Rate Discovery: The Key to Fixed-Rate Onchain Lending

Transcript

Cool. Hi, everybody. So, I'm Merlin. I'm co-founder of Morpho. Uh so, Morpho is a lending lending network with close to 10 billions of total deposit across like many EVM chains. And we're basically providing an infrastructure so that anyone in the world can create the earn and borrow product. So, [snorts] today I'm going to talk about fixed rate, how to bring institution in in the DeFi space, and also talk about a little bit about the DeFi market.

So, right now the the on-chain state for lending is actually this 51 of TVL, 51 billions. We bring around like 30 30 plus curators in the space. Curator was not even a thing like 1 year and a half ago. This is something that the Morpho ecosystem has created. Before the the creation, the risk management was enshrined in lending protocols. Morpho kind of externalized that risk management to another layer where risk risk experts can underwrite risk and and and create product targeting specific

risk profile and type of users. On Morpho, there's thousands of market that have been created with many and various different risk profiles, again targeting many different users. And what we've seen is that the institutional interest is picking up. So, we started with centralized exchange that integrated Morpho like Coinbase, Gemini, Kraken, etc. And now more and more we are onboarding risk curators, institutions, banks to use Morpho as back end and infrastructure to provide yield and and borrow product to their users.

But, um we can see that actually the largest pools of capital aren't here. Uh just for um the the sake of like bringing some numbers, uh the the entire bond market is one 150 trillions of dollars. Uh so, I'm I'm I'm speaking in trillions, so not billions. It's 1,000 X uh the current state of DeFi, approximately. So, it's insane, and uh there's a lot of growth that we can bring to the DeFi space. The problem is that this pool of capital is actually stuck in that um uh that legacy financial system, and there's a

good reason for that among others, which is actually how interest rate model work in the DeFi space. So, I've put that um this is the the interest rate model that is working uh right now on on Moola, but it it's actually basically the same for every uh lending pools, where um you have this curve mechanism, where at 0% utilization on a given market, so 0% utilization that the supply is actually not borrowed, um then you have like a low low rates, uh and as the utilization increases, uh that means that there's more borrowed demand, the borrowed demand increases,

then the rate uh the rate increases. Um what is the the logic behind this is as there's more demand, uh we you want to uh raise the rate so that lenders will come in to seize the opportunity, or borrowers will repay and bring that back to maybe a state of equilibrium. That kind of equilibrium is actually um not um um um not like uh led by the market. Uh It's not like market pricing. It's mostly like usually dials that or risk risk firms that are going to update the parameters of that curve

depending on the market conditions etc. But it's a lot lagging solution and and not market driven. On Morpho to be specific so you have this curve mechanism that can see on on top and then you have the adaptive mechanism which is for instance let's say the utilization is 100% for a few days. That means that users really want to borrow on that market. Then what's what is going to happen is that the curve is going actually to move upward so that the rate will increase and and this is to reflect maybe some macro changes in the ecosystem. So I don't know if

since the Fed decides to lower the rate or increase the rate. If you have a static curve like on the on the top you won't be able to actually you you won't be actually to capture that that change. With the the adaptive mechanism you will you will be able because it will adapt depending on on that utilization. So that's great. That that's something that works and has been there for the past past four years but has like severe limitations in what actually you can do. So for instance you can't you can't have you have no productivity on the rate so it's variable.

Each block it updates, it changes and you have no ability to actually plan in advance and say okay I'm going to have the 4% fixed rate for the next six months then I can plan and maybe do arbitraging, etc. Those kind of things are like becomes very, very uh hard to to do. Also, institutions usually they they work with terms. So, they know how much they are going to borrow during which period. They know there's there's a redemption period that you can that you need to match.

There are like some some terms. They have like different rates depending on their credit risk, etc. This is impossible to capture with a variable rate solution. And as I was saying, no long duration capital. You can't borrow for a year or two or three because first you don't have predictability. So, there's no way you can say like, "Oh, I'm going to borrow on that market USDC for the next three years." because maybe you'll get wrecked in a month because I don't know whatever has blown up and you you get wrecked in terms of rates.

So, because of all these limitations, a lot of institutions like the product that we are offering to them is actually not matching what are the needs and requirements. So, like above compliance, legal, etc., which is another topic that we won't discuss today. This one is actually like not fitting their what they need. Why why did we end up with variable rate? Reason is just like it's super simple. You have a formula. It's return on chain. It's a few lines of code. It's automated. It updates at any any block.

It's super simple to understand. It provides like instant liquidity. You can like go out, go in atomically. It does not require um like sophisticated people just because everything is like automated. You don't need to market maker. You don't need a risk curator to kind of underwrite the the risk and the pricing. You you can it can work even with very low liquidity. And also because it's simple, you don't need like I mean it it's not super gas intensive.

So you can work with that and it works very well. What but as I said it's it has several limitations. So why bringing rates and what rate discovery actually means? So the same way that more full like delegated the risk management instead from the protocol to the curators which allow to kind of scale the risk management and create many product different products at for different type of users. We are going to externalize the risk the pricing system. What does it means is we think that instead of having the doubt to

price and set the rate, it should be actually externalized to those that are underlying the risk. If you if you underwrite the risk, then you put a price on that risk and then you should be able to actually set that at the market level and like make and create offers that represent that instead of having one rate that govern them all that is the same for anyone with like different risk profile, different creditworthiness and maybe different duration. That does not really make sense.

So what what fixed rate will unlock in the device space is actually like as I said predictability. If you know that for the next month you're going to pay 2% then you don't feel to be to get wrecked. You know you can like do much better like tax reporting, accounting, etc. Um also it it matches institutions need to bring like to have like a fixed rate. Um it it brings like accurate pricing. So, you can if you identify the creditworthiness of specific users or entity, you'd be able to say like, "Hey, this guy I think is worth like 3.5% for the next month." Um and also you can like bring long-term fuel long-term

ambition, which is one of the reason and mission of the of the Morpho protocol is actually fueling human ambition with like by allocating and allowing any capital that is idle on Earth to be to be lent out to people that wants to be to to build to build things. Um what does it unlock? Many things. You can like create a bring corporate treasuries, you can bring equities on chain, you can bring bring real estate.

You can also bring like receivables. It's not written on the slides, but you have like payment service providers that have like many receivables. They want to they need like maybe instant settlement and right now they need to do that in the legacy financial system that like charge very high fees. They need to roll very often with a fixed rate. Fixed rate is a requirement. They don't want like variable. And all of these kind of things are like enabled by providing fixed rate. on chain.

But to build a fixed rate infrastructure, you need a lot a lot more things that that were not there uh of 4 years ago. And at Morpho, we built like for the the past four four years, we actually built and learned within the ecosystem to build that that solution. Um so first you need a a role separation. What does it means that uh we you provide the infrastructure uh that is immutable neutral so that on top of which like anyone can build uh products. And then the risk layer is actually externalized to um to a set of risk managers and curators that are underwriting the risk and also

are going to price that risk and make offers. So you need a live ecosystem of sophisticated actors. So the curators, the market makers, uh the funds, uh the hedge uh hedge funds, uh big whales, custodians, etc. So you need all those actors to uh actually come together and and to make the the ecosystem to thrive. And finally you need the right infrastructure. That means that a neutral immutable permissionless uh very simple infrastruc- uh infrastructure. And this is what we've uh we've built. And this is more for TBA. So to be announced. Uh I'm not going to to leak the the name. But we're we've built uh lending protocol where

anyone can on Earth can like make and create offers. So it's intent-based lending pro- uh protocol where you can say, "Hey, I want to lend my USDC to those bunch of people at that uh that rate." And maybe you can specify a a range of rates. Maybe you can specify that you only want to trade with people that have KYC 1 2 3, etc. And so you can have like call call backs, many other mechanism that makes like the the the offer very flexible, very rich in what you can specify. And instead of like um allocating that capital to one single

market and then you're kind of stuck in that market. You can actually create broad broad offers uh so that like anyone that match that offer this is actually settle on chain and then they get the money. So, you don't have to commit the the capital and you can update every day like you offers every minutes if you want depending on on the markets. And we think that this will unlock a lot of things especially like all institutions coming on chain. Um and uh again this is like a so I don't have the mullet you can see it but trying the stash at least.

Uh um So, you can see that fixed rate market are the primitive that we think is going to scale the DeFi space and this is missing at at the moment. So, thank you for for your attention. Um that's a that's a big thing that is coming in the next few weeks month. And uh super pleased to to like if you have any question feel free. I think I've a slight QA. Yeah, let's go. Okay. Yes, I wanted to ask so as a borrower will I be able to see the live >> [snorts] >> public order book or will it be private?

Yeah, so actually the order book um so first okay order book is that uh on the on on the Morpho TBA you're going to uh there there will be maker and and taker. A maker is someone that makes an offer and a taker is like some someone that looks at the all the offer and like takes like whatever he he he he he wants. Um so yeah, the order book will actually be on chain. So, if you create an offer you like sign something and then you can put that on chain but you could also have like signature like holding a like specific place so So can have like a sort of like a private uh order books uh as well.

Uh but the our vision is like starting with a public one. And so you can see on chain decode whatever the offer are and you can recreate another book and select the offer that you want. What that allows is actually true competition around the pricing. Because right now what what I I said is that you see the that like curve you can only go on that curve. And um there's no if you want to lend like lower rate or borrow like higher rate maybe because you want to borrow a lot more.

Uh the the market won't let you do that. While with Morpho TBA you'll be able to like you have like pure true competition at the market level. So if if there's plan to to make it private it's just that you can use Morpho as infra an infrastructure. You can like let's say you know an entity only you will lend to that entity. You can like sign an offer and just like send it to them and then they take the offer and they settle on chain. So you can have like a privacy like that.

And you use Morpho as like a settlement infrastructure. Hi. I would like to ask you mentioned the separation of roles when it comes to pricing the risk and also potentially transferring the risk. Do you also think about insurance in this case? And like is there a like a place for insurance in TBA? >> that that's a good question. Insurance one year ago nobody was talking much about it. Since six months like everyone is talking about it and I think it makes sense and it just like show that the ecosystem is getting more and more mature.

Um So what Morpho is not going to provide uh an insurance per se, uh but we are like we are in touch with many insurance provider at the moment, and some partners are coming to us and say, "I want to create earn or borrow product. I want to be insured for like I don't know, smart contract risk, risk of default, etc." And then we have like a pool and and uh like a pool of like some insurance providers, and we can do intro, etc. at the same same way we do with creators. But this this is coming like a a huge topic for some big partners.

We're at time, sorry. >> Okay. Sorry, I'm I'm I'm available after if you want. We can answer questions back there. We're at time, unfortunately, but thanks, everyone. Great, thank you. Bye-bye. >> [applause]