend an asset in exchange for a guarantee. On top of that, you can rebuild the equivalent of Compound and Aave with all the specific features, including risk management. The idea is to separate the lending engine from risk management.

How do you quantify this impact?

Morpho Blue represents a 75% reduction in gas consumption compared with Aave. That's a huge difference. There are much better interest rates and collateralisation.

The strongest idea behind Morpho Blue is that anyone can recreate a market. There's the USDC market backed by wBTC or USDC backed by wETH. What you can do is recompose those two markets and recreate Aave, i.e. Aave V3, Compound V3 on top of Morpho Blue.

The experts who manage risk for Aave can now create Aave and Compound on top of Morpho Blue. You can rebuild all this on the minimal protocol and without authorisation from Morpho Blue.

Some people explain that Morpho Blue will be too complicated to use.... Is this the case?

Morpho Blue is not for everyone. However, it is possible to recreate all this above Morpho Blue, and in an even simpler way.

Who are you targeting with Morpho Blue?

A lot of people. Obviously, all those who already work in DeFi. Theoretically, we can recompose any protocol such as Aave, Compound, Spark or Flux Finance without authorisation.

Really any market?

Yes. For the past few months, everyone has been talking a lot about real world assets. If you want, you can create an RWA market on the morpho primitive. That's how we're going to attract banks and very large financial institutions. They will be able to create specific markets according to their compliance and regulatory constraints.

What is your target?

Today, Morpho Optimizer represents just over a billion dollars. Our objective with Morpho Blue is not to increase this figure by 20%. The aim is at least to reach 10 billion dollars. We want to become the biggest lending protocol in the world.

DeFi is still tiny. It represents a few tens of billions of dollars. The aim is to go after Trad Fi, which represents tens of thousands of billions.

Is Trad Fi interested in you?

We've been talking to banks and asset managers for six months.

What's stopping them from going further?

For them, there are currently two problems with DeFi.

The first problem is that DeFi is a giant common pot in which money is mixed. From a compliance point of view, it's impossible for them to use Aave or Compound because they don't know who owns the money and especially who is paying them interest.

The second problem is risk management. Banks know how to manage risk, and they have no desire for a DAO to do it for them. Bankers want to control the process, especially when you don't know who is in the DAO.

Is this why some banks have forked DeFi protocols?

Exactly, JP Morgan forked Aave to control the whole process. They have replicated Aave's code and they manage their own risk management.

How is Morpho Blue more advantageous for institutions?

An institutional can tokenise an asset on Morpho Blue. They can do it on Ethereum and create a market with all its specific features: they can choose the asset, the collateral, the KYC, etc. You have created this market, and lenders can deposit money. Morpho Blue makes it possible to deposit money, refinance the transaction and withdraw the money. The traditional players can impose the conditions they want on each market.

Morpho Blue does not carry out risk management, that is outsourced. Experts will do it if you don't know how. But when you're an institutional, you have that skill and so you want to do it yourself. The only reason we use blockchain is because there is a network effect and execution is better. Traditional finance only needs the loan machine, not all the risk management.

You don't really like being asked this question, but with Morpho Blue, you're going to directly impact existing protocols?

There are many serious protocols in lending. There's Aave, Ajna, Euler... There's clearly competition. What I like about crypto is that I tend to think it's more united, i.e. when we launched Morpho Blue, I got congratulatory messages from Euler, Ajna, Krona, saying "well done, I hope we don't release our protocol too late".

In fact, this universe is so vast that it's a very good thing there are several of us working on it. But yes, there is clearly competition. Morpho Optimizer was based on Aave, so there couldn't be any direct competition, but now that we're not directly dependent on them, there can be. That's the game, and we're approaching it calmly.

How do you see things in DeFi?

The way we're building DeFi at Morpho is French-style, at least according to the Americans. We're extremely pessimistic about DeFi, in the mode that it doesn't work, what we currently have doesn't work, which actually amuses them a lot.

Why?

There's a huge gap between what Trad Fi and DeFi are capable of doing. It's just immense.

At the same time, DeFi is only a few years old...

Yes, but that shouldn't stop us from looking things in the face. Today, everything is not working so well in DeFi. The rates aren't as good, the risks are higher, there are hacks almost every day... We're a long way from being competitive. There's still a lot of work to be done. We have a strong presence in the ecosystem and we can still see how much needs to be done.

What's missing the most?

A lot of things were built during the Bull Market. They're interesting, but in fact you have to go back to the basics, and that's what we're doing with Morpho Blue. We shouldn't be looking for +10% on DeFi, the sector needs to aim for much more.

Isn't that a bit easy to say?

When you want to aim much higher, you realise that today's models aren't the right ones, and you have to have the courage to start from scratch, and that's what we're doing with Morpho Optimizer.

We're starting from scratch even though we're one of DeFi's biggest protocols today. But we won't be able to do it with the tools we currently have.

Is this a huge gamble you're taking?

The current DeFi won't change anything in finance, and our aim is to change finance, so we have to take risks. The aim is to be competitive with traditional finance. We're not doing all this just to top the DeFi Llama leaderboard in the lending category. We're fighting to be present on the traditional finance leaderboard.

You've announced a token for Morpho. When will it be available?

I don't know, but what is certain is that we want the launch of the token to be decentralised. That's really important. I hate the idea of a token launched with asymmetric information and retail investors getting ripped off. I want it to be a community decision. We're not here for the short term, we've got time.