DeFi as the Backend for Fintech: Building the Future of Onchain Finance

Transcript

[Music] Hi everyone. Uh so today I'm going to talk about DeFi as the back end for fintech. Uh which uh looking at the sponsors of this event is a pretty trendy topic. Uh so I'm Paul from uh Morpho. So um co and co-founder Moro is a lending and borrowing protocol on EVM chains. Uh we have $7 billion of total deposits across a wide numbers of assets uh chains and uh we are leveraged as an infrastructure by numerous fintex exchanges such as Coinbase to power

lending and borrowing services. Okay, let me find the clicker. There we go. Okay, so FinTex um you probably familiar with those logos from different regions of the world. New bank from Leam, Alipe, Apac, Creo in Europe, Robin Hood in the US, etc. And what all those logos have in common are, you know, mainly the following things. They're very technative obviously you know they like software they have huge software engineering teams and they're you know

driven by this so they're super super agile they innovate at like you know very fast pace much faster than traditional finance and one thing they also all have in common is that they have their super let's say super good user experience super intuitive like interfaces uh often driven by mobile first uh which makes them extremely accessible, right? Especially for new generations. And so essentially the one thing to remember from FinTech in my opinion is that they're owning distribution and they're owning an increasingly high share of like the financial autoflow markets,

right? So Robin Hood for example 25 like million user plus uh Coinbase not exactly a fintech we'll come to that but 100 million users u ravalo 50 million users etc etc but the one thing that's interesting about those fintexs is that they own distribution but they don't really own infrastructure Right? So you've noticed, you know, you open your fintank app, you have a lot of money in it and you can invest into ETFs, right? Or yield products that are in fact like money market funds, bonds,

etc. So software, you know, has been very good at, you know, owning distribution and creating those great user experiences through FinTech. But then all the capital is rooted to traditional infrastructure, right? And so you guess it, you know, the purpose of of this talk is to essentially talk about how DeFi is an opportunity for FinTech to do a lot of things, but mostly to own not only distribution, but also to own infrastructure. And so we're going to chat about, you know, what does that mean for them and how that's, you know, going to enable them to supercharge their financial services and build the

best possible products that we've ever seen in finance. So this is essentially fintech in the front and DeFi in the back. And we like to call this the D5 mlet where like in the front you only see like the fintech. It's like a web two experience and has full feature parity with what you would have as like your traditional fintech experience. But in the back you have this like mullet like that is DeFi that supercharges those uh financial services as you could see on on Merlin.

And so okay why is that interesting? Why does that supercharge FinTech? Um mainly in my opinion four things right initially what we tried to sell D5 as back you know 10 years ago was like D5 was going to have those like operational efficiency gains that's going to you know remove a lot of the back office operations etc etc that's kind of true but really this is missing the point in my opinion of what are the four main benefits and the first is efficiency And so what do I call efficiency here? It's the idea that DeFi provides to all of those fints a unified back end. A unified backend

that's going to share liquidity and orders globally. So what does that mean in practice is that you're taking a loan from Coinbase. The loan is powered by DeFi which means that liquidity can be taken not only from the coinbased liquidity but could potentially be sourced from other sources. So you know if Ledger integrates like an earn solution to provide yield the USDC deposited in this earn can be actually funding the loans of Coinbase right for example Morpho is both in Binance wallet and the Coinbase app. So you could imagine that someone earning yield on Binance is actually earning those interest because someone from Coinbase

is borrowing that capital. And you immediately see that we're moving away from a world where everybody has its own fragmented backend into like a unified backend where all orders get aggregated which immediately means better liquidity, better pricing, etc. And you could already tell, and we'll talk about Coinbase back loans because obviously we're super proud to power like Coinbase with our lending services, but the rates that you get on as a retail on the Coinbase app through DeFi are insane compared to like the institutional lending markets. You get like a loan at 5% Bitcoin backed whereas like institutional lending markets trade at like eight or nine. And so we even

had like institutional like calling us and say hey what why is the retail getting 5%. While we well usually we beat the retail with our rates we're getting eight. How is Coinbase achieving this? And the answer is Coinbase is sourcing liquidity globally. Everybody can see the opportunity to lend to Coinbase borrowers and so everybody does it and there is good competition and hence good rates. So that was number one. The second is ease of integration and you could sum it up in open source right or open in general.

Frankly, you could build a Neo bank in less than a day with Chad GPT now because all the codebase is open source like all the account abstractions, you know, all the tools are becoming plug and play in order to have wallet infrastructure like gas uh abstraction, chain abstraction, etc. For example, like on base, you have the onchain kit that allows you to do all those like integration in literally two clicks. And you know, you could just ask Chipity, build me like an app with like a yield product that plugs on top of Morpho. You just give it like the Morpho API or like the Morpho smart contracts. It does it in less than a day. Okay, maybe it will take a few

prompts, but frankly, it's just like just super easy. And you if you compare that to integrating with a TRFI API that you know is a black box and you can't, you know, easily integrate because you don't have such a community of open source code. Well, it's actually quite insane. And we've seen you know FinTax uh in France and LAM integrate Morpho in like less than a week and it's been at large scale like for you know tens of millions of users. Okay, third one end to end ownership. So this one echoes back to what I was saying when fintex own distribution but they don't necessarily own infrastructure, right?

So what does that mean? Morpho is immutable, right? So I can't change the code like you know when a fintech or an exchange integrates with morpho to provide y or to or to offer loans. Well the code can't change. So what that means is that essentially the exchange or the distributor is an owner of the code, right? I can't like perform an upgrade or like rug everyone or it's not even technically possible, right? And what that means is that as a distributor, I can now as opposed to what I was doing with like my trfy like ETFs, MMFs, etc. I can build products

with confidence that, you know, I'll be able to uh, you know, not have to trust anyone. Essentially another interesting aspect of that is that users themselves if they have self custody of their of their assets through the exchange or the fintech have a much stronger pricing power. So in practice you know if you're in your fintech and they let you take your wallet out of this fintech app what that means is that you're not prisoner of your app anymore. You own the position on Morpho through the fintech. And if you don't like the interface anymore, if the product is not good, if the pricing is not good, or if you feel like the pricing is not fair compared to what the experience you're

getting through the fintech, you can just take your wallet and plug it into another uh fintech or or app. Number four, which is probably slightly less interesting than the third one when you talk to users, however, is definitely important for the long-term game. And it's simply transparency. And you know, if you take the example of loans, if you're a fintech or an exchange and you've gone through 2022 23, you probably think twice about offering other collateralized loans, right? And the reason is that many users got burnt because they were said that when you deposit collateral you know to to borrow

maybe this collateral is not reapcated and maybe you know we've seen the case you know FTX is a good example of that you know they were actually sending the funds to like other companies and they were trading with this capital etc etc. In the case of DeFi, well, you can actually prove your users and anyone can verify the state of where each dollar of, you know, those products is. And this, you know, just fosters trust and confidence, especially when fintech, their biggest challenge when they try to convert banks to bank users to fintech users is that they trust the bank more than the fintech because of the name, because of the brand and the legacy, etc. And so those tools, those

technology are little nuggets that are helping foster trust uh for for users. Okay. So what does that look like in practice? So I took the example of Coinbase uh Bitcoin back loans and the way Coinbase does it and I think they were really the first to have a large scale like DeFi integration that provides users end to end ownership of their lending and borrowing position and you go to the Coinbase app and you the retail app not the wallet right you have no idea the loan you're going to take is going to be operated with DeFi and so how does that work you click deposit BTC and you take

along and it's written powered by morphone so all the wires are completely hidden but behind the scenes well there is a pass key right they you do like this face ID and what that does is that it's going to generate a private key and this private key is going to control a smart wallet and this smart wallet is going to take your BTC tokenize it into CBBTC deposit it on base deposit it on Maro take a loan from Maro in the form of USDC, send it back to the Coinbase account, turn this into USD, all abstracted, no gas, no chain, you don't even know it's powered by DeFi, right?

And the user gets better rate 5% as I was saying right now and at extremely large scale. We, you know, in just and I'll talk about numbers in a moment, but we reach like in in just a few months um more than a billion dollars Okay, give conversion in PDF does not work. So I can't do the demo, but you can of imagine that it's like a web two app with no web free component. Okay, in terms of numbers, uh just a few months, this is the first time DeFi is actually used for consumer loans like borrowing home uh borrowing to finance like home

loans or or cars or repaying like credit card uh debt etc. at scale. Obviously, you know, like we had users before taking like, you know, from the Morpho app, the Morpho interface loans to finance their, you know, mortgages, whatever. But this is the first time this is accessible to hundreds of millions of users, right? And so you can actually, you know, we have tens of thousands of users uh in the Coinbase app directly using Moro on base and today Morpho has become the largest D5 protocol ever on a layer 2, right? All protocols, all chain included. And that's mostly I think that's 40% of the volume comes from Coinbase directly. So it shows the power not only for you know distributors but also for D5 protocols

themselves the importance of plugging into those distribution channels. Here are a few other examples. Um you know I mentioned conveys but we are also integrated with ledger with safe with trust binance wallet lemon delock etc etc. And the interesting thing to remember from this is that they have a shared backend. They all operate with the same lending book, right? The yield of one is going to power the loans of the other and vice versa, right? And the goal, you guessed it, is to make this global to be the internet protocol for financing that's going to connect anyone that has a need for financing with anyone that has an excess of capital and want to generate yield, right?

to finish what we are observing and that's I I wanted to add this observation because I think it's very interesting is that we're observing just a convergence of all those financial apps right if you look at like the you know the revolute the Robin Hood the Alip pay you know CLA they're all making steps toward the crypto world and then you have on the opposite sides you know Coinbase launching a card for example making a step on the other sides and it's interesting to see that those two worlds are converging into like financial super apps that will have all the features powered by global rails which are you know defi and and crypto rails.

So what does that look like and that's the final slide of of of this presentation is a shared back end for everyone. You know, we talked about exchanges, we talked about fintex, we could chat about banks as well, which is like the next step in like this this evolution and they directly offer, you know, financial products from the DeFi infrastructure and, you know, maybe you need like a few intermediaries to interact with those primitive protocols. So, in morpho, we call them like asset creators, but in traditional finance, they're known as asset managers. And uh you have those like operators of D5 that will interact with this global book. You know in the case of Moro that's

financing lending but you could have like a unis swap or a hierrome like trading book. And so you need those like smart players to operate that like maximum efficiency those financial service on those global books to distribute. So that would be the asset manager in in the graph to distribute those into like exchanges, fintex, banks which from the previous slides we were saying are just converging at just like fintex or you know just one category. Okay, that's pretty much it. Uh thank you very much and we love to take questions if any.

[Applause] Let's go. One in the middle. Um, thanks a lot Paul for a great presentation. Uh just maybe a naive question, but when you look at DeFi infrastructure, um are there actors that somehow uh own DeFi infrastructure without, you know, DeFi users uh or actors such as

myself not really knowing it. I mean, you know, for instance, uh whatever DeFi wallet I have or, you know, DeFi interface, uh I use an iPhone. So to some extent I'm you know I depend upon Apple or you know so you know could you elaborate on that because I'm thinking that you know if there's such actors they may come to realize that you know they own the infrastructure or they you know they could somehow claim a piece of whatever you know the great value that DeFi adds that they don't necessarily realize now and but you know right so I'm I'm going to give you an answer. Let me know if it does not answer correctly

and I and iterate. But essentially what I mean by end to end ownership is that with permissionless immutable DeFi stack, uh take the morpho stack for example, it allows you to configure the lending and borrowing use case that tailor to your specific audience, the specific risk, the specific compliance that you need for your use case, for your distribution. And it's immutable meaning that no one owns it and everybody owns it kind of like because no one can change it then you kind of own it and and and everybody owns it. So that's in that sense that I meant like um everyone owns like the defi

infrastructure of defi. And now to go more into your questions, I think that anyone that has distribution, whether it's like hardware, whether it's your media, uh because it's going to be so easy to integrate with financial infrastructure, I think anyone will end up, you know, offering yield services or loans in one way or another. Like any hub that has some form of idol capital will, you know, integrate into clicks with like morpho and and generate yields. So, I don't know if that correctly answers your question around the iPhone. Let let me know if if that's useful or if you need more clarifications.

Thanks. Good enough. Thank you very much. Thank you. Anyone else? Oh, over there. Oh, we have to stop. Okay. Sorry. Thank you. [Music]