DeFi’s Path to Mass Adoption Goes Through Fintech Firms, Centralized Exchanges, Morpho Labs Chief Says

According to Paul Frambot, the CEO of Morpho Labs, a decentralized finance (DeFi) revolution relies on fintech companies and centralized exchanges acting as catalysts. These intermediaries hold significant influence and have greater motivation to adopt the new DeFi infrastructure than traditional financial institutions (TradFi).

In a similar fashion to how the automobile industry consists of distribution and manufacturing sectors, finance does as well. Fintech companies like Revolut and Robinhood serve as the distribution channels for digitalizing financial services. However, they still depend on traditional finance, or “TradFi,” as the manufacturer, according to Frambot.

He expressed the view that DeFi will undergo changes based on various proofs supporting his argument that decentralized finance can grow in collaboration with centralized crypto exchanges and fintech companies.

For instance, Coinbase’s (COIN, a US-listed crypto exchange) achievement with its layer-2 blockchain, Base, has inspired several fintech companies and exchanges to either develop or collaborate on their own layer-2 solutions. Robinhood unveiled in February that they were working with Arbitrum, an layer-2 blockchain, and many other fintech firms have already set up digital wallets for smooth integration with Web3.

“According to Frambot’s statement in an interview, Traditional Finance (TradFi) is not keen on transitioning to Decentralized Finance (DeFi) due to their significant advantage from established infrastructure. On the other hand, fintech companies lack their own financial infrastructure and must pay fees to TradFi. However, they possess distribution channels and user adoption. By developing their infrastructure through layer-2s and immutable DeFi systems, fintechs can increase profits, improve efficiency, and reduce operational costs.”

He expressed his disappointment that finance hasn’t undergone any significant changes yet. “We’re only catering to crypto users who already possess cryptocurrencies,” he explained. The vision of an open financial infrastructure supporting all financial services is still a distant dream. Founders are mainly driven by the lucrative opportunities in the crypto market, which provides little motivation for them to look beyond it.

According to Frambot, solving DeFi’s scaling challenges involves creating neutral protocols, similar to the foundational infrastructure of the internet. These protocols can be effortlessly added upon. Initially, Morpho thrived as an effective optimization service on leading DeFi platforms such as Aave. By employing a matching engine, Morpho reduced spreads and presented users with preferable interest rates. Later on, Morpho evolved into a foundational protocol akin to Uniswap, the top decentralized exchange by trading volume on Ethereum.

In Frambot’s view, a broker or fund model based on the blockchain, such as Aave or Compound, which must be flexible and constantly managed through numerous risk-mitigation governance choices, may not grow enough to bring Decentralized Finance (DeFi) into the mainstream.

“According to Frambot, a single compliance solution that works for everyone isn’t feasible due to varying KYC (know your customer) and risk requirements. Instead, there should be a fundamental protocol without any bias, which can be customized with additional financial features tailored to specific applications.”