During my time at university, I mostly did two things: learned about blockchain and failed to get a bunch of startups off the ground.

Despite the time I invested trying to understand the fundamental value of blockchain, I had a deeply negative perception of anything related to finance. All I could see was speculation and sharks, with a questionable chance of adding value to the world (more on this later). In fact, when I first met Merlin – one of our future cofounders – at an Ethereum hackathon in 2019, he suggested we start a DeFi protocol. I refused.

Yet, two years later, I began working on Morpho, a decentralized lending protocol that has now accumulated $700 million in deposited assets. The trigger for this sudden change in my life was a newfound answer to the question: What good can DeFi truly unlock?

Back to the basics

My mental shift began when I realized that blockchains like Ethereum would lead to the open sourcing of most web applications.

Even if I could read Facebook’s code on their GitHub, I would have to trust them to use that exact same code on their servers. Open sourcing is irrelevant in the current web structure if companies want to prove how they manipulate their users’ data.

Ethereum solved this fundamental problem with decentralized execution of code. Financial operations are a very natural use case for this structural benefit. If we replace banks’ back-end infrastructure with open-source code to be run on a blockchain, we have DeFi.

Creating more open and transparent finance is great. However, it was insufficient to make me want to dedicate my life's work to DeFi. What finally convinced me was its ability to make financial services more affordable for your average person.

DeFi will bring insane cost reductions

There are roughly 50,000 different banks or credit unions worldwide. They all do approximately the same thing and have to separately invest in developers, marketing, executive salaries… to build the same services 50,000 different times.

Now imagine replacing those thousands of banking tech stacks with one open algorithm that runs autonomously on Ethereum. The only thing the end user could end up paying for is the development of one single protocol.

• The Uniswap protocol, handling trillions in trading volume, was built by a team of less than ten engineers. (Highly recommend their article on how FX costs can be cut.)

• The Morpho protocol, with nearly one billion assets deposited in it, was built by four students, and we paid ourselves $600 a month.

Note that this significant cost reduction also applies to the environmental impact of traditional finance, especially when compared to DeFi on Proof-of-Stake blockchains.

TL;DR: DeFi will enable incredibly affordable financial services. This argument alone makes DeFi feel inevitable.

DeFi has no choice but to be aligned with the user

In traditional finance, if I want my money to do X, I pay an institution to execute X without losing my money. This can be simple custody, exchanging USD for EURO, earning interest on my savings, or other more complicated tasks.

In DeFi, things are structurally different. Paying for the operation of the service would not make sense since the code is open source, and anyone could fork it.

However, the user pays for everything that can’t be ingenuously copied. This is often referred to as the protocol’s network and can include: **the state of the smart contract (e.g., the liquidity it contains), brand, or future improvements. (For more on this topic, I recommend this piece from Jesse Walden.)

DeFi protocols’ natural business model is hence to take a cut on the value brought by their networks, not their code. To survive competition and forks, this fee shall be reinvested to extend the network itself (e.g., security, protocol improvements, brand) for the user's benefit!

TL;DR: In traditional finance (TradFi), institutions are basically paid to correctly operate a financial service. In DeFi, builders are paid to improve common goods.

DeFi has infinite network capacities

DeFi is not just about removing intermediaries; it also brings several technical advantages that are simply impossible in TradFi, such as composability. The one I like the most is probably its infinite network capacity: the ability to aggregate all the financial resources in one single place to deliver optimal efficiency of financial services.

Indeed, a helpful property of financial services is that they tend to work better if there is a lot of volume/liquidity at the same place. For example, the more liquidity there is on Uniswap, the better the trade execution.

Remember the 50,000 different institutions? Not only are they redundant intermediaries, but they also break the financial efficiency improvements of scale! Conversely, if one single bank owned all the financial resources in the world, that would lead to major centralization issues that even a crypto skeptic would agree on. As it is not centralized, all the liquidity could be aggregated in one trustless DeFi protocol. The latter would thus benefit from huge network effects and deliver unrivaled efficiency (i.e., cheaper for the user).

Concentrating all of the world's financial value in a single protocol may seem unrealistic, especially given the DeFi hacks that occurred last year. In fact, I believe that DeFi, except for a few protocols like Uniswap, still needs to metamorphose to support the infinite throughput mentioned above.

Most DeFi platforms are more decentralized brokers than actual internet protocols. However, this is evolving, and I will cover this topic more in a future post!

Where we are going

Over time, I learned that traditional finance is not pure evil. It has obvious utility, especially in abstracting complexities for the user, but also many extractive components. In fact, because of its opaque nature, the bad parts tend to prevail, as no one can really tell the difference.

The goal now is to decentralize the good parts. Some will bring the bad parts onchain, I am sure. Fortunately, since everything is open in DeFi, I am confident that, in the long term, natural selection will remove unnecessary components and improve existing ones.

This is how the whole Morpho story began: we explored the inefficiencies of existing DeFi protocols to find ways to better serve the end users. You simply can’t do that in TradFi.

While traditional finance is doomed to have bad parts lurking around in the darkness of its system, I believe the open nature of DeFi will make the good parts emerge in their most resilient and efficient form.