The bankruptcies of decentralized finance platforms Celsius and Voyager Digital did not sign the sector’s death sentence, far from it. In any case, venture capital funds still firmly believe in it. However, a distinction is being imposed in the landerneau of web3, between the “good” decentralized economy, the real one, and the “bad” one, which is not really decentralized. ONE storytelling which tries to make sense of the berezina the sector experienced last month by pointing out the culprits: so-called “centralized” financing or “CeFi”.
By “centralized finance” we do not mean traditional finance, banks, brokers and traditional financial intermediaries. But platforms like Celsius, to which users have entrusted their cryptocurrencies to place them, and in short, did anything with the aim of seeking unattainable returns. In DeFi, everything would be fine in the best of worlds, and why not until proven otherwise.
Decentralized financing raises more funds
What we can already see is that DeFi applications are on a very clear momentum in terms of fundraising in June ($624 million, more than double the average for previous months), while CeFi fees fell slightly. However, they are at a much higher level ($1.9 billion), according to data from research firm Messari for the first half of 2022.
Generally speaking, investment funds continue to raise money to invest in crypto despite the economic climate. Variant, for example, completed a new vehicle for $450 million in late July, mainly to invest in the start-up phase.
morpho Labs, young French hopeful
It turns out that Variant invested in mid-July along with about thirty other funds (including Coinbase Ventures, Semantic and XAnge) and about sixty individual investors in a French start-up called Morpho Labs, a new player in decentralized finance . The “true” since the startup has developed a protocol that allows lenders and borrowers to connect peer-to-peer, calculating an optimized interest rate thanks to a dynamic allocation system. The funding round, led by Variant and Andreessen Horowitz (which certainly seems to be increasingly interested in France), amounts to $18 million.
The Morpho Labs protocol, created in 2021 by a student from Polytechnique and Télécom Paris and a research director at CNRS, was developed as an overlay on the decentralized loan protocols Compound and Aave, which are a kind of money markets for cryptocurrencies. Through smart contracts, they aggregate supply and demand for liquidity through “liquidity pools”. Mr. X can save by putting his money in the pool. When Mrs. Y borrows, she “secures” her loan by blocking an amount greater than the loan amount, and the cash is released from the pool. This security is liquidated if it is not repaid.
smart contracts, nothing but smart contracts
Everything is pooled, so the savers share the interest (of which orders of magnitude are more reasonable than those promised by Celsius, for example). To maintain a liquid market, ie. moreover, to allow lenders to recover their assets at any time, the amounts lent are always greater than the amounts borrowed. Finally, there are more lenders than borrowers. As a result, interest rates, calculated on the basis of supply and demand, are not optimal for either the lender or the borrower. Everything happens through smart contracts, without human intervention.
Morpho Labs adds a layer to this system by matching loan supply and demand, “one-to-one”, by removing these two matched users from the pool. The lender’s money is therefore used 100%, and he does not have to share the interest with other members of the pool. In cases where P2P doesn’t work (no matching, or the lender wants to withdraw their money when it’s fully borrowed), the bottom layer takes over and users switch back to Aave or Compound (with lower rates).
the security challenge
Morpho Labs assures that $30 million in cash is already developing in their protocol. At the moment the startup is not remunerated, but in the future the idea is to charge a commission on transactions.
The French start-up is an example of truly intermediary-free decentralized financing, which would therefore be the alpha and omega of the future of crypto-financing. If it has developed less so far, it is for several reasons. First of all, less attractive prices than for centralized platforms (but we understand why, if everyone likes Celsius). Then a more esoteric operation – although more transparent – at the level of the user experience and fewer functionalities (trade, conservation, etc.). And the lack of support for fiat currencies. To their advantage, they generally make it possible to place savings in cryptocurrencies without having to block them for a minimum period.
It remains to be seen whether these applications of decentralized economy will resist in terms of IT security. Because if it is only the code that makes law, it is also the code that can fail.