“Trading is Costly, Burdensome, and Unfair to Every Participant:” Interview with Martin Froehler, CEO of Morpher
Martin Froehler: I’ve been trading the markets since I was 16 and in highschool. I have seen the markets through many perspectives and lenses. Back then, I had to go to the bank and would be charged an arm and a leg to trade US stocks. I went on later to manage a quantitative hedge fund, so I have a lot of experience trading the markets.
What I learned is that regardless of where you are, whether you are a small retail trader or a hedge fund manager, trading is costly, burdensome, and unfair to every participant. You have to deal with middle men, have less access to markets, have difficulty diversifying your portfolio, and there are often large transaction costs. The system is basically broken for all participants.
This inspired me to do something about it. I wanted to fix trading and investing for people who suffer from its current limitations and open the space to the entire global population. 80 percent of the global population does not have access to the markets, and we want to create an ideal world for trading and investing. In an ideal world, you could trade assets with perfect liquidity, no middleman, and zero fees. That’s essentially Morpher.
Why did you choose to set up your company in Austria? What made you decide to move away from Silicon Valley, and what is the difference?
Morpher is still a US company, so we haven’t left the US behind entirely. We chose to operate out of Europe pretty much right from the start because regulations of crypto and financial instruments are much clearer in Europe than in the United States. In the US, there is no clear framework for what constitutes a security and a financial instrument, and you have a lot of legal risk if you operate a crypto company.
In the EU, there is a clear and well-defined framework that applies to all member states, and you have a giant domestic market. If you achieve compliance in one EU member state, you can essentially promote your project in the entirety of the EU.
Secondly, the most attractive feature of operating out of Silicon Valley is the great network that you get. I feel that we still have that network through our investors, through my co-founder Denis (Stanford alum), and we are a part of the StartX accelerator at Stanford University. We also still have a great network through our seed investor, Tim Draper, so we have the good parts that come with working in Silicon Valley, without the exorbitant costs of living. The runway that we have as a company lasts much longer here than in the US.
How did you come to the decision to make a blockchain company and why did you choose Ethereum as the blockchain to run your application?
We use blockchain because it excels at eliminating the middleman with software. In other words, it eliminates the need for a trusted party in a value transfer.
In terms of Ethereum, you can run much more sophisticated applications by programming smart contracts, which are protocols that operate based on certain rules. That is what we have developed here at Morpher. Ethereum is the most mature blockchain out there: it has the most developers in the space, most development activity, and most support in terms of wallets and UX. The biggest drawback of Ethereum are the high transaction costs, and that was the reason for developing our own scaling solution of the Morpher protocol from the beginning. Morpher operates primarily on its own plasma side chain.
You said you started trading at the age of 16. What was your first crypto purchase, what did you buy, and how much? And are you still trading cryptocurrencies today?
I have basically given up stock trading and have shifted completely to crypto currencies. I made my first cryptocurrency purchase in 2015, which is pretty late in terms of Silicon Valley adoption rates. Back then, I bought one Bitcoin when it was trading at $300 and didn’t care too much about it initially. Within the span of a year, the price increased to $600-$700 per coin, and that’s when it really got my attention. I then kept buying Bitcoin, not a lot, unfortunately, in hindsight, and started looking at the underlying technology. The point where it really clicked for me was when I read the Bitcoin white paper, which I can recommend to anybody. It really highlighted why the blockchain is a massive invention for humanity, and from then on, I kept researching and going more into the crypto space. I was excited when Ethereum launched on Coinbase, and I bought some ETH when it was trading at $17. Those were my first steps in crypto, and as of today, I am one 100% in crypto, and I am not trading stocks anymore.
Do you think crypto can replace traditional assets?
Not necessarily replace, but complement. Yes, a lot of things will be on the blockchain, so I think that Bitcoin will replace much of the role that gold currently has, for example. Bitcoin is like gold 2.0! It is digital gold, and it is way superior in its properties to gold: it is more durable, fungible, you can easily verify if it’s counterfeit, etc. So yes, a lot of assets will be replaced by the blockchain, and other assets will have a digital representation on the blockchain, like real estate, for example. I believe that more and more development projects and also individual buildings will become tokenized, tradeable, and people will be able to buy a small part of the building they are living in, so this is more a complement to an existing asset class. I also believe that stock trading, how we do it at Morpher, will become completely tokenized on traditional exchanges.
Speaking of the recent pandemic, it dealt a huge blow to the world economy. What effect has it had on crypto markets and the DeFi community, as well as in your company in particular?
I believe that in observing the aftermath of the pandemic, with the money printing that’s going on globally by all central banks, that has had a huge impact, and people are starting to become aware of that. They see that the money that they have on their savings accounts has become worth less and less over time. They have also had more time over the pandemic to really worry about their financial future because they had the time to reflect on how they had been affected personally by the pandemic. A lot of people also flocked into trading and tried out new ways to preserve wealth or searched for new skills that they could do at home, and day trading was one of them. Those are some of the things we have observed in the last year.
At Morpher in particular, we had to work remotely, which was a big change for the team. Interestingly, this worked pretty well, and there were no major hiccups there. In terms of users that came to the platform, we saw a massive increase, especially in the first half of this year.
What do you predict the price of Bitcoin and Ethereum to be in the short and long term?
That is, of course, very tricky to predict. The easier one to predict is definitely the long term price of Bitcoin because Bitcoin and crypto assets generally need to be priced as a network, under Metcalfe’s Law. The more people that use something in the crypto space, the more valuable the underlying asset becomes. In terms of crypto adoption, we are where the internet was in 1997. The same percentage uses cryptocurrency today that used the internet back in 1997, so we are talking about roughly 2–3% of the global population. This is still super early, and if we just extrapolate the historic growth rates of the whole crypto space, crypto is being adopted much faster than any other technology before. That means that within the next ten years, it is reasonable to assume that between 30–40% of the global population is going to use Bitcoin. That’s a factor of 10x from today’s levels, and if we make a very simple guess, then that would also be a factor of 10x in terms of pricing of the assets from today’s levels within the next ten years. That is the longer term adoption perspective.
The shorter term adoption predictions are always more tricky because they are subject to human psychology, which is very hard to predict. What can be said about Bitcoin and Ethereum in the shorter term is that Bitcoin is still the dominant crypto currency and follows the four year cycle. Every four years, Bitcoin undergoes a halving event, which means that the block rewards that miners receive is halved. That is a predictable and deterministic supply shock for Bitcoin every four years. Historically, we have had three such events, and we have always seen that after such a price shock, it usually takes around 1.5–2 years until the real scarcity of the asset shows up in the markets, resulting in prices going parabolic. This is due for the fourth quarter of this year and for the first quarter of next year, and this supply shortage will result in dramatically rising prices of Bitcoin. In terms of short term predictions, I stick with my previous prediction that Bitcoin will reach $150,000-$160,000 by the end of the year and Ethereum somewhere in the range close to $10,000 per Eth.
How does the price of Ethereum affect your company? How is Morpher affected by bearish and bullish tendencies in the cryptocurrency markets?
We are definitely affected by Ethereum in particular because we have chosen to back the Morpher token on Uniswap, the biggest decentralized exchange, in Ethereum. We could have chosen the dollar or a stable coin, but we have chosen Ethereum because we believe that it is the more attractive offer for a crypto audience to benefit from the general appreciation that we expect to see in the crypto markets. In other words, yes it certainly affects us. The company holds reserves in Ethereum, and every time Ether goes up, that’s good for us because that means that our reserves are worth more in dollar terms. We have seen a huge influx of new users and a huge spike in trading volume when everyone was excited about the crypto markets back in April and May of this year. We have also seen this cool off a bit in times where the market is corrected, like in June and July, when many people were losing money on their crypto markets. During this time, we saw that the user activity on our platform goes back to levels below the peak.
Going back to Morpher. What is it like having Tim Draper as one of your main investors?
We are super happy to have Tim Draper on board. He was the first investor who really believed in us, back when we were fundraising our seed round. We were just two guys with a white paper, so that’s not a lot to show for, but Tim is really a visionary. He likes to invest in projects that have the potential to change an entire industry completely. Morpher is clearly one of these projects, and it is really great working with Tim. Back then when we were fundraising for our initial funding round, we had the option to go with another fund and even one with a slightly better valuation, so we would have had to give up less of the company in order to work with them for the same amount of money. Nevertheless, we chose Tim specifically because he is a visionary in the field, he is well-known to be a founder friendly mentor and investor, and he has a great network in Silicon Valley. Tim’s investment thesis is right at the sweet spot of what we want to build, so we feel very grateful to have him as an investor.
How is Morpher, in your opinion, a useful tool for professional and institutional investors and creators?
This will come over time. At least initially, Morpher is clearly a consumer product. The advantages that we can offer consumers outweigh the advantages, at the moment, that we can offer institutional investors. Consumers get access to all global markets with zero fees, infinite liquidity, 24/7 trading in both directions: long and short. This is something that they find nowhere else. For institutional investors, high networth individuals, etc, they will become our clients and customers in phase two of Morpher, as soon as the market capitalization of the token is sufficiently high. Once we approach around $1 billion market cap or slightly more and once the token is sufficiently liquid for them to easily move millions in and out of the token itself, professional investors will come. Morpher will become super attractive for institutional investors because it is essentially the perfect dark pool for them. They can trade without moving the markets and without having to disclose what they trade, without having slippage or commissions, and they’re even able to trade when their traditional exchanges are closed. The whole ecosystem has to mature a bit thouh, before it becomes attractive to institutional investors.
Speaking of your personal experience, what has been the biggest challenge you’ve faced at Morpher?
We have faced a lot of challenges. The biggest ones are always around the technology; blockchain is still very clunky, unfortunately. It is where the internet was in 1996 or so, so not everything that you would wish for is already there and built. You have to build a lot on your own. For example, in our case, we have built our own sidechain, our own plasma scaling solution, and our own wallet because we want to provide our users with the optimal user experience across all devices. Infrastructure like that is not built up yet on the blockchain. We also had to build our own data oracle because the blockchain does not usually know what’s going on outside of it, so the data oracle service is required to tell a blockchain, in our case, what the price of Apple or Gold is in real time. All these infrastructure components had to be built. This is very challenging, so a lot of very smart people are working on that globally and trying to build that out and we had to build it all by ourselves. That is still one big hurdle today.
The second big area where every crypto company struggle is compliance and banking. It is very hard to get banking or to be accepted as a partner in the traditional finance space. Once you’re in crypto you’re more or less a pariah and nobody wants to deal with you, even if you are super compliant and have everything worked out on that front. So those are the two most severe challenges for crypto companies.
What are you most looking forward to building at Morpher right now? What is your next big step?
I’m very excited to completely decentralize the Morpher protocol. At the moment, Morpher is still at the stage where all protocol roles can be voted for, so our users can already replace us in any key function that we currently still hold. I’m very excited to completely decentralize the Morpher protocol and also to decentralize the blockchain oracle making it available to other protocols in the space as well. I believe that our oracle is already much better than all other oracles out there. We have built it because we need real time market data for our own protocol, and it has been in production for over a year and functions flawlessly, so the next step for us is to share that technology with other projects. This will hopefully advance the entire space because this is again one of the infrastructure components that is still missing today, so I am very much looking forward to that.
