Despite the crisis in the crypto sector, Morpho’s decentralized financing project raises a handsome sum

Cryptocurrency prices have plunged in recent months, with bitcoin showing a decline of more than 55% since the end of March. Cryptocurrency lending platforms, such as the Celsius Network, have frozen withdrawals and are facing serious liquidity problems. One of them – Voyager Digital – even went bankrupt, in the wake of the liquidation of the fund Three Arrows Capital invested in the crypto sector. Other actors in the ecosystem can constantly waver.

And yet, this crisis context did not prevent Morpho from raising a good sum. This decentralized funding project (DeFi) “has just completed a $ 18 million funding round”, software research and development company Morpho Labs specifies in a press release released on Tuesday, July 12th. All this with young developers just out of their higher education, like its co-founder Paul Frambot, 21, who first completed his blockchain education at Télécom Paris and Polytechnique earlier this year.

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US funds less cautious

“In Europe, investors were suspicious, while Americans on the other side of the Atlantic approached us, and we immediately joined them,” assures the engineer, who envisioned the Morpho Protocol with Vincent Danos, research director at CNRS. US funds have therefore led this fundraising: Andreessen Horowitz (a16z crypto) and Variant, two recognized players in the sector. “About 30 funds and 60 individual investors participated in total,” says Paul Frabot. Among them are French business angels such as the co-founder of Ledger Nicolas Bacca or the boss of Arianee Frédéric Montagnon.

If the US has a head start 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 US venture capital. XAnge thus launched an 80 million euro fund dedicated to web 3 in early July, just one month after the creation of a similar 100 million euro fund by Cathay Innovation and Ledger, supported by Bpifrance.

Fund project audit and security

Meanwhile, Morpho has already raised the money needed to implement its application and protect its protocol as much as possible from computer attacks. “The collection will in particular make it possible to finance the security and revision of the code we produce, which is extremely expensive,” says Paul Frabot. Two weeks of revision of smart contracts, the “intelligent contracts” developed on a blockchain, are billed around 300,000 euros, he clarifies. “We use about ten accountants, we do not sacrifice security,” he insists.

Morpho was able to raise funds while lending activity appears to be in crisis. A seemingly paradoxical situation if we do not understand the difference between DeFi (decentralized finance) and CeFi (centralized finance). “Today, the CeFi is six feet below, 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 – hence centralized players – that help their users invest their money in applications developed on blockchain technology. However, some of these platforms, with very attractive interest rates that can go up to more than 20% per year, today bear the bulk of the price drop.

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“Conversely, DeFi is pretty healthy. When investors wound up their positions on DeFi applications, such as Aave and Compound, and wanted to recover their assets, there was no problem, ”explains Stanislas Barthelemi. Morpho belongs to the DeFi category, which refers to decentralized financing, and therefore operates without a central player or intermediary. In this case, the users themselves place their money directly on the blockchain.

Optimize the operation of the Aave and Compound protocols

Morpho is a decentralized autonomous organization (DAO) and open source. “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 makes it possible to lend and borrow cryptocurrencies. It comes as an “optimization layer” on two already existing decentralized finance applications: Compound and Aave.

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

“Morpho has identified a need and goes a little further than what already exists, by optimizing rates thanks to a layer over Aave and Compound,” confirms Stanislas Barthelemi.

Within the application, you must always deposit the equivalent of the amount you borrow in cryptocurrencies. This deposit serves as security (guarantee) for your loan. For example, if you want to keep your ether instead of selling it, you can deposit it on the app and borrow stack coins instead. “In the future, instead of selling your corporate shares to finance a project, you can use them as collateral and borrow ethers or stack coins,” explains Paul Frabot.

Millions raised … and no revenue

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

Morpho already claims “$ 30 million in cash” less than a month after launch. The application relies on fundraising to achieve fame and attract new users. It currently generates no revenue for its developers, gathered in Morpho Labs, which has a dozen employees. “It is a disintermediated system that incorporates the ability to take commissions on loans and loans, but this option is not currently activated,” Paul Frabot clarifies.

Morpho Labs is therefore funded exclusively through fundraising. The structure had already raised $ 1.3 million by October 2021. “Today, we prefer growth over profitability,” the young engineer explains. “The day society decides, we will charge fees,” he adds. Among the members of this community are the investors in the Morpho token, who enjoy the right to vote to change the rules of the protocol.

When the application will be widely used and will handle a large amount of cash, small commissions will earn big revenue.

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