Bankless - Morpho Midnight: The Future of Fixed-Rate Lending | Paul Frambot

Episode Date: July 29, 2026

Every lending protocol in DeFi quietly decides your interest rate for you. Paul Frambot thinks that was always a workaround and Morpho Midnight is his argument for what replaces it. Fixed-rate lending as the only true primitive, pricing trust on-chain, and the one switch Morpho won't flip yet. --- 📣SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24 https://bankless.cc/spotify-premium --- BANKLESS SPONSOR TOOLS: 🔓NEAR | TRADE CONFIDENTIALLY, GET 20% BACK https://bankless.cc/near-20 📊BITGET | TOKENIZED STOCKS 2.0 https://bankless.cc/bitget-stocks 🎯THE DEFI REPORT | ONCHAIN INSIGHTS https://thedefireport.io/bankless 👑BANKLESS PREMIUM | AD-FREE & BONUS EPISODES https://bankless.cc/spotify-premium --- TIMESTAMPS 0:00 What Is Morpho Midnight? 1:59 DeFi's Wrong First Shape 7:18 The Only Real Primitive 14:47 Inside a Midnight Market 20:49 Openness Is the Advantage 22:52 Order Books and New Curves 30:01 Pricing Trust 35:40 Stablecoins and What's Next 37:13 Who Comes On-Chain Next 42:18 Collapsing the Margin 44:50 The Bankless Connection 47:57 How Big by 2027? 51:59 Hester Peirce on Vaults 55:49 Who Takes the Liability? --- RESOURCES Paul Frambot https://x.com/PaulFrambot --- Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures

Bankless Nation, we got Paul from Morpho back on the podcast talking about a new thing. Out of the world of Morpho Midnight, we're going to talk about it and everything else is going on in the world of Morpho and Vault broadly. Paul, welcome back onto the show. Hey, thanks for having me again. Paul, what is Morpho Midnight? Yeah, Morpho Midnight is basically the next version of Morpho after Morpho Blue. So Morpho, we're infrastructure that allow people to earn interest on one end and get some financing on the other end. So we give you a stack that allows you to create some lending markets, right?

In Morphabu, blue, you could select one collateral, a loan asset, an Oracle, and you had this like variable rate, open term lending experience that was like pretty convenient and pretty passive to get into. And we've done this for the last two years, but, but, you know, what we realized as we were talking to more and more institutions is that one thing was liking. It was control over the interest rate, right? whether you're a retail user of a large app like Robinhood or Coinbase, you want predictability on your rate, like you want to know how much you're going to pay. But most importantly, if you're a large institution, you want control on the rate because you want to price the risk accurately, right? It's actually not a thing in traditional finance to have your interest rate rely on like

arbitrary formulas or arbitrary governance like it is the case in DFI. And so basically the combination of those two feedbacks made it obvious that the future of DeFi financing had to move away from the so-called interest rate model that we have today that basically dictates what the rate is going to be to a much more, you know, traditional way, which are zero coupon obligation. So long way of saying more from midnight is like a fixed rate, fixed term, lending and barring infrastructure that allows you to build lending and borrowing markets that have a term and has a fixed rate. And to me, this seems like Morpho is building financial infrastructure that is very ubiquitous in TradFi. And in Morpho and also Defi broadly, we kind of built the things that made sense for us to build in the first place. Like Ave, Morpho, Morpho, you know, Morpho Blue, things that don't really mesh well with TradFi,

but do mesh well for retail participants, the AMMM, for example, is just a retail friendly phenomenon. And Morphabu is like the same thing. It's just like, oh, like retail actually doesn't really care about stable interest rates. They just, you know, they're okay to be exposed to the market of whatever the market wants to pay them in that moment. And it can flex up, it can flex down. And that's just like not true for institutions. And so based off of your customer feedback from talking to institutions, I'm like, I'm sure they were like,

we are looking for the form factor that we are familiar with. please build it, and that's what Morpho Blue is. Yes, I think pretty much. I like the way you explain that is in the early days of Defi, basically you had multiple constraints. Gas was high. And also the set of users that was interacting with the chains was basically users with their metamask wallet that had a little bit of money.

And there were in no way financial experts, right? So basically the protocols initially had to internalize a lot of the complexity in order to provide a passive experience to users and they could not rely on any other intermediaries to do that. So this is why the early versions of Uniswap, for example, is passive both on the LP side and on the trader side. You can do passive LPs on Unisov v2 and passive trading. This is why compounds or AVE manage the risk for you,

they manage the rate for you, they manage everything for you. But as the ecosystem grows and like the complexity of the players, they're more and more complex and understand they want more control, right? And so as a DeFi protocol, you have an interest in modularizing some parts of your code and of the responsibilities that you have

and leave it to the market because the market will price it better and it will scale much more because they'll be able to discover much more use cases. What does that mean in practice? In the case of Uniswap, they turn Unisov V2 into Uniswb3 that externalize the LP,

like some of the LP management a little bit more. And so it's not easy to passively LP on UNisobB-free. It's still easy to take. But in UNisobB4, it's actually hard to take and it's actually hard to LP directly at the smart contract level. Because, like, DFI is like in layers now. You have a white set of, you know, you have those MEV bots or like market makers

that are going to run the different auctions in UNISAPs, whatever. That basically overall provides the market efficiency that is closer to Trotify infrastructure. Sure. And lending followed the same thing, which is it started with the very passive thing that managed both the risk and the rate for you. And then Morphal Blue we came in. Like morpho blue is harder to use than it is to use Avey, right? Because you have to choose beyond like this like, you know, 2,000 markets, 1,000 volts. Like, you know, it's hard. And so you rely on those curators to basically simplify the experience. So you have one extra layer. And midnight goes one step further in that direction and says, hey, you know what? The protocol should not. manage the risk, but it should also not manage the rate. And the ecosystem participants should do it. Anyway, long way of saying that defy is layering, and that's a good thing, in my opinion, is just going to provide us much more flexibility and much more market efficiency. And it will give the serious institution the control demand. I've been trading crypto assets for almost a decade. And I've used so many wallets, exchanges, aggregators, front ends. And I'm kind of always looking for

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advice. The thing that I want to know is that when we discovered crypto, or discovered defy. There are some defy primitives that just felt really elegant because it gave some numbers and some parameters and it gave it up to the market, right? And so we learned that Ether Delta, the first order book exchange on Ethereum is like not the way that we're going to build that. And what came after Ether Delta, Uniswap. And Uniswap created X times Y equals K. And it worked well with blockchains. It resonated with the construction of blockchains. And the inputs and the outputs were all determined by the market. And it felt very elegant and it felt very defy native. It was intuitive to, you know, financial first timers like myself who learned

finance through crypto. And it all worked. And that was like the early era of 2021, DeFi and beyond. And now we have things like Morpho Midnight coming online. And, you know, what are the four ingredients of a Morpho Midnight loan? You have the loan token, the collateral asset, a maturity date. And then permissions for any sort of permissioning system that a vault manager would want to want to create. And this is all, it doesn't feel defy resonant. It feels very much like TradFi asking for product features and then Morpho Midnight building them. But that's my bias as a like a individual defy like on chain enthusiast. And I want to know, the question I have is like, is fixed term, fixed rate lending, borrowing and lending,

is that also a logical conclusion for finance? Or is that just kind of how finance we built finance top down? Do you get what I'm saying? Oh yeah, it's a great question. I love that question because I have a strong perspective on this. So first I would, so the answer is I think yes. I think fixed rate, fixed term is the right primitive for financing. It is a true primitive.

It is the true and it's the only true primitive and it's a deep, deep conviction that I have because if you have variable rate, what does it vary on? What is the function? And the function, the answer to that is that it's arbitrary. You rely on something to say what is the rate, which makes it not a primitive.

A primitive does not rely on anything for its existence, right? Whereas a fixed rate fixture market, the primitive is a zero coupon obligation, which is an extremely simple, construct much simpler than the mess that a landing pull is because a landing pull is a mess, right? It's a very simple construct which you know, you

could describe in even simpler parameters than than X, Y equal K. It's basically the idea that you have this like object that you can trade that at the maturity will, you know, be valued at one and the interest rate is determined by the discount that you have compared to

one. And so this object is extremely simple. And I think, you know, I like to believe this is the right primitive because it does not depend on anything. And the reason we could not get there in the first place is that we needed to manage the rate for people, which once you have this layer of curators that are able to handle the complexity

on behalf of simpler users, then it does not make sense anymore to internalize this by the protocol. Maybe if I'm hearing your answer correctly, you know, aside from all the other reasons why it failed, one reason why Ether Delta failed was because they're just,

weren't enough people trading on it. It was dog shit UX in addition to that. And maybe the best thing, the best mechanism in that moment of time was actually uniswap, X times Y equals K, because that matched the amount of participants that we had on chain in that moment. And there was, Dharma was a startup that I remember back in 2017. And it was actually doing Morpho Midnight. It was doing fixed term, fixed rate loans, peer-to-peer style loans.

No central contract, unlike Avey, unlike Morpho. And even Ava had Eastland before, which looked like Dharma to some extent. And so we've actually tried this before, but it never worked back then. And I think your answer is, well, we had not nearly enough market participants in the level of sophistication and liquidity in order to bootstrap that whole thing. I think that's mostly right. I think there's a few reasons. Three reasons. I think the design.

So, okay, first thing, is like gas at the time. would not allow you to, you know, do crazy stuff, right? The second is the most important, which is the liquidity. And by liquidity, I mean the collection of participants that altogether make markets active and easy to enter and leave without moving the price too much. You did not have that at all back then, right? And so, of course, like a product like compound when it came out that, you know, provide you that simple user experience was a much broader product market fit

because the market at the time was like basically us with our metamask wire. it, right? And we knew nothing about it. Now, our users, like, you know, Apollo is like the largest private credit fund in the world. They're, you know, investing it in Morpho. Those guys are the most complex portfolio manager in the entire world. Like, they don't need someone to tell them, hey, my, you know, DAO is going to set the rate for you. They hate that. And, and, you know, I've pitched to like all the largest traditional financial institutions in the world. And like, pretty much half of them are like, this interest rate model thing

is the most stupid thing we've ever seen. Which, why? Why do they think it's stupid? Because they don't, like, from their perspective as portfolio managers, they want to control their, like for a given risk, they want to be able to control their rate and their terms.

And the defy construct does not let you, does not make you owner of your terms. You basically, the terms that you have are dictated either by a formula in the case of Morpho Blue or a governance in the case of Alve, and basically, to their eyes, it's a retail product. It's basically like Avey is the asset manager and you deposit money into it

and they choose the risk profile for you, right? And so basically they don't, and from their perspective, they're the good asset managers. They don't want to rely on anybody doing that for them, right? Which, by the way, is different than trading. I think defy trading and defy lending had a very different trajectory.

And I think UNISOP has been able to get to much cleaner, primitive sooner because it's lower dimension. Like lending involves risk and risk is multidimensional, which requires some management and everything if you want to handle it properly. But yeah, and I think the third reason is that, frankly, when you look at Eastland and Dharma,

it's like the designs have a lot of problems, right? In general, you know, you mentioned the UX of East Delta and everything. It's just like there's a lot of thought that goes into midnight that, for example, you know, you don't have liquidity fragmentation in midnight. Like you can, like, post one liquidity across 10,000 markets that are isolated and your liquidity will be available to borrow in all of those markets at the same time. Those are, like, key features that are truly zero to once in terms of, like, liquidity, etc.

that, you know, yeah, basically would make that work. Can we go through the actual just construction of a morpho midnight market? You talked about it a little bit. and I kind of gave the four ingredients. But I want to hear from you. Maybe you can explain from bottom up, like the building blocks that go into a Morpho Midnight market. And then once we have that market

and we have many markets, how do those kind of compose together too? But let's start from the bottom and we can go higher. Sure. Let's construct the word thing. So the cooperative is actually not so different from Morpho Blue. You have collateral assets.

You have a loan asset. You have an oracle to price those collaterals and those loan assets. And instead of having an interest right model. Instead, you have a term. Right. And so... And an interest rate model is the utilization curve. Yes. That's the same thing. Right. And that's the thing that the institutions are like, I don't want somebody else to tell me what that curve is. I want to set that for myself. Yes, exactly. Exactly. It is basically in Morpho Blue, you do the market at a formula that dictates the race based on the

amount of liquidity, like supply and demand that was in the market. In the case of Morpho Midnight, we externalize that and we say, hey, you know what? The market is going to price the interest rate. The market is going to set what it is. And that's true, in our perspective, that's true technology. Like we as morpho are computer scientists. We're not finance people. We want every financial component to be removed from the infrastructure.

And that's what midnight truly achieved in a way that we will never be able to do it. So anyway, basically, a morpho midnight market should think of as a zero coupon bond that can be traded in order, or like a zero coupon like obligations, it's not exactly a bond, but an obligation that can be treated and the price of that obligation until the term dictates the amount of interest rate

that you will have. Just like a traditional like zero coupon obligation, basically. So that's the core primitive. Now, in order to access those obligations, it's a bit like Morphabu. More for Blue, you have thousands of markets, Morpho midnight, you have thousands of, like, you know, obligations. So you probably want to make sure, like, to route through all those, like, different markets,

you probably want to use a vault, right? And this vault is basically going to be in charge of allocating across the different markets that it's interested in. When you're a vault and you deposit into Morpho Blue, you just have to select the risk, right? Like the risk parameters. But you don't really choose the rate at which you invest, right? whereas in midnight, you can say, hey, here's the risk I'm willing to take. I'm willing to lend to a Bitcoin back loan market.

And this time, you can say, hey, I'm willing to lend at like 5%. And not below 5%. And not only you can do that, but you can also manage the liquidity. So you can manage the rate, but also the liquidity. And you can say, hey, you know what, happy. I don't care if I have my money right now. I can lock it for six months, in which case I can achieve higher capital utilization. or you want to say,

hey, I really want a lot of liquidity, in which case you can also do that. So to the eyes of the user, the vault looks like morpho blue vault. Right. But behind the scenes, the curator, when you use Morphobin night behind the scenes,

they're going to basically buy those obligations and you should think of the vault as like aggregating those different obligations. Right. Aggregating the different obligations, but still below the hood are the two market participants. are new. So this is a new behavior from both a borrower and the lender,

because the borrower is borrowing for a fixed term. The lender is lending for a fixed term. And so that part of the whole supply chain needs to get bootstrapped by the whole midnight end product arm, right? Yes. It has to be bootstrapped by the midnight product arm. But from a user perspective, you probably still want to be passive, like the users in the Combinus app and the Robin Hood app,

they still want to be passive to some extent. So this is our votes are still important, and they will basically roll the different obligations on your behalf, et cetera. And it's actually part of the bestrupping. So it's like there we have like decks aggregators and this is a little bit like morpho midnight. Like I don't know what you call these things. The individual market for a morpho midnight market. Obligations.

Obligations. These are aggregated. And so like if I'm a if I'm a depositor looking for yield and I want like, you know, I just want to get utilization on my USC. then Morpho Blue will allocate across Morpho Midnight according to like my intent, if you will. Yes, I think that's right. But as a user of the vault,

you would never see any of that. Like, you know, the trader is going to... But it gets, but that's helping you bootstrap liquidity on the midnight side because like there is USDC or whatever available to immediately come and fill in borrowing requests. Yes, exactly. And this is the sort of like, you know, part of the strategy of the launch of,

of midnight is that midnight has billions of dollars already accessible if we turn on the switch of like volts being able to allocate. It's a parameter in the code of morphovorts is that we can basically say now all the morphovolds that have all those billions of dollars of liquidity, they can allocate into midnight. We are conscious this is, you know, a big decision. Like there's a lot of liquidity involves. So we really want to take our time.

We want the launch of morpho of midnight to be as slow as possible. We want ecosystem participants, market makers, lenders, bars, to get families with the code, integrate into their API. We want to take our time. Defy has been rough, like for the last, you know, six months. And then once we show confident about the state of the markets, you know, we can vote for basically the vaults to allocate into midnight. And that will bring like, you know, nine figure scale, 10 figure scale pretty, pretty easily. I suppose building the mechanism, the primitive of a fixed rate, fixed term loans, that's one thing, and it's nice to have that on chain as a feature. But the uniquely Defi thing is the fact that there is also morpho blue right next door

that you're able to flip the switch. And then these things, you know, 1 plus 1 equals 3. And there's some synergies here. I guess that part is uniquely enabled by Defi. Definitely. I think there's a million things that are uniquely enabled by Defi. I think the first thing is, you know, I like to sum up all the advantage of crypto by one word, which is openness.

Because the system, the infrastructure is open, basically have two concrete benefits. The first one is you have better pricing because of very open and fierce competition. When you think about it, like when Coinbase users are coming to Morphuan Chain to borrow, they have tens of thousands of lenders that are competing to give their users the best rate possible. And because the infra is open, it's like completely global, right? And so as a result, the defy borrowed product of Coinbase delivers much better rates than what you would get if you were to use a centralized desk for the same financing opportunity. And that's like the key killer use case is that the spread between the lending rate and the borrowing rate is going to be crushed in a crypto environment because everything is so open.

So that's the first benefit of openness. And the second benefit is obviously accessibility. Like the code is open source. Everything is readable. So it just have it's much easier to. integrate. Like we integrate in pretty much every single fintech in this world, right? And, and it's like the same pieces of code that are being reused times and times over again. So it's like the compounding effects of open source of open infrastructure are extremely strong. They're extremely hard to activate,

you know, as we know, this industry is like, there's like a lot of inertia to activate. But I can tell you like, like as we think about adoption and liquidity and the torque effects, it's just this thing is incredibly snowballing. Let's talk about the secondary market activity that happens. after a midnight, sorry, what did you call it again? The obligation, but you can say market. Obligation, market, yeah, the obligation. But I want to know why you call it the obligation, because you're talking about it, when a midnight, morpho midnight,

market is created. We've created an obligation. And that's a token, right? And that's a zero coupon bond equivalent. Yeah, exactly. So it's a zero coupon obligation that basically you should think of, like, an object that is traded. And so the market trades the object, which is the obligation.

That's like terminology, but whatever. Right. And so like the idea, like maybe correct me if I get these details wrong, but the idea is that if you are offering 5% yearly on a one year alone, then this obligation is issued and it's worth 95 cents. Exactly.

And then it will settle, it will resolve in one year at $1. And then this thing can be traded between market participants on elsewhere or elsewhere from Morpho. and it could be traded and that kind of creates a market place. How do you see that side of the market happens on Morphal? So you can't like, I mean, you could trade it elsewhere if you wanted to, but there's really no reason to because all the liquidity will be agreed at the Morphal market level. So you set it on the law firm.

How will that market emerge? Will that be like an order book? Yes. It is like an order book. It is like an order book. It is like an order book where basically, you know, curators can come in and put make offers like so in more for midnight you can make make bar offers take bar offers make land offers and take land offers you have really four types of orders so as a as a

landmaker you can offer your liquidity to to bars at a at a given rate right and so when it gets taken by a bar you basically are are entering the loan and now the two participants can decide to exit if they want to, in which case they can take existing offers or they can make offers themselves to exit, right? But it's important that the primary and the secondary market are in the same construct, right? Like the protocol makes almost no difference between the two, which means that, you know, if for example you are, there is like this end of year maturity that is happening, that's you're in, well, maybe, you know, if you want to live one month before the end of the year, maybe you'll be able to match with someone that is here just because they wanted a one month's maturity law, right?

And those are like the same markets, basically. And so the reason why I have some sort of like retail oriented aversion to fixed rate, fixed term marketplaces is because an individual like contractor agreement or like market obligation is not the market. And the reason why I call things like unoswops X times Y equals K or. Avae's model is because there, it is the market. It's just like aggregated a bunch of people. And so like when two parties come together and they agree on fixed rate, fixed term loans, I'm like, well, that's so top down. That's how do you know that's even what the market going rate is.

But I think what happens here is that when a ton of these things are created, then in aggregate the market emerges because so there's so many individual building blocks producing it. No, I actually think you have both of those effects in midnight. So if I'm reading your question correctly, for a given obligation, you can have, it's an end-to-end relationship, just like on UNOSOP or on AVE. It's not like an OTC. You could do OTC transaction if you wanted to through the midnight construct. But if you take like the BTC, USDC market and end of the year, it functions exactly the same as a morpho blue pool or an AVE pool, etc. It's like the given obligations are fungible

the same way your A tokens are fungible, right? So it is a market for a given obligation. Now, on top of that, because you have so many obligations, you also have transversal network effects thanks to like multi-market offers, callbacks, we can talk about this. But yeah, does that make sense? Yeah, I think so.

The thing that I'm interested to see emerge is some sort of like, interest rate curve on assets. Now, I think, like, the dominant asset inside of Morpho Midnight is going to be stable coins and dollars just because that's just the world that we live in. But there's going to be interest rates emerging on, like, non-crypto asset or non-stable coins like ETH and Bitcoin. And so maybe you can talk about that.

You're smiling and you're nodding your head somewhat enthusiastically. So maybe talk about, like, how interest rates or, like, bond markets emerge for, for, like, things like Bitcoin and Eath. Yeah. You know, the reason I'm laughing is because we release midnight. And then literally 10 hours later, you had already like five or six threads on like the rate curve. Even though, you know, the protocol was just launching,

there was like 100K of liquidity or something. And people were already drawing the rate curves. Doing TIA on the rate curve. And I was like, guys, it's still very small market. Like, you know, anyone could manipulate that. But still, I think it's cool, right? And I think it's true that you're going to have brand new data points. that, you know, frankly, you don't have in defy or even in finance, you know, for some of it.

It's like as we tokenize assets, et cetera. So I'm very excited about this. I will say it's more like I don't think it has so much business value for more in the short term. So it's like I need to like it's a bit like an herd like interest for me. But yeah, I think I think as the market participants get more complex, we will offer price discovery on on a a lot of different assets and their like native interest rate, what I'm most excited about is actually not the price discovery of the rate of the given stable coin,

but more of the underlying trust assumption. What do I mean by this? Is that when you come to morph as a bar to borrow something, you have to prove yourself, right, to get the financing. So usually you come with a big stash of Bitcoin or a big stash of collateral. But midnight lets you extend this to more than that if you want to. So there's a module in the protocol that lets you express,

why you should be trusted. So that could be collateral, but that could also be your identity or that could be your, you know, receivables, whatever. And then the creators will be able to see this and then price it, right? And that echoes to an article I wrote like a year ago approximately that's called the price of trust,

which, you know, obviously I wrote in the context of midnight. And basically this is what I'm excited about is like more from midnight as a machine to price trust assumptions and why you should be trustworthy or credit worthy in general. And anyway. So as a borrower, I could give extra reasons

as to why I am trustworthy and some can be very like hard-coded on-chain crypto-native collateral. But it could also just be like, I have this business and we make this much money and here are the documents

to prove that, but it's up to you to believe that or not. Exactly. Exactly. And this is the exciting part. you don't even need collateral at all. Like, I could come to the midnight market right now and say, hey, I'm Paul.

I'm like the CEO of this thing, and I sign it. You know, I prove it in some capacity with a proving mechanism that has some trust factor. I'm requesting 100K. I'm sure people will lend to me, right? They probably lend at the terrible rate,

but they'll press it. You'll have to... Who would determine the rate? You would say, like, hey, blend me $100,000. Like, whoever is willing to take the risk. And here's the key thing when you externalize risk and you externalize rate from the, obviously, like, you know, you know this better than I do. Like, it's been like six years since we talk about like undercalaturalized loans.

And we've always been asking, how is my defyre protocol going to underwrite underclatialized loans? Like, the answer is it does not. Like a piece of code is not here to give credit to people. Like, credit is complex. However, maybe the largest private credit funds in the world know how to underwrite. those things, right? And they'll give it a price. Right. And so the key things, the key elements that you need to have in place in order to unlock the next pockets of loans and under collateral trust credit, et cetera, is actually like externalizing

the rate and externalizing the risk such that the market can price any type of risk. And maybe what you prove about yourself is like a little bit like, you know, fancier and not that trustworthy, but then the market will price it and say, oh, actually your statement, like about your company, I don't believe that. I don't think that's a, good document, right? So they'll press, but maybe it is, right? And so they'll give you a right according to that. Right. Because like somebody could come in and say, hey, we represent Apple. We are Apple. Here are our S-1s. And then it could be fraud. Of course. And it's not, it's not for Morpho Midnight to ascertain whether that's fraud or not. But that, all of that

information is made on chain. Like this, it's just like public attestations. So this is a module. And by the way, I should say we're not focusing on that for now. We're focusing. something that's possible in the protocol, but for now we're starting with the very boring, I mean, not barring, be like over-clatelized crypto loans, et cetera. But that's something... The basics, you know,

would be able to share more in time about is the protocol lets you express on-chain trust signals about yourself, right? Whatever that means, could be an oracle. Like, we don't say how... It's a very general module. It's basically... Yeah, it's just like a memo field.

Is it just a... Yeah, exactly. It's like an empty module. And you can basically say, hey, here is my... whatever ZK proof of whatever, like, you know, and that the curators will assess this

and will price it, right? And I think, by the way, I think this is the answer to underclutch lessons. I think this world construct. I see how that would work. It is, right? That's exciting, right?

Yeah, absolutely. Yeah. Because it's like, what you're also doing is like if somebody, like Apple, the company Apple, for example, wanted to get a line of credit, it's on them to provide enough material

to create trust in the market. And so they need to get their lawyers to sign off on something. Like they need to make a public statement about this. Like, yes, this is actually us. This is actually what we're committing to. And then the people probably supplying money to that market are like, well, if Apple doesn't follow through on that,

I'm going to sue them. Exactly. And I'm going to take them to a court. But that's, again, outside of anything on chain. Exactly. The value of on chain is the matching. It's the open. matching with end lenders with end bars, which achieves better price discovery and better,

better efficiency, which lowers the cost of capital for an apple or for whoever, frankly, right, it's not restricted to Apple. Like, if you want to a home mortgage, you could, you basically, it lets, more for lets let's you run global auctions on every single lender in when you get your home mortgage. Like you're going to, instead of doing like a, just going to your bank and obey to whatever interest rate they give you, you're going to run an auction on 10,000 different banks. Right. it. Now, in practice, we are going to help facilitate this. Like, obviously, we're not

responsible for the enforcement of any of that, but we can come up with a language for people to express why they are trustworthy. And if we, you know, a good language, good abstraction will allow for good capital formation and facilitate. So that's our role, right, in all of this. But I think overall, this is the solution to, like, extending beyond the set of our class relations that we have took us a lot of time. to realize, I'm not going to lie, but I think this is really the key of this. The other thing that is exciting about that is that if that works, that starts to get identity to emerge on chain because you're going to want addresses

and their credit history and who they are and their history of repayment and all of a sudden, like, identity emerges out of that. 100%. I think, I think Morph of Midnight is going to be the first PMF of the identity layer. The identity layer had a PMF problem because there was no business case. But now the business case is going to be very clear is that your cost of capital is going to be a few bibs lower if you provide that identity primitive.

Hence, there's like a clear value that you can achieve by having your identity on chain. What assets do you expect to do well in Morpho Binnight? Obviously, like, stable coins are just so prolific and I would expect stable coin yield and stable coin borrowing with basic collateral like Bitcoin and ether, which is the status quo to also continue. But like, will there be new types of assets

that will hit resonance with Morpho Midnight? Yes. I think first I should mention, as you said, that stablecoins is the major focus for us, like in general. One interesting statistic is that 92% of Morphal is loans are stablecoins, whereas the average for lending protocols is like around 50% or 60%. So there's still a lot of like ease leverage lending, et cetera, et cetera. We're actually the largest USDC like defyre protocol on EVM by quite far now.

And because we focus so much on just like, because we think stablecoin markets are the one that will eventually grow the most. That being said, there's a lot of value. It's a smaller market, but there's a lot of value for allowing people to lend assets and to short assets, whether that is ETH, Bitcoin, token and stocks at some points. Like SEC lending, for example, securities lending in general,

is a big, big use case in TrotFi. And so eventually Morpho Midnight should allow for this with the right compliance guidelines. And yeah, and so I'd say I am, excited because I think it's going to be a huge use case eventually if you look at trot-fine numbers, but I'm even more excited about like stablecoin lending in general. What new entities do you think would be able to come on chain because of Morpho Midnight? Either like any sort of like partners that you have lined up to actually make markets happen

on Morpho Midnight or just like, what's the next most proximate Wall Street institution who's like, oh, finally they figured the crypto bros and figured out fixed term, fixed rate. Now I can go play on chain. Like who do you think that is? All the large ones that have a crypto arm, if they haven't touched midnight already, they will in the next 24 months. And I'm not saying this just like, you know,

like we literally talk to all of them. We actually built POCs with a bunch of them. And some of them, they're not at POSC stage anymore. They're actually like launching entire businesses. So, which by the way is like a true, interesting moment for the institutional adoption of crypto is like moving out of POCs. But yeah, I think, you know, the order of things has always been like wallets first, then exchanges, then fintechs, then neobanks, then asset managers, and then the actual banks

is the order of the adoption. And then for each of those buckets, you look at the most aggressive players and they will move in first. Right. And then they will force the bigger players that are usually the most conservative in the category to lean in eventually. And yeah. How does this fit in to the whole neobank, neobrokerage revolution that we're kind of watching on Ethereum. So like last year, about this time, there was this whole movement and like attention on neobanks.

Like, oh, without, with stable coins, with such a proliferate growth of stable coins and easy to build wallace, he says, it's easy to make a neobank. And like etherfi kind of led that. Now we're getting into like neobrogerages. Well, now there's tokenized stocks on chain. And now with tokenized stocks,

it's easy to make a neobrokerage, a brokerage without actually being a broker dealer. I kind of see Morpho Midnight and more. Morpho blue generally is saying like, well, don't you want margin? And if you have all of these assets on chain, like can't Morpho the platform create margin accounts for all of these things? Yeah, 100%.

Like, you know, Morpho is infrastructure for all those like players to connect to global networks to offer good yield products or loan products. Right. So it's like an absolutely essential piece. Like if you want to offer some form of financial app, you have loans, you have yield. Otherwise you're just not a good. financial app, right?

It's going to be hard to defend without that. And I will say, though, I think it's an interesting revolution. I will say anybody that has distribution now will think about financializing their user base. I don't even know if financializing is a word, but basically I think, I think, yeah, I'm French.

Sometimes I use words. I'm like not 100% sure. But I think anybody that has a surface of interaction with a large set of users will end up with user accounts that are powered by self-custodial wallets like a dynamic, a turnkey or a preview. And from there,

they will be able to access global networks on chain, which will allow like a Twitter or like, you know, frankly, whatever app that has distribution to or let the users earn interest on their balances. Or like now you have Uber that has, you know, Uber Cash and they will let you earn interest through chains like on this or urban.

B&B or like whatever. So I think it's, you could see it both ways is like, oh, it's going to be great for new banks, but also everybody's going to become a new bank, including those that are not professional new banks, and they have the edge of having distribution from their other adjacent activity, basically. Yeah, you definitely saw that,

this pattern that you're talking about kind of emerging like a decade ago with McDonald's and Starbucks, where like Starbucks, you were like, you can deposit. They had something like hundreds of millions of outstanding obligations to their own customers who had loaded up their like Starbucks wallet with like $50. And then Starbucks was like collecting all the yield on that.

And so like we saw early, early tremors of that. I remember talking about that a lot in 2021. And now what you're saying is like, well, if anyone has any sort of distribution, you can turn it, you can turn your app into a Venmo with yield so easily. Yes.

I think that's right. I think that's incredibly easy now. And that also comes down to the point I was making about openness and accessibility. It's like literally chat, GPD can build a new bank, like very easily thanks to basically like, you know, like defy where you can just like if you embed like a self-custodial wallet. It's like so easy.

And I think we reached this inflection point not so long ago, by the way. I think it's like a three months thing where it became the easiest way to build like a financial app is on crypto rails. Like there's no, it's easiest, it's easier. I don't think we have the quality of the financial products yet, except in summary. like payments or yield sometimes, but eventually we'll just get better and better. Talk about capital efficiency

because institutions are going to come on chain. They're going to put their money on chain if and only if it is more capitally efficient for them to do so. And that's kind of always been the long promise of crypto, just your capital goes further in crypto. How does Morpho Midnight fit into this equation? Yes.

Capital efficiency ultimately is going to be everything. I think the cost of capital for loans being better on chain is going to be the largest, the biggest gravity pole for the next wave of adoption. And again, I'm super biased because I'm building a learning protocol.

But I really think it is. I really think financing is the cornerstone of finance and as the name hints at. And I really think financing is also some of the markets today in Tratify that isn't uncompetitive and that gives a huge net interest margin to the financial system,

which we should account for like 200, 300 bibs on the entire economy. And because on chain rails, everything is open, if you have an infrastructure that lets you set the price, then you have open competition. And if you have open competition, you compress the net interest margin,

which is both the reason we're going to be hated and loved because that's going to create an immense amount of disruption. And by the way, we've threatened a bunch of, of business models, but then we also save other people a bunch of money. Exactly. And, you know, it's like the story of tech is like disrupting industries.

Took us a lot of time to disrupt finance because it's like it's a much lower industry for regulations reasons, for so trust reasons, et cetera. But we're there now. And I can tell you those like those banks and asset managers detect this problem seriously. Like they really understand that the way they were making money is going to disappear because of the openness of the chain. And basically you can take two postures, either you prevent this from happening

or you fully lean in. And because if you're first, then you have the opportunity to disrupt yourself and disrupt others before they do. And as a reality of the game theory is that you should fully lean in because some others are already started

to fully lean in. And yeah, you don't have the choice, right? And I think actually DFI has much more leverage on TradFi now than people may think. It's like, this is not a choice thing for them. Like, they have to. because some of their competitors are already leaning in. Say someone took some Schrodenfreude in watching banks get unbundled,

I would expect that this would be a very big moment along that journey. Because something that you said is collapsing the net interest margin. Well, you're just talking about collapsing how banks make money and putting it back at the margins. And so, like, you know, there's been a bunch of things that we've invented in crypto that have created like this whole, like bankless movement, technologically speaking, like one, bankless money, Bitcoin and East, stable coins, like the money of actual real banks. And then this is just like also just taking

kind of the back end of banks and allowing it to get expressed on chain. And so like in 2026, we finally have fixed rate, fix term loans. That is kind of where banks get a lot of their yield and supply a lot of, just make a lot of their money. And so I would suppose if somebody had a podcast called Bankless, they would be thrilled about this. I actually did not make the connection. How about what I was doing? About like the sort of like what we're saying in the name of the podcast. I think that's right.

I think it's not just just because fixed rate, fixed term is a big part of the banking industry that it's interesting. It's also because now it's market defined interest rate. This is more than being fixed right, fixed term is because now it's a marketplace. This is how this is the purest expression. of we're going to have competitive cost of capital. This is it.

We have an open market for trust. And by the way, this is why I, this is why I do more for in general is one way to think about this net interest margin is,

so I like to think of bars as people that have ambitions to realize something in the world and they need capital to achieve it, right? And they need the lenders, which are the people, the believers,

that the people that, that trust them to achieve stuff, right? And I think of this as a very noble activity. Finance does not look always the most noble activity. It looks like the only industry that moves value around without like creating value and yet tax a cut, right? It sounds very extractive. But when you paint a picture of like, okay, people have ambitions,

they want to realize them, people believe in them, and so they transmit capital. It seems like a very important thing to do. Yet the cost that is bared on like the infrastructure level that connects the two layers is very high. And it's like the 300 bits that we've been talking about on the entire economy. I think of Morphus' mission is basically collapsing the cost of trust,

like collapsing the cost at which humans have to believe in one another and trusting one another. And you achieve this by providing open rails in which people can compete to offer the best possible terms to their counterparts. And frankly, this is why I work in crypto and what I get excited about all of those things is that the promise is like absolutely exhilarating

in my perspective. How much TVL do you think Morpho Midnight will have by the end of 2027? Oh, by the end of 2027? So, okay, I think everything is highly dependent on when we unlock the business cases for TrotFi. Because, you know, if you look at the time today, like crypto back loans is like, what,

the $60 billion market, it's great. I think Midnight is going to event. actually eat a lot of that and will be the largely dominant player over like, you know, anybody else, including Marful Blue. But that's still in the order of magnitude of tens of billions, right? And that's probably going to take a few years to get there anyway. What I'm excited about is what are the new addressable markets that were going to be unlocked by midnight?

What are those like? Because the order of magnitude can very quickly change if you onboard new types of of asset curators or asset managers in the network that basically handled trillions of dollars, right? So I'm not saying, obviously, midnight will be trillion of dollars by 2027. Those are timelines. I don't fully control myself. But I think, I think, I think, I hope it will be more than $10 billion.

That would be like, I hope he would have outgrown more for blue. If that's not the case, I would be very disappointed, to be frank. And I would not be surprised if we've crossed like the $100 billion mark then. Because it, you know, frankly, like took two years to Morphabu Blue to reach like $10, 10 billion. So I think that's not unreasonable to think in those orders of magnitude. Yeah. Yeah.

Yeah. I did a podcast with the blockchain capital guys. And they said $2 trillion is like conservative by 2030. For what? For midnight or? Excuse me, for stable coins. For stable coins. It's $2 trillion of stable coins on chain by 2030.

And I think that implies some sort of explosion in credit markets, credit borrowing and lending markets as well, because it's so fundamental and foundational to finance a lot. Yeah, I agree with that. And to be fair, I'm very bad at quantifying predictions. I've turned out to be pretty good in defa defining directions and, you know, at the high level. But quantifying how much and one is like, you know,

depends a lot on, you know, maybe clarity not passing or clarity passing. it will influence a lot or like things that are not in my control. Some exciting news. We are launching a new podcast to help people figure out the crypto cycle, how to navigate it. The best crypto cycle investor I know, his name is Michael Nato. He runs the defy report. This is the guy that sent me a sell alert before the 1010 price drop happened. His cycle analysis has been absolutely on point.

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Hey, Bankless Nation, it's David. If you're hearing this, that's because you are listening to the free bankless podcast feed. Did you know that there is a premium bankless RSS feed? The premium feed has extra interviews that I do for my own personal research and just deeper questions that I want answered about the crypto industry, questions that I want to answer so I can be more informed as an investor, both at Bankless Ventures and also just in my own personal portfolio too. Also, there are no ads, which means if you listen to the premium feed instead of the free feed, you'll get about 20 hours of your life back every year because you choose to support Bankless directly. So if you're interested in getting extra content all while skipping the ads,

or you just appreciate what we do here and want us to keep doing it, we'd appreciate it. If you signed up for bankless premium. And there is a link in the show notes to get started. Cheers to a good 2026. I want to get your take on Heser-Perses statements recently. She released some statements last week. I'd summarize them as like respectful to the sector, the vault sector,

because it's grown pretty large while highlighting some key concerns that she has about the sector growing any larger. More specifically, she said that vaults may be investment companies or investment contracts. And she also said that lending strategies may create notes that are secure. What was your reaction when you read Hester Persis' statements?

Yeah, so first I wasn't surprised. I actually, last week, I spent the entire week in Washington, meeting multiple times with the SEC, with the CFTC, with the different senators and staffers, et cetera. We're in, like, close contact with all of those regulators. I think generally I'm thankful of the thoughtfulness that goes into, I don't know if you write the full post, but it seems very reasonable to me.

when you read it, you're like, hey, some of those votes may be investment companies, right? And there's a bunch of vault stack out there. There's a bunch of different types of vaults. And some of them are fully non-custodial, like fully immutable, where you can't change the risk parameters within the bounds of a time lock. And some others are frankly just fireblocks wallet, right? You just deposit into a fireblocks wallet. And then this fireblock wallet gets to manage everything.

And there's a world spectrum. And yes, you know, I'm ready to believe that, you know, some of it is like investment, you know, companies, right? And some of it may not be, right? And so I think it's a very thoughtful statement to make. Like, you know, to her points, like, if it looks like something, then it probably is that something. And, you know, I encourage curators and, you know,

just generally space actors to engage with the SEC. I think they've been very open, in my opinion. Over the last, you know, months as we know. So, so yeah. I think them acknowledging the same. spectrum of vaults was like the most important piece for me is that they truly understand that there is like a world like spectrum of like non-custodiality control agency that a curator would have on the vault and same for lending protocols like a lending protocol can have a lot

of agency on how the risk parameters are set or no agency like like it's the case for morpho yeah she said this line about vaults this description is purposefully broad and generic as with many new developments in crypto this term does not have a specific widely understood definition and only someone who's been paying attention to crypto for like five plus years would be able to like have that realization that sometimes we come up with words and the word itself is just like over purposefully broad and generic for example the word token itself

like some tokens are literally securities and others are just like a receipt token a utility yeah just doesn't actually explain anything yeah did you go for it sorry that was just going to say frankly that's you know when I came up as a word curator I, that was also on purpose, right? I had no idea what this role was going to be about, right? Like, and is that, you know, closer to an asset manager? Well, not really because it's non-custodial and they can't really manage assets.

But at the same time, there are some parts of the activity that resembles that, but like is that, you know, necessarily manager or activities, etc. And so I think, you know, the safe bet is like, it's a new thing. So you create a new word. And then eventually, you know, as we, as we discussed with regulators and figure out, like we draw the line on what should be like an investment like contract in that case or or are not regulated under the SEC, then you can maybe do a second iteration on the vocabulary you use

in order to have maybe an extra objective like a network token or a securities token in order to clarify verbiage. Did you listen to my interview with Andrew Hong? I did not. So you know Andrew and his company heard? No, I'm not familiar. He does, like, AI-enabled inspect source of vaults. And so this vault deposits into that vault, which deposits into these vaults.

And so he, like, has a startup that kind of, like, shows you a sort of topology of all the intertwining permutations. The frankly, scary level of intertwiningness in a lot of the vaults. And so him and I were talking about just, like, the vault industry. And we were talking about the risks of said vaults. and we came down to the end of the podcast, and this was after he's like scaring me with all the different, you know, combinations of different vaults out there

and just like, if you think you are innocently supplying your USC to get 6% in this fault, but then it explodes into 17 more vaults. And like the problem, the problem statement that we kind of came up with is like no one in the vault space is taking liability because Morpho doesn't want liability

because you guys just want to be a neutral, tech platform and the curators don't want liability. Well, because no one wants liability. But like our, the conclusion that we came down to is like somebody in the vault vertical needs to take the liability and become registered and compliant with, you know, the three letter agencies, four letter agencies, so that they can, you know, I don't know what the correct term is. Maybe Hesser had it in the, in her paper, just like investment manager or whatever.

But somebody needs to take on a regulated duty so that this thing can be a little bit more compliant and the risk is managed, but then these people are taking more upside so this whole thing can grow 100 times bigger. That was kind of like my takeaway. I think that's an interesting thought. I think there are basically three different actors.

You have the distributor, the curator, the curator, and the infrastructure, right? And the Volt infrastructure and the market infrastructure are huge of those. You know, as a morpho, I think, we think of our responsibility as like we want to provide code that is, you know, safe and, and, you know, audited and et cetera. And also we want to provide a controlled environment for the curator.

Like, for example, a morpho vault can deposit into other vaults. A morpho vault can only deposit into morpho markets. And it guarantees the user and the responsibility that we have is like guarantees the user that vault curator can only add morpho markets within the period of a time lock. And during that time lock, it's important to understand that users can withdraw. Whether the stable coins, if the Volt is liquid, or the position in kind, no Morphal Volt curator that has the correct parameters can steal your money without you having the right to withdraw.

Right. It's important to understand because, like, if, you know, I give you an extreme example, if like tomorrow, North Korea, like, hacks a morpho vote that has the proper configs, like, in place, where basically you're going to have a few days to exit the vault, until the time lock goes down. And that's non-custodiality, right? So that's a guarantee and a responsibility

that morph as a technology platform, as the, yeah. Then you have the curator and you have the distributor. The distributor surely has a responsibility because they choose everything, right? And they're only going to offer one option for the user. And so they need to disclose as much as possible the risk to the user. And I'm not, I'm no one to say

if they should take legal responsibility or not, et cetera. And then for the curator, I think similar, except it highly depends on the vault stack, right? If you have full discretion on where the asset goes,

then it's hard to think that if you're in control, then you're not liable, right? Like it's, at least in my perspective, right? But I think, you know, I take all of this with a grain of salt because there's a lot of nuances in every volt stack in every configuration, et cetera,

that I'm not always aware of. That's at least my basic mental model. I think I'm aligned with that. I'm trying to get down to the bottom of this. And so I'm doing this episode with you about midnight, but then also I'm doing an episode with the upshift in the beta people and also with the stakeholders. Because I want to answer the question,

who should have more legal liability in this vertical? Not that I think having legal liability is noble, although sometimes it is appropriate but also that's how this thing gets bigger and safer at scale and so like who should have reliability and how that looks I'm sure I mean I'm sure Hester is on the case here

she is maybe I should just wait for her but the curator feels the closest to having the most of them because they're the ones like deciding how much risk and what that risk is and they also need to have more upside too they need to have a little bit more skin in the game

And so I want that to be a more loaded, encumbered job that has more upside. That's kind of like my first intuition. But I'm sure that there's plenty of cases where that doesn't quite make sense either. Yeah, I think that's probably my intuition as well with the caveat that it's highly dependent on Volt product and the Volt infrastructure itself. Because you could imagine both infrastructure that are so non-custodial where like the reliance on the curator is purely operational and not managerial and some other vaults where you expect them to manage.

And if this is the expectation from the user, then maybe it should be right that way. So I think it's all about the implicit contract that you have with the end user and how their money is going to be protected and how much do they expect reliance on you to protect your money. I think plays an important role here.

Cool. Paul, I'm excited to see Morpho Midnight grow. I'm sure you were very happy to get it out the door. Yes. And then that one day will come where you flip on the switch and Morpho Blue and Morpho Midnight. night will be intertwined and that will also be exciting. But for now, we will watch Morpho

midnight grow a little bit more organically and we're excited to get more institutions on change. Thanks to this primitive. So thanks for coming on the show and telling me about it. Thanks, David. Bankless Nation, you guys know the deal. Crypto is risky, but not risky enough. You can lose what you put in, but the institutions are here. And so we're going even more westward. It's not for everyone, but we are glad you're with us on the bankless journey. Thanks a lot.