Justify Everything: At Morpho, Doing Less Enables More

When Coinshift spoke to Sébastien Derivaux and ADCV of Steakhouse Financial earlier in Q4, we asked them what they were most excited about in the space right now. Their answer was clear: working with Morpho. The team is young and visionary, the Steakhouse co-founders told us – and the protocol clean, streamlined, sophisticated in its simplicity.

We couldn’t agree more.

Since 2021, the Morpho team has been rethinking the foundations of onchain lending, creating a streamlined infrastructure that merges efficiency and security. Morpho's first product, the Morpho Optimizer, made waves by enhancing the efficiency of leading DeFi protocols such as Aave and Compound, reducing inefficiencies in liquidity utilization while maintaining compatibility with existing systems. They’ve been pushing the boundaries of what decentralized financial systems can achieve ever since, equipped with their very own built-from-scratch protocol and a refreshingly native (and very necessary) "back to basics" approach. 

Morpho is poised to fundamentally change the way lending works in DeFi – to say nothing of traditional finance – setting an independent new standard in onchain infrastructure by connecting asset managers directly to end users. At Coinshift, we’re fans of their super streamlined, zero-compromise solution and groundbreaking approach to yield and liquidity optimization (among other things). In fact, our csUSDL token is built on Morpho's refined non-custodial protocol, which allows users to benefit from lending yields and competitive borrowing rates, without intermediaries.

Coinshift editors caught up with Morpho CEO and co-founder Paul Frambot, who spends  most of his time between Paris and New York – that is, when he’s not on his annual, roughly two-month long world tour of crypto conferences. When we spoke, as Paul was about to make his way to Devcon in Bangkok, he wrote on X: “I hate this kind of narrative, but DeFi Renaissance is truly what it feels like rn.” 

The post got our attention.  

CS: What does “DeFi Renaissance” mean to you?  

PF: My answer is probably going to be very different from what other people have been saying. Obviously, there is the price component and the Twitter momentum that everyone’s feeling from that. But to me, what makes it a real renaissance is deeper than fluctuations in the market: distribution partners and institutions are becoming interested in DeFi in a way that I have never seen before in my three years of building in this space. It's not just about the impact of the election, either  –  this started happening three or four months ago. The fact that prices have gone back up supercharges that energy, but we’re seeing people and institutions integrating DeFi as part of the core financial infrastructure for their individual use case. That gets me insanely excited. 

CS: Morpho was founded in 2021 – another year of record growth in crypto. What pain points, market gaps, or broad concerns were you responding to when you began? 

PF: I was 19 at the time, but I had already spent a few years trying to build companies. All of them failed. I had been studying consensus algorithms and distributed computing at university, and I started to think, “why not do a startup in a field of something I actually know?” Consensus algorithms brought me to blockchain, blockchain to crypto, crypto to DeFi. Then, from DeFi, I started looking at lending. The first thing that struck me about DeFi lending was that the interest rates were much lower for lenders than they were for borrowers. If you look at AAVE, you could be paying 3%, but earning 1% – that’s a huge gap. The first Morpho protocol was created as a solution to bridge the gap between the two rates. It's a pretty trivial arbitrage, but the idea was to allow users to pay 2% and earn 2% instead. It was essentially enabling peer to peer matching in which borrowers would pay exactly what lenders would earn, creating a net positive compared to existing solution. The money would flow directly from one user to the next without going through any complex implementation details.

We raised funds at university – twice – and when we had $20 million, we obviously left school and launched the project. It went well. We got to $2 billion in TVL. The thing is, what we were building on top of was too restricted for us. We were capped by the size of AAVE. So we decided to rebuild everything, our own thing, from scratch. 

CS: Bold move.

PF: It was. We had to deliver. We were building on the fastest-growing protocol at the time, and suddenly we had to drop all of it and build something completely different. But that’s what we did, and that’s what we have now. A few months ago, we raised $50 million in a round led by Ribbit Capital – one of the largest FinTech investors in the world – with the ambition to provide financial infrastructure and support use cases beyond what we see in crypto today, built for mass distribution.

CS: If you ask someone what they know about Morpho, they will immediately compare you to AAVE – and say how what you’re doing is different and better.

PF: It’s simple, right? AAVE is a managed product. Morpho is an open and immutable infrastructure that allows people to build managed products.

Permissionlessness, decentralization, and primitiveness. Those are our three main principles. AAVE could also argue that they're decentralized, but they change and upgrade their code, and they rely on human beings for that. They also rely on human beings for risk management. Morpho’s code is completely immutable. That immutability means that people own the code base entirely – so they set their own risk management. It’s not even comparable in terms of decentralization. In terms of primitiveness, instead of having a one-size-fits-all monolith, doing something more layered and more primitive allows for much more diversity of use cases, built on a very basic primitive that's much safer and much more efficient.

CS: Would you call Morpho’s philosophy “minimalist”?

PF: Good question. Yeah, I think that's a fair qualification of the culture in general. It especially describes one of our co-founders, Mathis, who I believe is one of the most brilliant minds in the space, and who has a minimalist approach to pretty much everything in life. We have this internal value that we call “justify everything.” Essentially, every single choice – every single addition we make to the team, every single process that we want to store – has to be thoroughly justified. That pushes us to minimize, by nature. 

Primitiveness also really forces you to have fewer things. Users can build all the fancy, opinionated features they want on top of your primitive. They won't be integrated at the core, but anyone can integrate the right defensive features for their project on top of the same building block, as layers – instead of building a new monolith each time. Simplicity is a great tool if you’re going to have a layered stack like Morpho’s. We’ve all seen the hacks and we’ve all been in those war rooms. We’ve seen friends and competitors get their entire projects drained. It really comes down to the complexity of the code. If you are able to encapsulate complexity into simple abstractions, that’s really nice from a resiliency perspective. 

CS: Do you feel like these values of primitivism and simplicity are representative of a new generation coming into the space? Sure, everyone is relatively “new” to crypto in the grand scheme of things, but you have an especially young team, and you’re leading the next phase of lending DeFi. Do you see your values as a shared philosophy of the talent that’s going to be moving the space forward?

PF: Well, if you think about it, it's actually the oldest philosophy in DeFi. It’s Uniswap. I don’t know if those are the official principles, but Uniswap – the number one, original protocol, right? – emerged with the exact same basis of permissionlessness, primitiveness, and decentralization, which by nature means immutability. 

CS: So it’s actually a “back to basics” approach. Would you say that a lot of projects stray pretty far away from the fundamental principles you’re describing? 

PF: 100%.

CS: What is your philosophy of risk, then? How much do you take on in order to maximize yield or rewards while keeping things simple? 

PF: Risk is a very abstract thing, really. It's about anticipating the future and making sure you can mitigate the bad outcomes you foresee – ideally, before they happen. So on a very basic level, it’s hard to reconcile managing risk with immutability. There is a fundamental tension there: if you have a model based on predicting the future, you have to be able to adapt – which means your code won’t be completely immutable. Plus, you also can’t manage risk in a “slow” way. You have to be fast; you have to have knowledge to respond at all times. This requires some form of management, which is inherently opposed to immutable protocols. 

CS: So maybe the better question is, how do you manage contradiction?

PF: Our philosophy has been to say, “hey, we are just infrastructure providers.” People can build the risk management models on top of that and set their own approach. People will use different tools to do that, suited to their needs. Some will use tech and governance and manage risk with tokens – that’s how AAVE does it. Some will have more centralized systems; others might put users of the lending use case in control. Our take? We're agnostic. There really isn’t one single best solution to management structure. That’s why we created an open market for people to figure out their own.

CS: How do the roles at Morpho – allocator, curator, guardian, etc – fit into Morpho’s open approach? 

PF: Well, we kept those simple, too. You have an owner – the master admin, say, a DAO – who sets vault strategy and assigns roles. Then you have curators to define vault parameters. For example, at MakerDAO, they pay contractors like Block Analytica to manage and curate the vault risk. Block Analytica has bots as allocators,  whose role is to constantly rebalance assets to maximize returns and adapt to market conditions within parameters set by the curator. So the curator makes risk decisions; the allocator allocates capital within the bounds set by the curator. Guardians – DAOs or other trusted entities – have veto power, typically within a specified timelock period. 

CS: What are Morpho’s house preferences in terms of liquidity management? The attitude, for example, toward an over-collateralization buffer for assets like csUSDL that might enhance scalability or manage redemption risks efficiently?

PF: I don't think we have a position on how liquidity should be managed. The reason we were built as an open market is that we want people to express themselves and build the use cases that they deem the most relevant. Steakhouse has their own style; other vault creators have their own style. That’s what we want. We don't have an opinion on style. Of course, when something is obviously bad, like a misconfiguration or something, we'll try to detect it and provide open source tools to help solve it. But otherwise, we don't have any “takes.” 

CS: So what are the biggest challenges or lessons you have learned in building decentralized lending protocols so far?

PF: We've bet on the infrastructure play, which is great. But I think we need a better user experience as a whole. Honestly, I wish we had spent more time and resources at the app level – investing in making great products and hiring the necessary engineers for that. We know that in a few years from now no one is going to go through the interface, but it is still such a big brand signal. We went down the purely engineer founder route, where the signal is “we don’t care about the UX.” But we don’t want to be that. That’s a mistake.  

CS: That’s where the Coinshift UX comes in! What are you most excited about at this stage, whether that's in terms of what you're working on at Morpho or what you're seeing really generally in the space and the conversations?

PF: I'm most excited about seeing traditional finance distribution coming on chain – for the first time ever. It has been great to see all the fintechs, all the tech-enabled neobanks actually getting into crypto for the right reasons – to me, that is huge.