DeFi: a continuously optimising financial system

Last week there was a public debate between Aave and Morpho, two DeFi lending protocols. Paul Frambot, the founder of Morpho, countered some of the claims made online by the Aave community with the following tweet:

For some context, Aave is the largest DeFi lending protocol today and has been around since 2018. Morpho was founded in 2021 and launched its first product, Morpho Optimizers, in 2022. Optimizers is built on top of existing decentralised lending protocols such as Aave and Compound, and optimises rates for both lenders and borrowers on these protocols. I wrote about the mechanism through which they do so in more detail here.

I won’t go into all the details regarding the claims made by Aave, but one of them is that Morpho Optimisers are "a leech on top of Aave."

I have a couple of responses to that.

The first, is that I don’t think it’s true. Morpho’s Optimizers product is additive to Aave. Paul backs that up with some figures that I've taken from his tweet:

  • Current liquidity deposited by Morpho on Aave: ~$1.3B
  • Current liquidity borrowed by Morpho on Aave: ~$500m
  • Interest generated by Morpho for Aave: $7.5m

Optimisers utilises Aave's infrastructure and liquidity, while also bringing its own liquidity onto Aave. The borrowing activity that has been brought onto Aave through Morpho has so far generated $7.5m in interest payments for Aave.

Secondly, even if Optimisers were a direct competitor building on top of Aave, that's the point of DeFi. One of the core tenants of DeFi as an open and permissionless financial system is that companies, and even competitors, can build on top of one another. The code of DeFi protocols like Aave, Compound, Morpho etc. is open source and developers can, for the most part, integrate with these protocols without having to ask anyone's permission. This differs to TradFi, where everything is closed source and integrations with other companies require permissions.

Users also have far less lock-in in DeFi than in TradFi and can shift their usage to newer products that offer superior experiences. This reality forces DeFi companies to relentlessly innovate and improve their product, otherwise they risk losing users.

Ultimately, Morpho saw an inefficiency in the market and decided to solve it. Anyone else, including Aave, could have done the same. The outcome is a product that gives both lenders and borrowers better rates. I consider that a win for users and for the industry as a whole.

DeFi is a continuously optimising financial system. It’s like a living organism, evolving through natural selection so that only the fittest thrive. The result is more bottom up innovation and competition, which should be celebrated because it ultimately benefits the end user.