Is DeFi dead?

It seems that not many people in the community are willing to talk about DeFi protocols anymore. But on the other hand, the family of former US President Trump is planning to build a new DeFi project, World Liberty FInancial. The popular meme has created tens of billions of transactions for Solana Dex. Lido, Uniswap, Pancake and even Ethena, which has emerged in this round of bull market, are still the most profitable on-chain protocols. Although DeFi's momentum is not strong enough, it wins in durability and stability.

Annual cumulative income

Among them, the lending platform is one of the tracks with the largest on-chain capital capacity, and it is not an exaggeration to say that it is the most important, because Liquid Staking with a higher TVL is to some extent just a channel for Wrap, and platforms such as Lending and Dex are needed to have liquidity and extensive use cases.

With the entire crypto industry pursuing PMF and actual revenue, many DeFi tricks that rely on subsidies to maintain survival and data are no longer reliable. As the platform effect of DeFi becomes stronger and stronger, there are not many DeFi projects that can continue to create new highs in data in today's market, and the one with the strongest development momentum is Morpho, which has accumulated more than 70 million US dollars in financing.

Morpho announced in August 2024 that it had received $50 million in financing from Ribbit Capital, a16z crypto, Coinbase Ventures, Variant, Brevan Howard, Pantera, Blocktower and more than 100 other investors. Founded during the last bull market, Morpho, which has risen again after a bear market trough, has also relied on innovation to take a similar path to rebirth as Solana and Pendle. Morpho is designed not only to serve end users, but also to support developers and enterprises. Its goal is to go beyond the crypto field and become the cornerstone of a new Internet-native financial system.

Since its launch, Morpho has accumulated more than $3 billion in asset supply, becoming one of the most commonly used DeFi protocols in the world. What is more noteworthy is that Morpho has transformed from a "L2" similar to Aave and Compound to an original DeFi lending infrastructure. Its TVL data is even close to that of its former "parent" L1 Compound, and some data dimensions have even surpassed Compound. In the context of the market's pessimism about DeFi, the rise of Morpho is highly instructive for the entire track.

Morpho team background, as well as Optimizer history and technology, (Aave, Compound's "L2")

Just like Nvidia's GPU hegemony is a step-by-step search for use scenarios and iterations. Morpho has also gradually developed from improving and optimizing the market segments of AAVE and Compound.

Morpho, which was born with DeFi Summer, positioned itself to improve the capital efficiency of existing DeFi protocols in the initial stage of the protocol, "combining the liquidity pool model used by Compound or AAVE with the capital efficiency of the peer-to-peer matching engine used in the order book. Improve Aave or Compound by providing the same user experience, liquidity and liquidation parameters, but APY is improved due to peer-to-peer matching."

The initial version of Morpho simply deposits users' funds temporarily on Aave or Compound to earn the platform's basic APY. If other users have lending needs, Morpho will take out the funds and lend them to users in need. This peer-to-peer lending agreement, coupled with many optimizations in the actual process, can improve the problem of retaining funds on the Aave platform, thereby improving capital efficiency.

At this stage, Morpho's main product is called Morpho Optimizers, which is a middleware built by Morpho for existing DeFi lending protocols to improve capital efficiency.

According to historical data found by DeFillama, the peak TVL of Morpho Optimizers is about 400 million US dollars. According to current data, Optimizers can increase APY returns by 0.51% and 0.29% on Aave V2 and V3 respectively.

Morpho has a hardcore and solid founding team. The Morpho team consists of people with technical backgrounds who have spent years researching advanced topics in crypto and founded the protocol during their university years. Paul Frambot serves as CEO and brings his blockchain engineering expertise from Telecom Paris and Polytechnique. Merlin Egalite brings extensive software engineering experience from positions at The Commons Stack, Kleros, Blockpulse and Paris Digital Lab. Mathis Gontier Delaunay, formerly VP of Kryptosphere, now leads research, and Julien Thomas, who holds a Master's degree in Data from Polytechnique Montreal, guides the development.

As members of the founding team, none of the above four people have left the protocol since the cooperation, ensuring the continuous and timely expansion and development of the protocol. Similar to the popular Founder Mode, more competitive new products can be quickly iterated in the turbulent crypto market. In 2023, Morpho also introduced DeFi OG 0xloth, who previously worked at the stablecoin protocol mStable, to be responsible for Morpho's business work. Team members were also selected for the 2024 Forbes "30 Under 30" list.

However, if it is limited to this, it is almost impossible for Morpho to really stand out. Not only may it become a project comparable to the main protocol, but its importance and valuation space will also be difficult to open. Just like another DeFi star Pendle, adapting to the market's active transformation has allowed Morpho to achieve exponential growth. The subsequent launch of Morpho's main product Morpho Blue has truly put it on the fast track of development.

Morpho's unique innovation Morpho Blue

TVL has grown from 0 to nearly 1 billion in less than a year, which is the data performance of Morpho Blue. As the core functional module of Morpho today, Morpho Blue has a lot of ingenuity in its design.

In short, Morpho has achieved professional team management, fund isolation and efficiency by dividing borrowing and lending into two independently controlled layered modules, the market and the vault. It not only has the advantages of a modular lending platform like Euler, but also does not lose the liquidity of a monolithic lending platform like Aave.

The vault is like a VC, and the assets are like LPs. Users earn yield by depositing assets in vaults curated by third-party risk experts. Each vault has a unique risk profile and strategy determined by the curator, and the professional curators who manage the vaults will continuously optimize the allocation of vault assets, reducing the time required for users. It is worth noting that although there are managers who develop and optimize strategies, the funds are uncustodial, just like most other lending protocols, and ownership remains in the hands of users.

Markets are like startup protocols to be funded. Morpho allocates funds from all vaults to markets, but can only allocate funds to markets that are whitelisted by curators. In Morpho's markets, each market contains only one borrowing asset and one collateral asset, with its own interest rate. The risk of each market is also limited to the market. Because the unique creativity of the market limits the risk of vault funds, there is more potential to create markets for more niche assets. Even if unexpected situations occur, bad debts are immediately shared among lenders.

Just like users are making fund allocation, most of them choose stable investment, and some may choose investment with high risk preference. Now in Morpho, the combination of vault and market provides users with a reasonable way to allocate funds. Morpho does not disperse funds to other protocols. Funds always flow within Morpho. Specifically, the path of funds is from lenders to Morpho vaults, and then to Morpho markets. Black swans in any party's agreement will not cause 100% capital loss.

Of course, the fund operation mode in Morpho vault is the well-known over-collateralization mode, and because of the vault-market model, both borrowers and lenders have higher efficiency. If you still remember the bad debt problems caused by credit loans in some previous RWA protocols, then rest assured that in over-collateralized protocols, no vault expert can do evil. To give you an intuitive example, if a vault lends USDC with Coinbase's cbBTC as collateral, your position will be overcollateralized by cbBTC to guard against bad debt risk.

Morpho built this design so that users can customize their returns and borrowing options based on their risk preferences. For borrowers, higher collateralization rates in the Morpho market can improve capital efficiency, and peer-to-peer lending without additional fees can also reduce costs. For depositors, both professional planners and Morpho's vaults with different risk preferences are more attractive.

Morpho can be regarded as an enterprise-level custody platform to some extent, which is open, transparent and traceable. At the same time, it meets the requirements of developers and enterprises to build any functions they need and maintain full control-without handing over governance to a third party or DAO.In June of this year, Sky (MakerDao) used Morpho to build its DAI and USDe lending use case.

Not only for investors, professional developers and teams can also charge a certain share of the income of the managed vaults, just like VC or MM's GP. This is conducive to stimulating the enthusiasm of planners, promoting them to increase the income of vaults, thereby increasing the income of users.

Gauntlet, a professional crypto research institution that previously cooperated with the Aave platform, chose to suspend its agreement with Aave in 2024 and instead cooperate with Morpho, and served as a planner to open the Morpho vault. Morpho provides a more open and scalable model for risk managers such as Gauntlet. Gauntlet's Cannon once said in an interview with CoinDesk that Aave DAO pays Gauntlet a fixed fee every year, but his team hopes that its remuneration will increase with the increase in performance. Morpho offers risk managers the potential to earn more profits with greater flexibility.

From optimization to reconstruction, Morpho's journey

In the article "Morpho's Mission: Turning Financial Infrastructure into Public Goods", the Morpho team analyzed the reasons for the fundamental changes in the protocol: the team initially focused on a specific challenge - optimizing existing crypto lending services. But it soon became clear that systemic improvements required a complete rebuilding of the lending market from scratch, not as a specific product or service, but as a financial infrastructure that anyone can use to build their own products and services.

Morpho also realized the problem, established its mission, and rebuilt the protocol step by step, eventually completing the design of a customized lending system that shares liquidity and is open and flexible. In the future, more simplified development components will be introduced to establish close ties with more developers, planners, and users.

Hide the technology in the details, Morpho's minimalist operation guide

If the conceptual introduction makes you dizzy, then why not try the product directly. Although there are new concepts of Markets and Vaults, in fact, for ordinary users, Morpho UI design makes it easy to use and understand.

As shown in the figure, the details of USDC's income in the pool include basic income, third-party rewards and MORPHO tokens

For depositors, you can directly filter out the assets you need through the search function on the Eran page. After depositing assets, you can not only earn the basic income paid by the borrower, but also get MORPHO tokens and other rewards provided by third parties. Interest is paid when withdrawing from the vault, and rewards are paid and can be collected on the rewards page every month.

Since MORPHO has not yet been circulated and included in the income, Morpho has also provided a new function for users who care about the development of the Morpho protocol, which calculates the treasury yield by adding the MORPHO full circulation market value (FDV).

USDe/DAI market details

Morpho is extremely simple to use, but if you are a researcher or potential partner and want to study the specific details, Morpho's detailed documentation and Vaults give you enough introduction and explanation. Taking the borrowing process as an example, the details page not only records the borrowed assets, collateral assets, liquidation loan value ratio (LLTV) and oracle in detail, but also regular data such as total amount, remaining liquidity and APY, liquidation fines, liquidation records and vault bad debts are all displayed. Considering the design of Morpho, the market obtains liquidity from which vaults, as well as special information such as borrowers, are also fully displayed to ensure transparent information.

Why can Morpho carry the banner of the new generation of DeFi?

Morpho's data fundamentals

Today's protocols like to emphasize revenue. Whether it is Pump fun or friend tech, which is spurned by the community, they have completed more than 10 million US dollars in protocol revenue before issuing tokens.

As an asset-heavy lending platform, Morpho has always been the most likely on-chain protocol to generate real cash flow, and has accumulated $21 million in fees. Morpho has not yet charged any fees for the protocol, but vault managers can set performance fees for their vaults. The fee is charged by collecting interest generated by the vault, with a maximum performance fee of 50%. It is worth mentioning that in actual operation, the average level of this value is about 10%, and some are 0%, which is much lower than Aave's 20-30% reserve factor, which is one of the reasons why Morpho can provide higher efficiency than Aave.

After launching the Base network this year, Morpho's cumulative address volume on the Base network has exceeded 45,000. Compared with the number of addresses in earlier versions, Morpho has now increased by an order of magnitude.

Currently, Morpho mainly supports the main network and Base. If more EVM-compatible networks and L2 are launched, combined with token incentives and circulation expectations, TVL may soon surpass Compound.

Reject silos and integrate with a large number of DeFi protocols

As Morpho said in its mission - to become a public good and build a financial infrastructure that anyone can use to build their own products and services. To become a DeFi underlying protocol like Uniswap, integration with the entire DeFi track is essential.

In addition to the important DeFi protocols mentioned above that are related to Morpho, such as MakerDAo, Ethena and Usual, Morpho has also integrated various time-tested tools and protocols in the DeFi track such as Safe, Defi Saver, Furucombo, Superform and Instadapp. You should know that Morpho's deposits exceeded 3 billion US dollars at its peak, and a large number of borrowed assets were allocated by professional planners and flowed into various DeFi protocols we are familiar with.

There are also senior DeFi users who have completed ultra-long-term arbitrage on Ethena by using Morpho.

Can MORPHO add fuel to the development of the protocol?

MORPHO is the governance token of the Morpho protocol, and the maximum total supply of tokens is 1 billion. As of September, the distribution of MORPHO is as follows:

Morpho DAO 34.5%

Users 5.4%

Morpho Association 6.7%

Reserved for Contributors 5.8%

Strategic Partners 27.5%

Founding Team 15.2%

Early Contributors 4.9%

Morpho DAO, composed of MORPHO holders and delegators, is responsible for governing the Morpho protocol. The governance system adopts a weighted voting system, and the number of MORPHO tokens held determines the voting weight.

MORPHO token holders will be able to vote on changes to the deployment and ownership of Morpho smart contracts (related to the protocol's support for other networks), the Morpho Optimizer and Morpho's fee switch (related to the protocol's revenue), custody of the decentralized front end and protocol governance, and managing DAO funds.

Although the MORPHO token is extremely important to the protocol, it is currently non-transferable, just like the EIGEN token of another important protocol Eigenlayer. This means that it cannot be traded on DEX, let alone listed on those heavyweight CEX.

However, the token can be made transferable through a DAO vote. Currently, Morpho DAO is discussing the transferability of MORPHO, and the token is likely to be officially launched before the end of the year.

During the discussion, some community members also suggested that MORPHO introduce veToekn and introduce more incentives to expand the number of token holders and the TVL of the protocol and other overall data; let MORPHO tokens adopt a JLP-style repurchase strategy, which can avoid tax issues related to staking and does not require staking of tokens

DeFi has not died, it has just changed its development method and become a habit for all participants, and it has also become an indispensable foundation for the industry.DeFi valuations have gradually stabilized, and at the moment of changing development methods, we should focus on DeFi again, find a business model for the long-term sustainable development of the project, and promote the development of the project through innovation and practice. Morpho has the courage to reflect and finally find a new market fit through innovation. DeFi projects can be said to be rare in the impetuous crypto market.

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