Cryptocurrency prices have fallen in recent months, with bitcoin posting a more than 55% drop since late March. Cryptocurrency lending platforms such as 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 that Three Arrows Capital had invested in the crypto sector. Other players in the ecosystem may still falter.
And yet, this crisis context didn’t stop Morpho from raising a handsome amount. This decentralized funding project (DeFi) “just completed an $18 million round of funding,” software research and development company Morpho Labs specifies, in a press release published on Tuesday, July 12. All this with young developers just out of college such as co-founder Paul Frambot, 21, who only completed his blockchain training at Télécom Paris and Polytechnique at the beginning of the year.
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US funds less cautious
“In Europe, investors were suspicious, while on the other side of the Atlantic, the Americans approached us and we got in touch with them right away,” assures the engineer, who devised the Morpho protocol with Vincent Danos, research director at CNRS. American funds have therefore led this fundraising: Andreessen Horowitz (a16z crypto) and Variant, two renowned players in the sector. “In total, about 30 funds and 60 individual investors participated,” says Paul Frabot. Among them are French business angels such as Ledger co-founder Nicolas Bacca or Arianee’s boss Frédéric Montagnon.
If the United States has an edge in financing the sector, the emergence of funds for Web 3 in France should facilitate fundraising in the territory, without having to resort to American venture capital. For example, XAnge launched a €80 million fund for web 3 at the beginning of July, just a month after the creation of a similar €100 million fund by Cathay Innovation and Ledger, supported by Bpifrance.
Financing project audits and security
In the meantime, Morpho has raised all the money needed to implement his application and protect his protocol as much as possible from computer attacks. In particular, the fundraising will allow us to fund the security and auditing of the code we produce, which is extremely expensive,” said Paul Frabot. Two weeks of checking smart contracts, the “intelligent contracts” developed on a blockchain, will be billed around €300,000, he specifies. “We use a dozen auditors, we don’t compromise on safety,” he emphasizes.
Morpho was able to raise funds while lending appears to be in crisis. A seemingly paradoxical situation, if we don’t understand the difference between DeFi (decentralized finance) and CeFi (centralized finance). “Today, the CeFi is six feet below, mainly due to the lack of transparency from many players,” recalls Stanislas Barthelemi, a consultant at Blockchain Partner, a consulting firm affiliated with KPMG.
The CeFi refers to exchange companies and platforms – i.e. centralized actors – that help their users place their money on applications developed on blockchain technology. But some of these platforms, which are posting very attractive returns that can reach over 20% a year, are today bearing the brunt of the price drop.
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“Conversely, DeFi is quite healthy. When investors reduced 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 exactly to the category of DeFi, which refers to decentralized finance, thus operating without a centralized player or intermediary. In this case, 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 pre-existing decentralized financial applications: Compound and Aave.
These two protocols make it possible to deposit liquidities in order to lend them in exchange for an interest rate. “But there’s a big difference in interest rates between what lenders offer and the rate at which borrowers can actually get a loan,” says Paul Frambot. A failure related to the much larger number of lenders, who have to share the revenue, than borrowers. To avoid this rate difference, Morpho’s algorithm is designed in such a way that the two players – lender and borrower – can directly establish a peer-to-peer (P2P) connection.
“Morpho has identified a need and is going a little further than what already exists, by optimizing rates, thanks to a low above Aave and Compound,” confirms Stanislas Barthelemi.
Within the application you will always have to deposit the equivalent of the loan amount 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 into the app and borrow stablecoins instead. “In the future, instead of selling your company shares to fund 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 coordination layer of a new global and decentralized financial system,” Spencer Noon, general partner of the Variant fund, said in a statement.
Morpho is already claiming “$30 million in cash” less than a month after launch. The application relies on fundraising to gain exposure and attract new users. It currently does not generate any revenue for its developers, collected within Morpho Labs, which has a dozen employees. “It is a no-intermediary system, which includes the option to take commissions on loans and loans, but this option is not currently activated,” specifies Paul Frabot.
Morpho Labs is therefore funded solely through fundraising. The structure had already raised $1.3 million in October 2021. “Today we prefer growth over profitability,” explains the young engineer. “The day the community decides, we will charge a fee,” he adds. Among the members of this community are the Morpho token investors, who benefit from voting rights 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 revenue.
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