What People Still Get Wrong About Crypto Lending

Transcript

I think one thing that might hold people back from participating in DeFi is this idea that there is risk involved. >> The community has been tricked into thinking that we should build a trustless system to be able to do under collateralized loans and credits, which is obviously wrong. The mechanism that we're building is completely crypto agnostic. It does not have to work with cryptocurrencies. It could work with like any form of tokenized assets in general. >> Project for me 5 to 10 years out, what does the shape of finance look like? >> One single database for the entire world. Paul, thanks for being here. You're building out Morpho. Tell us what is Morpho? What are you doing?

>> Morpho is a non-chain lending and borrowing infrastructure. So, we allow people on one end to earn yield and on the other end people take loans and that's done on onchain in an open way. >> For somebody who maybe is not into crypto, how would you describe what you're doing? Crypto is about exchanging money without banks and morpho is about lending and borrowing without banks, right? There's no intermediary and and effectively you can lend and borrow in a much more open without intermediate way. >> Okay. So disintermediated banking. >> Yes. Disintermediate access to loan like open access to capital in general to like if someone has an ambition and wants to do something and they can prove that they're trustworthy then they can

get a loan without having to rely on like a specific entity. What misconception do people have about what you're trying to solve? >> The biggest misconception about DeFi lending is that the protocols that operate the lending and borrowing engine are in charge of issuing the loans and that in the blockchain world, in the trustless world, the lending opportunity should be trustless and should be risk-free. And for approximately seven eight years, we've been building lending and borrowing protocols that was were understood as this like fully autonomous engine where the thing was trustless and nothing bad could happen.

Whereas in reality, what we realize building lending and borrowing protocols is that we should have trustless execution of the loans, but the loans themselves, you know, are obviously risky and that you could take losses from them. As a result, I think the industry have had a very hard time framing how collateralized loan could ever exist because you don't have legal recourse. People could simply run away with the money. the community has been tricked into thinking that we should build a trustless system to be able to do under collateralized loans and credits which is obviously wrong like is is not going to be the case. I think moving away from this to a model where the only thing that's trustless is

connecting people and executing the loan logic in itself but more letting the market effectively price the risk as opposed to you know getting the protocol to issue the loan you get the market to issue the loan. So I think that was like a key realization for us as we were building moro and that's I think still today is not well understood in in the crypton native Twitter in general. >> Yeah. I mean I think one thing that might hold people back from participating in DeFi is this idea that there is risk involved risk maybe that they don't want to take on. What would you say to people who have that hangup?

The morph's code is very very close to the code that you have in the traditional phenom like uh system. I think there is this misconception like association with like crypto and crypto volatility and prices where people get to lose a lot of money by just like investing and you know losing money due to the volatility. Whereas the mechanism that we're building is completely crypto agnostic like it does not have to work with cryptocurrencies. It could work with like any form of tokenized assets in general whether there are stocks whether there are like the safest like investment products in the world such as treasuries civil coins etc etc and I think you know the way one should reason about risk when they get into those products is effectively yes you have you

know mostly two things you have the operational risk like literally like the code is it safe and you have the market risk like when I'm the product I'm investing in it like is the person that is borrowing the fund going to repay right and those are effectively theoretically can be much better on chain because on the operational risk you don't have counterparties it's like executed purely into code and there is an argument to be made that open source code grows like safer over time because of how many reviews it gets and on the market side of things there's really not much that is different from a traditional loan that you would get except that again this time the loan is underwritten in the open, which means

that you have maybe much fairer competition to assess the price of the risk you're taking. Meaning that when some some borrow gets underwritten in in in the blockchain, you have a lot of lenders competing to give you the best and fairer price, right? So, you're going to take risk and you're going to be compensated fairly for the risk you're taking. Whereas in the traditional finance world, maybe you're taking a bigger risk, but with a financial rewards that's going to be to a lesser extent, right? So anyway, so I guess the way one should think about the risk in crypto lending versus in TRFA lending is like through through the similar like risk analysis, but with blockchain technology having the potential to lower those risks in general.

>> You're having lots of conversations with tradi institutions, how much education do they require about DeFi and about what you're building? >> A lot. uh frankly but also the good news and surprisingly good news at least it was a surprise to me they learn very fast approximately 2 years ago like a year ago we were like spending with like those institutions who were mostly like the research labs like they were like trying to do a state of the market or like just to to inform their leaders to make sure they're not losing anything very important but there was no actual like business drive right but as soon as they started to sense business drive and this business drive meant like literally

like distribution like distribution is coming on chain. There's a lot of money on chain that's underserved in terms of yield in terms of financial products and they see this as a business opportunity and as soon as they realized that they started pouring in like a lot more resources and they started learning much faster than what they used to to do in the past. And so the the bad news is we do have to educate pretty much like all Wall Street, right? At the same time, the good news is that they learn super fast, right? Hopefully they don't learn too fast, right? Because we want to preserve an edge for some time and grow alongside them. That's I'd say the the big like surprising like takeaway of the last 6 months.

>> Who's been most surprising in terms of their ability to get up to speed so quickly? And conversely, who are you uh embarrassed about? I think the way I think about like the the adoption like curve is like wallets, exchanges, fintech, neo banks, asset manager, banks, those are like the order by which this sort of like disruption uh order. So like wallets are like the fastest to integrate decentralized finance and then you have the exchanges and you see like the Coinbases of the world that start moving on chain and they start like removing their servers to like move on chain and then you have fintexs that are like oh like you know all this like crypto technology could effectively make me my financial services much better and so they're following the move that

Coinbase is doing and the neo banks are kind of like in the middle slower than fintex but they they're they're still quite technative companies so they move fast which leaves us with the two trati pillars which are like the asset managers and the banks. I'm impressed by asset managers. I'm embarrassed by banks in general. There are exceptions in both cases, right? But asset managers have definitely been like the fastest to execute. >> You're working with Apollo. >> Yeah, the Apollo of the world like Apollo has been particularly impressive by how fast they've they've been moving.

But you know other asset managers have been great as well like you know like the the Fidelity team that uh the Black Rockck team obviously and and and a bunch of others. But I will say Apollo has been specifically like very very impressive. And from there you have the banks right and the banks they have to obey to a much like you know more important set of regulation at least for this specific type of activities which really prevents them from like moving as fast and they're still in the paradigm where when you get to talk to them they take a lot from you uh but they don't give back as much right it's not entirely true for all the banks right we have some some exist surprising but in in Europe and France we have like the

largest like banking adoption where like they're launching stable coins and they're launching their morph volt and we have for example the sock gen in France announced that they're moving progressively their loan books on on morpho which I was not hoping to get like a year ago right and and it's been very impressive and it's getting a ton of traffic >> is that just because they like you you're French so you guys hit it off >> and I'm sure like the the the friends you know vibe helped [laughter] like uh you know like our office is not so far away like they come to our office. We go to their office like every now and then. So that surely helps.

>> Proximity helps. >> Also, I will say that SGen is probably by far the most like forward thinking bank on crypto in the world. They were like issuing onchain loans like 3 years ago. they have their own stable coins and in general like European banking is waking up especially as they don't see any euro stable coin like really taking off and you know some could argue circle is doing a good job with your which is true but it's nowhere close to the state of adoption that USDC has no there's a massive gap and opportunity to take like you know the crown of the euro stable coin especially if you're European native like it's it's very hard for circle as a US-based company to like claim that that crown even though I think They're doing a good job.

>> 99% of stable coins are denominated in USD. Do you think there is an opportunity for a Eurocoin? Can it exist and compete in >> that environment? >> There are a lot of people that get paid in euros, right? And so that reason alone should make it a big enough opportunity for, you know, settling and paying and storing value in euro. I'm interested in a euro stable coin that yields, right? Like I I get paid in euros and right now like it's widely underserved in DeFi. Hopefully it was more for we've widely adopted Euro stable coin much more. It's been a big thing and you know maybe also like those Euro stable coins you know frankly I see free path for for them like either they come like from a big fintech or a big bank/ exchange uh a big bank or they

come from circle I think it's going to be like one of the three. Not sure what the central bank is up to these days with the coin as well. They had plans it changed a lot. Okay. So, project for me 5 to 10 years out, what does the shape of finance look like? What does the landscape look like? >> I didn't have a financial background. I had a computer science background when I started in DeFi. And so, what I learned about finance over the last four years of like you know talking to all the largest financial institutions of the world, all the payment company etc. And as I was building from scratch and first principle, I had like zero bias about how to build a financial service myself.

We built this as out of pure intuition of like what a financial service should be. This experience essentially taught me one thing about finance that finance is like essentially 50,000 different banks and credit unions that all have se segregated infrastructure like literally servers and databases that are segregated and they don't trust each other very well. they don't, you know, connect very well with one another. And effectively the entire inefficiency of the financial system comes from the fact that you have 50,000 databases that are asynchronously updating each other that don't trust each other and requires an enormous amount of middlemen that effectively update the values and the

entries from one place to the other. And you pay like 25 different intermediaries in order to connect one database to the other. you don't even know what database exists. So you need a payment network to connect the different banks and you have to make like the information secure etc. And when you look at this, you're like, "Wow, like that's a huge mess, right?" And then you have Ethereum on the other hand, which is like one single database for the entire world, like one single computer for the entire world where you don't get to have this mess of like updating the different entries and having different trust levels and all this like complex web of intermediaries.

And so I can't help thinking of like painting a much cleaner picture of finance where first we're all operating in the same computer. So there is no need for the middleman to update quote unquote the unupdated like databases and communications. So that's the first thing. The second thing is that the system is open meaning that the competition is operating in a truly genuinely fair like uh fashion which means that for the first time ever you're going to have the value that has been concentrated in those inefficiencies that's going to be pushed to the to the hedges of the network.

like the consumer is going to benefit immensely because whatever financial product that they used to have in a closed fashion is going to be superpowered by by the open blockchain. The reason being that when the system is open uh you get to beg much more liquidity and aggregate much more intense from the entire world. So, we were thinking about loans, but when you're going to ask for like a mortgage, instead of going to a specific bank, you're going to come to the open blockchain. It's going to say, "Hey, here's why I should be trusted." And then you're going to have the entire world quote you on your interest rate and say, "Hey, we'll give you 3%." And maybe GP Morgan is going to say 2.8 hate and maybe a random student in Argentina is going to have his own quant model and it's going to overrite you and it's

going to be like this massively competitive open network where anyone gets to participate and anyone gets appreciated by their own fair value and and their fair like creditworthiness and so you know fundamentally I don't think like um we're going to have like no you crazy like financial primitives like the financial primitives are you know going to roughly be the same like you know you're going to have options you're going to have oblig applications and you're going to have trading. The main difference is that because of how open the system is, it's going to be widely more efficient. So the prices, the take rates are going to go down widely. So that's one. The second is like the integraability being so easy. It will be much easier to get access to financial products in general just because

technologically it's super easy to integrate into a single database as opposed to integrate with like 50,000, right? And both in terms of like moving from zero access to an access to financial services, but also in terms of like having a much deeper and broader access to diversified like financial primitives and also much more personalized. So really frankly like efficiency and like much lower take rates uh much broader access to a much wider set of financial services that are much more personalized are like the key main differences when you run finance on chain.

>> It's a compelling vision for the future. >> Yeah. >> Lightning round. All right. Worst piece of advice you've received as a founder. >> Join an incubator. Yeah, I guess or wait like I I got some investors telling me like, "Hey, you should finish school before like starting Marvel for like before talking to us." Obviously, that wasn't you guys. >> Probably. I would be very surprised. >> You didn't even ask if I was a student. You just invested. And you didn't know I was a student, by the way. I never told you but >> not [clears throat] into the credentialism over here. >> What book would you recommend people read? >> Read. >> Fantastic. I love is awesome. Like I mean I I >> Chris Dixon's book fantastic. Like it truly is. It truly is a very good book.

Like and I really mean it. Like we were lacking one like one single book where you get like some like true like crypto wisdom and like real web free wisdom like not just like the crypto trading aspect but like really the computer science aspect and like what effectively this world like industry brings to the world. >> Biggest productivity hack. >> The thing about productivity like it's the sum of tiny things that you optimize here and there. I think for me like one of the latest thing I learned is like this Slack feature where you can do like the catchup messages. I don't know if you see that. It's only available on the phone unfortunately. But for whatever reason you catch up so much faster with this like feature which I I find insane >> and you sort of like swipe left and

right like mark on red mark red. >> But here is a good one. Like when I walk from one place to another I turn on like chat voice and I ask it like a bunch of questions of things I don't understand. Right? So typically I'm in a trapfy call like you know with an asset manager they for a bunch of terms I don't understand and I pretend I do and I'm like yeah and I just write them on my to-do list and then from my to-do list like when I walk from some place to another I talk to chip and I ask it like hey can you explain to me about this term or about this thing and then you go very deep while you walk and that's like a very nice way of making ws productive when you go from one place to another

>> that's amazing that's like the uh the clearly premise of cheating on Everything. Yeah. The AI company. Final question. Smallest hill you'll die on. >> Yeah. Probably something around preserving the French culture. >> Which aspect of the French culture? >> Food. Probably >> butter croissants over other types. >> Yeah. Yeah. >> Okay. >> I think butter croissants is a perfect example. I in New York I paid like $8 my poca. Uh which to me is insane. Like it was not even close to be as good as like your random French bakery. So So I think that would be like a good one. And in France, it's like $1.

>> I recently learned that the shape of a croissant dictates the ingredients that were in there. There's like actually a French law where straight croissants are made of butter and curved ones can be made with other oils. This is actually a very important distinction. I don't know if they follow it in America, but >> No, it's very important. If you don't have transparency in bakery, you end up buying like industrial croissant like >> you need transparency spoken like a true DeFi advocate. [laughter] >> Yeah. Croissants transparency. >> Yes. All right. Thank you so much, Paul. >> Thank you.