This story was republished from Medium. The original story can be found here.

Hi everyone! We are Morpho Labs, a software development company committed to bootstrapping, developing, and decentralizing the Morpho protocol.

Morpho’s white paper will be released next week and today we give a brief overview of the main concepts of the protocol.

What problem Morpho is trying to solve?

The main interest rate protocols in DeFi such as AAVE, Compound, or CREAM are working on pool-to-peer models. Many suppliers provide liquidity in a pool and borrowers can help themselves in this common pot.

In the early days of DeFi, this mechanism solved the pain of matching users according to their rate conditions but it had some tradeoffs. In order to preserve the liquidity of their pool, those protocols are inducing a spread between the supply and borrow rates. In other words, many suppliers share the interests paid by the few borrowers coming to the pool.

In practice, you can notice that in pool-to-peer protocols, the borrow APY is always much higher than the supply APY.

Bringing radical efficiency to interest rate protocols

Morpho is a suite of smart contracts, each of them connecting to an existing liquidity pool. It improves the capital efficiency of existing lending protocols by reintroducing peer-to-peer while maintaining the underlying liquidity and liquidation guarantees.

Morpho establishes a new metric: the P2P APY, a rate that is right in the middle of the supply and borrow APY of the underlying liquidity pool. Both Morpho’s borrowers and suppliers benefit from this APY when they are matched peer-to-peer. When a credit line breaks, users fall back to the underlying liquidity pool! This way, users are able to enjoy an optimized APY while they are matched while defaulting back to the APY of the underlying pools when they are not.

In the end, Morpho is providing the same user experience as current interest rate protocols, with the same market risks and the same liquidity but with improved rates!

Vision

We believe one of the greatest strengths of DeFi is its open-source and composable nature. Anyone can fork or connect existing protocols in order to optimize them. At the end of the day, as contributors bring new ideas, the global efficiency of the whole system will increase for the benefit of the end users!

This is what Morpho is about in the first place: Improving the capital efficiency of current liquidity protocols such as AAVE, Compound, or CREAM. However, not only do P2P markets built on top of liquidity pools optimize yields, but they also open new economic design spaces for DeFi.

Fundraising

For its first funding round co-led by Nascent and Semantic, Morpho Labs is raising $1.35M. We are very excited to be backed by 30 investors from all over the world, including AngelDAO, Cherry Ventures, Stake Capital, Atka Capital, Faculty Capital, and more than twenty amazing angels! If you think you could also be valuable to the protocol, please feel free to contact us.

We are super excited about this fundraising as it will be a great opportunity to expand our ranks and continue improving Morpho.

‘Wen?’

Morpho is the result of 9 months of research and development, we are super excited to finally introduce you to what we have been building. The coming days are going to be full of juicy announcements so don’t hesitate to follow us on Twitter, join our Telegram community group or keep an eye on our webpage.