The failures of decentralized finance platforms Celsius and Voyager Digital have not signed the industry’s death sentence, far from it. In any case, venture capital funds still firmly believe in it. However, in the landerneau of web3 a distinction is about to impose itself, between the “good” decentralized finance, the real one, and the “bad” one which is not properly decentralized. A storytelling which tries to make sense of the berezina experienced by the sector last month, pointing out the culprits: the so-called “centralized” finance, or “CeFi”.
By “centralized finance” we do not mean traditional finance, traditional banks, brokers and financial intermediaries. But platforms like Celsius, to which users have entrusted their cryptocurrencies to place them and which, in short, have done everything to seek unattainable returns. In DeFi, everything would be fine in the best of worlds, and why not, until proven otherwise.
Decentralized finance raises more funds
What we can already see is that DeFi applications have a very clear dynamic in terms of fundraising in June ($ 624 million, more than double the average of the previous months), while CeFi withdrawals have slightly decreased. However, they are at a much higher level ($ 1.9 billion), according to data from research firm Messari for the first half of 2022.
In general, investment funds continue to raise funds to invest in cryptocurrencies, despite the economic climate. Variant, for example, completed a new $ 450 million vehicle in late July, specifically to invest in the start-up phase.
morpho Labs, a young French aspirant
It turns out that Variant invested in mid-July, along with thirty other funds (including Coinbase Ventures, Semantic and XAnge) and sixty individual investors, in a French start-up called Morpho Labs, a new player in decentralized finance. . The “real”, since the start-up has developed a protocol that allows to connect lenders and borrowers in peer-to-peer, calculating an optimized interest rate thanks to a dynamic allocation system. The funding round, led by Variant and Andreessen Horowitz (who certainly seems to be increasingly interested in France), amounts to $ 18 million.
The Morpho Labs protocol, created in 2021 by a student of Polytechnique and Télécom Paris and research director of the CNRS, is developed as an overlay on the Compound and Aave decentralized lending protocols, which are a kind of money market for cryptocurrencies. Through smart contracts, they combine liquidity supply and demand through “liquidity pools”. Mr X can save money by putting his money in the pool. When Ms. Y borrows, she “guarantees” her loan by blocking an amount greater than the loan amount and the money is released from the pool. This guarantee is liquidated if not refunded.
smart contract, nothing but smart contract
Everything is pooled, so savers share interest rates (whose orders of magnitude are more reasonable than those promised by Celsius, for example). Furthermore, in order to maintain a liquid market, i.e. to allow lenders to recover their assets at any time, the amounts lent are always greater than the amounts borrowed. Finally, there are more lenders than borrowers. As a result, interest rates, calculated on the basis of supply and demand, are not optimal for either the lender or the borrower. Everything happens through smart contracts, without human intervention.
Morpho Labs adds a layer to this system by matching loan supply and demand, “one to one”, by removing these two matched users from the pool. The lender’s money is then used 100% and does not have to share the interest rate with other pool members. In cases where P2P doesn’t work (no matching, or the lender wants to withdraw their money when it’s fully borrowed), the lower tier takes over and users go back to Aave or Compound (with lower rates).
the security challenge
Morpho Labs ensures that $ 30 million in cash is already evolving in its protocol. For the moment the start-up is not remunerated, but in the future the idea is to charge a commission on transactions.
It remains to be seen whether these applications of decentralized finance will hold out in terms of cybersecurity. Because if it is only the code that makes the law, it is also the code that can fail.