Despite the crisis in the crypto sector, the project of decentralized finance Morpho collects a nice sum

Cryptocurrency prices have fallen in recent months, with bitcoin down more than 55% since the end of March. Cryptocurrency lending platforms such as Celsius Network have frozen payouts and are facing serious liquidity problems. One of them – Voyager Digital – even went bankrupt, after the liquidation of the Three Arrows Capital fund invested in the crypto sector. Other players in the ecosystem could still falter.

And yet, this context of crisis did not prevent Morpho from collecting a good sum. This decentralized finance (DeFi) project “just closed an $18 million funding round,” according to software research and development company Morpho Labs, in a press release issued on Tuesday, July 12. All this alongside young programmers who have just finished higher education, such as its co-founder Paul Frambot (21), who completed blockchain training at Télécom Paris and Polytechnique just at the beginning of the year.

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US funds less cautious

“In Europe, investors were suspicious, while the Americans approached us across the Atlantic and we immediately joined them,” assures the engineer, who conceived the Morpho protocol with Vincent Danos, director of research at the CNRS. American funds therefore led this fundraising: Andreessen Horowitz (a16z crypto) and Variant, two renowned players in the sector. “A total of around 30 funds and 60 individual investors participated in it,” says Paul Frabot. Among them are French business angels such as the co-founder of Ledger Nicolas Bacca or the head of Ariane Frédéric Montagnon.

If the United States has the upper hand in financing the sector, the emergence of funds dedicated to Web 3 in France should facilitate fundraising in the territory, without having to resort to American venture capital. XAnge thus launched an 80 million euro fund dedicated to Web 3 at the beginning of July, just a month after Cathay Innovation and Ledger, with the support of Bpifrance, created a similar fund of 100 million euros.

Audit of projects and security of funds

Meanwhile, Morpho has already raised the money needed to implement its application and protect its protocol as much as possible from computer attacks. “Fundraising will specifically enable the financing of security and auditing of the code we produce, which is extremely expensive,” points out Paul Frabot. About 300,000 euros were invoiced for two weeks of auditing smart contracts, “intelligent contracts” developed on the blockchain, he specifies. “We use a dozen auditors, we don’t make any sacrifices in terms of security,” he insists.

Morpho managed to get funding while credit activity seems to be in crisis. A seemingly paradoxical situation, if we do not understand the difference between DeFi (decentralized finance) and CeFi (centralized finance). “Today, CeFi is under six feet, especially due to the lack of transparency of many players,” recalls Stanislas Barthelemi, a consultant at Blockchain Partner, a consulting firm affiliated with KPMG.

CeFi refers to exchange companies and platforms – that is, centralized actors – that help their users place their money on applications developed on blockchain technology. But some of these platforms, which post very attractive returns that can go up to more than 20% per year, are today bearing the brunt of falling prices.

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“In contrast, DeFi is quite healthy. When investors reversed their views on DeFi applications, such as Aave and Compound, and wanted to recover their assets, there was no problem,” explains Stanislas Barthelemi. Morpho belongs precisely to the DeFi category, which refers to decentralized finance, so it works without a centralized player or intermediary. In this case, the users themselves put their money directly on the blockchain.

Optimize the operation of Aave and Compound protocols

Morpho is an open source decentralized autonomous organization (DAO). “Morpho Labs is a service provider for Morpho, an algorithm that lives autonomously on the Ethereum blockchain and is a common good,” explains Paul Frabot. This lending protocol allows lending and lending of cryptocurrencies. It comes as an “optimization layer” on top of two already existing decentralized finance applications: Compound and Aave.

These two protocols allow liquidity to be deposited in order to lend it in exchange for interest. “But there is a big gap between what lenders offer and the rate at which borrowers can actually get a loan,” said Paul Frabot. A breakdown associated with a much larger number of lenders, who have to share earnings, than borrowers. To avoid this rate difference, Morph’s algorithm is designed so that two actors – the lender and the borrower – can directly enter into a peer-to-peer (P2P) connection.

“Morpho has identified a need and is going a little further than what already exists, optimizing the rates, thanks to the layer above Aava and Compound”, confirms Stanislas Barthelemi.

Within the app, you will always have to deposit the equivalent of the amount you borrowed in cryptocurrencies. This deposit serves as collateral (guarantee) for your loan. For example, if you want to keep your Ether instead of selling it, you can deposit it to the app and borrow stablecoins instead. “In the future, instead of selling your company shares to finance a project, you could use them as collateral and borrow ethers or stablecoins,” explains Paul Frabot.

Raised millions… and no income

“If successful, we believe Morpho has the potential to become an essential coordinating layer of a new global and decentralized financial system,” Spencer Noon, general partner of Variant Fund, said in a statement.

Morpho is already asking for “$30 million in cash” less than a month after launch. The app relies on crowdfunding to gain notoriety and attract new users. It currently generates no revenue for its developers, gathered at Morpho Labs, which has a dozen employees. “It is a disintermediated system, which includes the possibility of charging commissions on loans and credits, but this option is currently not activated”, specifies Paul Frabot.

Morpho Labs is therefore funded solely through fundraising. The structure has already raised $1.3 million in October 2021. “Today, we favor growth over profitability,” explains the young engineer. “The day the community decides, we will apply the fees,” he adds. Among the members of this community are investors in the Morpho token, who have the right to vote to change the rules within the protocol.

When the application will be widely used and handle a large amount of cash, small commissions will bring large revenues.

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