In this bonus episode of Tokenized recorded at Money20/20, Cuy Sheffield, Head of Crypto @ Visa is joined by Paul Frambot, Co-Founder & CEO @ Morpho to discuss on-chain lending in 2025 and more!
In this bonus episode of Tokenized recorded at Money20/20, Cuy Sheffield, Head of Crypto @ Visa is joined by Paul Frambot, Co-Founder & CEO @ Morpho to discuss on-chain lending in 2025 and more!
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This episode is brought to you by Visa
A world leader in digital payments, Visa is bridging the gap between traditional financial institutions and innovative blockchain networks, helping players in the payments ecosystem navigate the ever-evolving world of tokenized fiat currencies with confidence and ease. Learn more at visa.com/crypto.
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We’d also like to remind you that the views or opinions of our contributors today are their own and do not necessarily reflect those of the companies they are representing. Nothing we say should be taken as tax, financial, investment or legal advice, do your own research!
Music by Henry McLean
Cuy Sheffield 00:00
Kai, welcome to tokenized. The show focused on stable coins and the institutional adoption of real world assets. I'm Kai Sheffield, head of crypto at Pisa. Today, I'm at money 2020 recording a special episode here in the booth. We are missing Simon, who forgot his passport, lost his passport. You've got to give Simon some crap about that. But we've got a very amazing guest today. I'm here with Paul frambo, CEO and co founder of Morpho. How's it going? Paul, how's your day been? Hey, it's been great. Thanks for having me. Awesome. And then, two quick bits, before we get into the content, I need to remind you that the views or opinions our contributors say are their own do not necessarily reflect those the companies they represent. Nothing we say should be taken as tax, financial, investment, legal advice. Do your own research. And this podcast is made possible by Visa. All right, let's jump in. We've been going deep down the on chain credit, on chain lending rabbit hole together. Can you take a step back? Just explain what is Morpho? What does Morpho actually do? And how do you explain on chain lending to someone who has never gone down the defi rabbit hole before? Right? So Morpho is on chain lending and borrowing platform, meaning that we enable people to, on one end, earn yield on their assets, and on the other end issue loans, right? And this is all done and settled in a non chain native way. And so effectively, we'll allow someone like a Coinbase, for example, that is offering yield to their users, they would effectively power that yield through the Morph network. And on the other end, you have people paying that rate that are effectively borrowing capital from the more for lenders. And those could also be like Coinbase, but could also be like fintechs and other players, like other exchanges, etc. And so you used this analogy before, of like, you see stable coins as like a checking account, and then this concept of vaults as a savings account. Say, say more about that. Like, do you think every one of these FinTech apps that offer stable coins is going to then offer yield? And what is a vault? Yes, that's right.
Speaker 1 02:09
So we really think of stable coins as the way you store cash and transfer cash, like through blockchains, essentially, but that's really just the first step, right? Like, you have this checking account that's not giving you any yields, and effectively, way can do things to morph was deposit in what we call a vault. So you should think of a vault as a fund, but that's non custodial, and managed directly on chain in a non custodial way. And so what that means is that now all stable coins, whatever they are, they're able to generate some yield, yield that is powered on the other end by bars that are taking some financing from those stable coins that are being lent out. So we really think of vaults as this new way of bringing yields and all different kinds of risk profiles and compliance profiles to any cash that is sitting here, either on chain that is, frankly, currently just lacking investment opportunities. So the way
Cuy Sheffield 02:58
that I started getting really interested in this was, I feel like people understand stable coins as being this programmable form of money. You can use a stable coins in a smart contract. But then there's the question of, okay, what are smart contracts good for? What is the use case? And it feels like the use case has been representing a lending agreement as code, and that's existed for a long time now. Remember defi summer in 2020 you had this crazy new ecosystem of lending and borrowing. And so we did some work with the on chain data team, partnering with Allium and Artemis, and found that six, $70 billion of stable coin denominated loans were originated and dispersed over the last five years. And so when we say that, people are like, Whoa, that's a lot of volume. What's actually happening? Could you talk a little bit about the history, how we got here, and how defi has evolved, and then all of those loans are collateralized. And so for someone in tradfi or FinTech, how should they think about this idea of, okay, you're lending, but then there's this asset that's backing it, and like, where that's
Speaker 1 03:59
going, right? Right? So first to your point, we're leveraging smart contracts. At the end of the smart contract are just a piece of code that runs on a server that's decentralized, right? And that's the blockchain. And what's the point in using smart contracts, really is the fact that people can come together on terms and agree on terms without having to trust any central authority. And what really is interesting about making this in a decentralized way is not really the decentralization, per se, but the fact that multiple players can come together at a single place, and as a result, you have much better, much more open marketplace and much deeper liquidity, because everybody is able to connect on the same loan agreements through this smart contract that no one needs to trust. And so initially, when defi lending started, like seven years ago, and the first idea is, right, okay, a loan is like a promise of future value that the borrower is making to the lender. But in the non chain world, in the beginning, no one knew what the other address was. So in order for the lender to be able. To trust the borrower, you needed some kind of, like, big trust assumption, and that was the collateral, right? So the initial idea was like, Hey, you bring in some crypto collateral as a borrower, and I can trust you, and I can lend you that stable coin. Because the reason I trust you is, if you don't come back, I get your collateral and I sell it and make my position wall, right? So that's really how this all started, initially, through, like people that wanted to take out some loans out of their Bitcoin, that said there's nothing fundamental around making this lending primitive, strictly around crypto financing use case, or crypto back loans actually can achieve any form of lending agreement directly on chain, right? With all the benefits of having this open connectivity, where everybody can regroup, right? So that's most of the thing we've been exploring with Morpho is like, how do we progressively move away from just only have crypto collateralized loans, which have been enormously successful, like, that's to your point, like, $600 billion of loans originated sitting right now on the platform of Morpho, we have $15 billion of loans. That's great, but that's still a tiny drop in the ocean of what you know financing is and credit is, and our mission really is like to bring the entirety of credit on chain, and that starts with crypto collateralized loans, but will extend soon with RWS as collateral. We already have $500 million of RWS as collateral. And then progressively, how do we move away from collateralized position to like purely credits and the collateralized loans, et cetera, et cetera. It's interesting, whenever I talk to banks about this broader ecosystem, first, we never say defi. Defi as a brand is terrible for banks. It is, it is, it's terrible for regulators. We like on chain credit, on chain lending. We think those are much better descriptions of what this actually is. But then when you talk about crypto collateral, there's this idea that, okay, at first, that seems kind of weird and niche, but then you recognize there are a few trillion dollars of crypto assets out there. It's very liquid, it's globally accessible. It actually works pretty well. But I think we're seeing a lot of interest in what can you do beyond that you mentioned now, if you have tokenized treasuries, if you have tokenized receivables, can those go in a smart contract and then enable a loan to be dispersed? And then ultimately, the holy grail of, can you actually do unsecured, uncollateralized lending using some of the same infrastructure? And so what do you see as some of the challenges and the things that need to be overcome if we're going to transition from purely crypto asset collateral to tokenized, real world assets to uncollateralized what doesn't exist today, like what's preventing us from doing that right now? So a few things. So first, at the end of the day, it's all of a trust problem, like, will the lender be able to trust the borrower for the commitment that they're making, that they will come back with the money? And obviously, crypto, liquid, crypto collateral is such a very good way to prove that you're trustworthy. But now to your point, we're starting to zero WA, and actually it's one of the fastest growing areas of liquidity. Over the last two months or three months in Morpho we went from zero to 500 million, as I was mentioning. And so what was needed in order to have those real world assets as collateral was like, Okay, we need to have this on chain representation of something of value that is not crypto, that is not belonging to the chain, but that belongs to the outside world. And then the protocol needs to understand how to price it. So we need to craft those oracles and those primitives that are able to bring to the protocol the notion of price and what is the value of that trust that you're bringing with you from the off chain world. And as we continue to expand the set of collateral that you can bring in, you can also imagine that we bring in some identity primitive, right, that can also foster trust. Like, you could even go as far as like, Hey, I'm Paul. I'm like, the CEO of the Morpher protocol. If I go to the Morph network tomorrow and I sign with my name, there is some reputation behind my identity, and maybe the lenders on the other side of the network will give me a price, will give me a quote, and maybe it's not that good. I did not make any commitments, right? So maybe they have made me pay like 30% or 40% but in order to foster trust, maybe I bring a legal contract that I sign and say, Hey, under the laws of the US or of France, because I'm French, like my physical collateral will be seized. And that helps foster trust, right? So at the end of the day, what we need to bring those various types of financing on chain is like, how can we bring those different primitives that can foster trust for the commitment that the bar is making? How do you think about the transitions from these protocols as applications to infrastructure? Does it seem like in defi summer and where most crypto Native people, they're taking a wallet, they're going to a destination, to an application. They're connecting their wallet. They're either depositing to lend or they're borrowing from that protocol. But they have to know what the protocol is. They have to seek it out there. Now it seems like we're seeing this capability being embedded in in the back end, as infrastructure into existing apps. Like, when did that start happening? Can you talk more about some of the clients and what they're doing with warfo right now as infrastructure, 100% for a very long time, there has been this misconception of crypto is a product of its own, where it's something you should sell to the end consumer, as it is. And frankly, when you think about it, beyond speculation, crypto is not really a product of its own. Crypto is infrastructure. It's a function. It's an engineering function that will be across all the large enterprises, all the large like person that have to manipulate value at some point, they have to have some crypto PMS and some crypto engineers that understand how to manipulate value with the best possible tools available, meaning blockchain, Rails, right? And we learned this actually through building, meaning that initially, for example, the very first defi use case, the protocol itself, was issuing the loan, meaning that the protocol was setting the risk parameters, and effectively, like issuing the loan to the borrower. And what Marvel introduced, and we're the first to introduce this, was like, actually, what if the protocol should just be very neutral, and we should have fund managers themselves issue the loans. And morph was just immutable, an opinionated rail that's just going to do the accounting of interest, and that is going to do the liquidation, and that's going to connect lenders with borrowers as a network, right? And as a result, all those fund managers that were in tradfi rail start to see the benefit of being on chain and start rebuilding the entirety of their fund, using crypto as an infrastructure to distribute product that they would have managed and distribute in the tradfi world, except now that they benefit from all the openness that makes the pricing much more competitive, which is probably the number one like interest of moving on chain. Then obviously they have all the 24/7 and the aspect of blockchains, where you can get liquidity on any forms of financing immediately, with interest being accounted like every second, you have the integrability, which is much easier for FinTech to integrate crypto rails, because everything is open source. And then finally, you have transparency, right? Like, you know, for example, when crypto.com or Gemini like offer crypto back loans on Morpho well, they can show to their users, hey, here is the collateral. It's not transferred to like an FTX type of structure where the collateral is being lent out to another entity, like every single user can audit at every point in time where the money is right, which faster starts in the product, et cetera, et cetera. That
Cuy Sheffield 11:57
is a super important difference. When what we saw last cycle with sci fi, there are a bunch of these lending applications that were offering yield on one side and loans on the other side, but you had no idea how many assets they actually had. They said they were over collateralized. Maybe they were maybe they weren't. So having that visibility into all the assets in the protocols super important. 100% FTX was like, actually the perfect example of a company that was offering a crypto product with a tradfi infrastructure, as opposed to try to do a normal financial product powered by crypto infrastructure, which is the right way to go about blockchain technology in general. And then what about the permissionless nature of all this? Like if you talk to a bank or FinTech and you say, Okay, why don't you integrate a lending protocol where your customers are going to receive a loan from someone across the world, and we don't know who they are. It's really weird if you're lending or borrowing and you don't know the identity for most businesses in tradfi. Like, how does that play out over time, using the capabilities of portfolio? So I think the word permissionless has been probably doing a lot of harm to our ecosystem overall, because it has been understood as defi protocols, and they were and like on Chain Finance in the beginning should always be like a single pot where everybody gets to coming off funds with everybody. It's not what it is today, right? If you take the Morpho protocol, for example, we think of it as providing a toolbox where as a lender or as a borrower, you can impose the condition that you want or expect from the other party. So if you're a lender and you want your user to have a specific KYC, you can programmatically expect this from them and enforce this right. The same way, if you expect your vault depositors to be accredited investors, you can also impose this to them. So we like to think of Morpho as like a permissionless infrastructure for builders, meaning that you can build the financial rest that you want, whether it's like open for everybody, you can do it or restrict it to just two parties, you can right? It's really fully complete. And then what does this mean for banks? Because it's it's interesting. It seems like the crypto ecosystem, they're really leveraging this idea of composability. You mentioned you have Coinbase, you have crypto.com and it's fascinating that you have a Coinbase customer depositing into a vault that is lending, that it might be a crypto.com or binance customer that's borrowing on the other side. And so it's almost like there's this lending network that's being built out where, traditionally lending happens in this very vertically integrated you have a bank that's lending to their customers and they're competing with other banks that are lending to their customers. There's not really the concept of a credit network that exists. And so how should banks look at this today? And you've started to talk to some of the larger institutions, how are they thinking about participating and what it means for their role in the longer term, right? That's actually on point, because when boarded the first bank, like three weeks ago, on more for like sustainable, with one of the largest European banks that is actually moving their loan book progressively on chain. So to your point, the entire value of building this on chain is now everybody can. Connect into a single venue, in a single marketplace, creating a level of efficiency and liquidity that is impossible to think on, like a tradfi route generally. And the main reason is very simple, is like every single bank has its own back end, its own books that are fragmented with one another, effectively on Chain Finance is the opportunity to have this global connectivity layer for markets, where effectively, everybody gets to put out their bids and their offers on what they are ready to land or what they're ready to borrow, and as a result, you get better pricing, more efficiency. So if you're looking at it through the lens of a bank, there's multiple approaches you could take. The first thing is, you could become a non chain asset manager yourself, same way stock chain got involved with MorphOS like, they effectively like, deploy their new vault, and they welcome customers deposits into that vault, and they invest it by issuing various types of loans directly to on chain borrowers. Right? So that's one type of use case that is increasingly popular among institutions. The other category is playing the other side of the market. Let's say you want some short term liquidity, or some short term financing directly from on chain capital that runs 24/7 that is ultra competitive, out of which you're going to get the best rates. This is another opportunity for banks to get financing on like some various use cases.
Speaker 1 16:16
It feels like in Internet of credit, where you could still have banks only in relationship with customers, they could capture the intent that a customer wants to borrow, but then route it into a protocol, instead of being limited just by their balance sheet. And then you talk a bit more about the global nature of this. And whenever people think about stable coins, first thing you think about tends to be cross border payments. And they recognize that stable coins, you can transfer 24/7, across the world, but this is all cross border lending, like you have people in the United States that are lending to businesses in Brazil, and you're dispersing the funds from a vault directly to an end wallet in real time. And so how do you create, like a global cross border lending ecosystem? How do you manage the local regulatory requirements, and how does that play out in the next few years? It's a good question. What we're saying is that we have like, 50k banks currently in the world, and credit unions. They all have their segregated back ends with their segregated database. This table, coin at the end of the day, is a database, right? It's a single shared database across all those different players that is effectively saying who owns what. And that's marvelous, because now there is this shared computer, this shared base layer, where everybody is able to interoperate in a very easy way for payments. But to your point, a stable coin can be a database for payment, but could very well be a database for credit as well. That's what vaults are, effectively. Is like making stable coins a credit network as well. Now there's a lot of questions around like, hey, we have all this global connectivity layer. How do we approach regulations? For example, I think the way on Chain Finance approaches regulation is pretty clear, and it's the same way internet protocols approach regulation, meaning that every body should be locally compliant to their jurisdictions and apply the guardrails that they need to but the protocol in itself should externalize the compliance management. So if you think, for example, HTTP, HTTP does not implement the 210 countries different regulations, they get the websites to effectively make sure that they're locally compliant. And the reason this is so is because you want HTTP to connect people, whoever they are, wherever they are, and then the guardrails are imposed at the application level. So I guess the Tai Jairo is of this is like one should regulate apps, not protocols, is really how to put it simply. Yeah,
Cuy Sheffield 18:30
it's a fascinating space. We're going to spend a lot more time around, on chain, credit, lending, on the show going forward. That's all the time we have today. Thank you so much for listening. Paul, where can people find more about you? We are Morpho labs on Twitter and morpho.org on internet, awesome, and I'm on x at Kai Sheffield and visa.com/crypto if you haven't already, please subscribe to tokenized on Apple, Spotify, wherever you get your podcasts. You enjoyed this. Please leave a review. Special thanks to our audience here around the yellow booth in the middle of Monday, 2020 this was A lot of fun. Thank you all for listening.