$MORPHO

Tomorrow, Morpho’s native token, $MORPHO, will become transferable. The Morpho token was launched in June 2022 but up until now users could only earn it by using the Morpho protocol. The token could not be bought or sold on centralised or decentralised exchanges. Tomorrow, users will be able to do just that.

Morpho was founded in 2021 and is one of the leading onchain lending protocols. We invested in its first financing round that same year and shared our investment thesis back then here.

The team initially launched its first product in 2022, which was focused on optimising rates across existing lending protocols. However, they soon identified an even greater opportunity: the creation of aggregated onchain lending markets. More on what that means later in the post.

Today, Morpho stands as one of the leading DeFi protocols, with over $2.6b in total deposits. The team exemplifies how relentless execution and a sharp focus on minimising distractions can lead to the creation of the next DeFi blue-chip.

Here, I outline some of the key themes related to Morpho, review their metrics, and explore what the future holds.

High level thoughts

A clear initial wedge

• Morpho initially developed an optimizer on top of existing variable-rate lending protocols, Aave and Compound, called Morpho Optimisers.
• At the time, Aave and Compound were the largest protocols, but their design resulted in a spread between the interest rates paid by borrowers and earned by lenders. Borrowers were paying higher interest than lenders were receiving.
• Morpho Optimiser addressed this by creating a product that made both borrowers and lenders strictly better off than if they were just using Aave or Compound. If you’re interested in how this was done, check this out.
• The Morpho team scaled this product to $2b in Total Value Locked (TVL) at its peak.
• What made this product so compelling was not only its simplicity and the immediate value it provided to users, but also how it helped Morpho build a brand and gain the credibility needed for its second, more ambitious act.

Pioneering aggregated onchain lending

• While developing the initial product, Morpho identified an even greater opportunity to pursue.
• Protocols like Aave and Compound were monolithic in their construction. They coupled both lending/borrowing functionality and risk management together in a full stack approach.
• The drawback of this approach is that every lender and every borrower in the market is exposed to the same risk parameters. It also leads to a bloated codebase that is vulnerable to security exploits and difficult to maintain.
• Morpho saw the potential to separate these functions and create a lending stack that decoupled lending functionality and risk parameters into thinner, separate layers.
• This led to Morpho’s second act: a lending stack with a lean base layer that focuses solely on borrowing and lending functionality, with a separate risk management layer on top. On Morpho, anybody can create their own lending market and customise their risk parameters.
• Morpho calls this an aggregated lending stack, because while it is modular in its construction it also comes with unified liquidity across its different lending markets. This means that while individual lending markets can be set up with different risk parameters, they can still share some of the same underlying liquidity.

From application to infrastructure

• By separating lending functionality from risk management, Morpho transitioned from building an application on top of existing lending protocols to creating a foundational piece of lending infrastructure that third parties could build any lending / borrowing experience on.

• Rather than the Morpho team setting all risk parameters for everyone on the platform, such as collateral types, collateralization ratios, or oracles, Morpho enabled third parties to develop their own lending strategies and set their own risk parameters on top of its infrastructure.
• Since launching, 54 vaults on Ethereum and 26 vaults on Base have been built by 10 independent vault managers.
• Notable vault managers include Re7, Gauntlet, Steakhouse, and B Protocol, all of whom are building independent, revenue-generating businesses on top of Morpho’s platform.

Executing on the DeFi Mullet

• Today, Morpho is widely integrated across various DeFi apps, including Instadapp, Brahma, Safe, and DeFi Saver to name a few.
• One of the team’s key focus areas moving forward is to integrate with products outside of DeFi. The way the team is thinking about its integration strategy is to grow from DeFi to centralised crypto apps (Coinbase, Binance etc.) then to fintechs (Revolut, Nubank etc.) and eventually to banks.
• The "DeFi mullet" thesis posits that the ideal intersection between fintech and crypto lies in each focusing on their respective strengths: fintech excels at customer acquisition and UX, while crypto offers superior infrastructure.
• Morpho is a prime example of this vision in action, with fintech products increasingly adopting Morpho’s decentralised lending infrastructure into their platforms.
• Here, Morpho’s CTO, Merlin, provides a technical overview of how the integration with SwissBorg is structured.
• As stablecoins become more widespread in various financial applications, they will require lending infrastructure that can seamlessly integrate and operate with them. Morpho is building that infrastructure.

Don't rush the token launch

• When the Optimiser product was gaining traction, the Morpho team could have made their token transferable then already. In fact, many were urging them to do so.
• However, the team believed that while the Optimiser product was solid, they had another even more promising product to build and did not want to launch the token too early as a result.
• Teams only have one shot at launching a token (or making it transferable). Timing it well, and having a launch strategy that plays into the wider product strategy is important.
• Now the Morpho team believes that they have a product that can truly revolutionise lending, which is why they have decided to launch $MORPHO.

Metrics

Deposits

• Total deposits including AMOs (automatic market operations) surpassed $2.6b.
• AMO refers to the integration with Maker, where DAI (USDS) is automatically minted to users that want to borrow from that specific vault.
• Morpho is live both on Ethereum and Base.
• 86% of the deposits, totalling $2.04b, are on Ethereum.
• 14% of deposits, totalling $323m, are on Base.

Loan volume

• Total borrow volume stands at $755m on Ethereum and $111m on Base.
• Approximately $36m has been generated in interest payments on Morpho.
• The protocol itself does not take any fees yet. All interest payments flow directly to the lenders and vault managers that take a cut.

Users

• While most of the Morpho deposits are on Ethereum, Base has more users. Approximately 78% of Morpho users use Morpho exclusively on Base.
• Higher fees on Ethereum result in fewer users with larger deposits whereas the low fees on Base attract more users making smaller deposits.

Vault managers

• Since launching in February of this year, Morpho vaults (excl. Maker) have made approximately $510k in revenue.
• Maker has earned approximately $26m in interest revenue.

Conclusion

• The Morpho team has successfully built not one, but two DeFi protocols, each with over $2b in TVL.
• Morpho has established itself as a DeFi blue-chip while also pioneering a new model for onchain lending and for building DeFi products all together (the protocol takes care of the code and third party managers build businesses on top)
• To maintain its leadership, Morpho needs to continue its strong execution within the DeFi ecosystem. On Ethereum, the competition is fierce with Aave.
• Key to Morpho’s future success lies in its ability to expand beyond DeFi:
  • Stablecoins are becoming increasingly widespread across fintech apps.
  • As fintechs adopt stablecoins, they will need new infrastructure that is compatible with these assets.
  • Morpho provides the necessary infrastructure for lending so that in the future all fintechs will enable their users to generate yield on their stablecoins through Morpho.
• DeFi and TradFi are still two parallel financial systems. Morpho is amongst the best positioned to bridge that divide.