Early lending avoid protocols were restricted just like the
short tail of assets. So like Ethan and USCC and
Bitcoin. So we started building Euler as
like an integration with Uniswap at the time actually to enable
people to lend and borrow not just the short tail, but also
the long tail of assets. If you get liquidated on Euler,
the because it's a fair auction, the bonus tends to be basically
the fair market rate, like however much it should cost to
do the liquidation plus a little bit extra.
The actual cost of it might be a few $100, whereas the cost of it
on another platform might, might be yeah, literally hundreds of
thousands or millions of dollars.
When tap is drained in protocol, they a lot of the assets come
back in terms of like USDC or USDT, right?
And Circle and Tether. If, if they get requests from
law enforcement or they know that funds have clearly been
stolen, they have the ability to put freezes on asset.
A lot of attackers will just effectively auto convert any
stolen funds into E or an asset that's like more decentralised
and more difficult to kind of freeze basically.
So that's what this guy did. The recovery period while we
were tracking down and negotiating the recovery, the
the price of East rallied. And so actually it was kind of
like the attacker put on a long position on behalf of all of our
users. Welcome to Epicenter, the show
which talks about the technologies, projects and
people driving decentralisation and the blockchain revolution.
I'm Brian Crane and today I'm speaking with Michael Bentley,
who is the CEO and Co founder of Euler or the labs or the
finance, which is a very innovative defy lending
protocol. So I'm really excited to talk
with Michael about that. So just before we get started,
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Cool. Thanks so much for coming on,
Michael. I'm really excited and looking
forward to this one. I'm curious tell, tell us maybe
a little bit about yourself and how did you get into crypto
first? Yeah.
So first, thanks for having me on.
Yeah, looking forward to it. How did I get involved?
Well, I used to be before, before this life.
I used to be a research scientist, used to be an
academic. My specialism was evolutionary
game theory, so I used to do like lots of population
modelling of biological systems and how they change over time
effectively do. I was more on the math side, but
I used to collaborate a lot with like computer scientists and
biologists and other people. I started as a bit of a script
crypto skeptic when I first heard about it in 2015, didn't
think it sounded very cool. I just mistook it must look
Ethereum for like some kind of boring database like solution or
something. I just wasn't, wasn't
interested. But by 2017, like maybe late
2016, early 2017, like the, the, the markets had kind of got a
bit frothy and I kind of got drawn in at that time and
started I think later that year I started building braiding box
and things for some of the primitive decentralized
exchanges at that time, something called Index that I
used to, to trade on and Etherdelt.
So I don't remember that one. These are like literal order
books on Ethereum, so quite slow, quite clunky, but they
were kind of like a good introduction to like markets and
how theory works and stuff. And then, yeah, stuck around as
things like deteriorated in terms of the market conditions
over the next few years and got more interested in a bunch of
other stuff in 2019, in early 2020, like D5 was sort of
starting to emerge as like this kind of force to be reckoned
with. It was like unis law and, and
yeah, and things like that were becoming popular.
And that's when I got sucked in and started studying interest
rates and, and things. And so I actually started Euler
off the back of doing hackathon project where I'd created a
novel interest rate setting mechanism that was more
decentralized for like less dependent on on third parties
than than the ones that were being used on on compound at the
time. What was the original vision
for? So we wanted to make something
where you could lend and borrow any asset.
A lot of the early lending environment protocols were
restricted to, to just like the short tail of, of assets.
So like Ethan and USCC and Bitcoin and maybe a handful of
others. And yeah, I guess, I guess in my
hackathon I was like, I was sort of inspired by like, how do you
set interest rates? If you want to expand that set
to like everything, you need an interest rate model that's that
can adapt over time and adapt itself.
You don't want necessarily like like a slow process of
governance or third party like changing interest rate bottles.
So we wanted to see, yeah, could we could we, could we that
lending environment happen for anything.
And so we started building Euler as like an integration with
Uniswap at the time actually. So Uniswap V2 had oracles for an
inbuilt Oracle for the value of assets.
We plan to use that to enable people to lend and borrow not
just the short tail, but also the long tail of assets.
Create, create lending, borrowing markets for all of all
things. Didn't actually work out like
that. We had to pivot, pivot a few
times as as the punching room. But that's that's that was one
of the early visions, I think. Yeah.
OK. OK.
And then I'm curious, is this, it sounds like something where
maybe your evolutionary game theory was that background
knowledge very applicable here? Oh, I mean, massively right.
It's yeah. I mean, in that day job, you're
often like, what was wrong? What was I actually doing?
You know, How do you build these models You like consider like a
set of things are entities, people, biological organisms,
and they're like kind of playing strategies in this big like
competitive game and they interact a lot.
And so you have to like model that out and think, you know
what, what will be the, the like equilibrium state of if, if
you've got like two different entities playing different
strategies, right? And that's very similar to what
happens in markets, right? You have like lenders and
borrowers, you have like people striving to like optimise
profitability or optimise some kind of metric like risk
adjusted return or whatever. And so, yeah, there's a huge
amount of overlap in terms of designing a like AD 5 protocol
that that can facilitate like markets and designing a model
about how, how, yeah, populations change in response
to their environment. It's it's, yeah.
If you just abstract everything, then it's, it's actually very,
very similar kind of task. So yeah, it was, yeah,
definitely My background was very relevant to what I do now.
So I, I imagine you're pretty unique among the five protocol
founders having like that kind of perspective and background.
Do you think that, you know, did that just help you maybe design
or learn a little bit, you know, have better models for different
risk events? Or do you think it also ended
up, you know, just in in a different protocol design
because of that background you had?
I think I think, yeah, I think it's, I mean, yeah, I mean D5
founders tends to come from really varied backgrounds,
right. And then there's like trade-offs
having different to all those backgrounds.
You know, like I think famously Euler, we're very like
engineering driven. A lot of the things that we
build are like really, really strong on the engineering front
and well like well architected. And so we have like very strong
attention to detail to like low level processes and mechanisms
and things. So like, for instance,
liquidations on Euler, I think we have the best liquidation
during in, in all of defy a lot of a lot of liquidations when,
when they happen on other lending growing protocols,
effectively, the borrower just has like some of their
collateral, like slashed and sacrificed.
And then that's used as a reward for the, for the people that
that are performing liquidations.
And it's often really costly, really, really costly,
especially if you're a big borrower, you've got like, you
know, 10s of millions of dollars at risk.
These bonuses, you know, this, these kind of slashings can be,
and that can be worth like hundreds of thousands of dollars
or millions of dollars on Euler. We use, we use a different
mechanism. So we don't take like a fixed
amount of the class. Well, instead we, we have this
like auction that plays out. It's a Dutch auction that plays
out on the bonus. That's, that's, that's
distributed. What's neat about that is that
if you get liquidated on oil, the because it's a fair auction,
the bonus tends to be basically the fair market rate, like
however much it should cost to do the liquidation plus a little
bit extra to kind of justify it. And so like the equivalent, if
you're a large bar on oil and you get liquidated, the actual
cost of it might be, I don't know, a few $100, whereas the
cost of it on another platform might might be literally
hundreds of thousands of millions of dollars.
And so that just think that that like process that like focus on
on auctions and how they can drive efficient outcomes.
I think was very much driven by like who we are as builders at
Oiler, which is is effectively just a team of engineers or
scientists. Yeah, all of our backgrounds
have like a strong influence over how how Oilers architected.
I think it's, yeah, certainly, certainly always been a bit
different to other, other platforms in that regard.
And so the the high level vision then where you guys ended up was
basically like a lending protocol where you can borrow
like any asset and use any asset as collateral.
That's kind of the I. Think that was the that was the
original vision and and then as we as we adapt as we grow over
time, we realise actually allowing anything to use this
class all is there are other other like factors that come
into play right like even if you could do that, you need to find
like counterparties or willing to sit the other side of that
trade and the truth is that there's just not a market for
that like there's I'd love to use my like long tail mean coins
or whatever that I've got in my wallet as collateral, but who
wants to lend to that like who's going to take the the other side
of that trade? There's just not really anyone
available. And it's kind of like, you know,
the that's that's true in real life, right?
Some, some assets just make really good collateral and you
can go to a bank and say we want to take our loan against a
certain stock portfolio or so a house or a car or whatever.
But but some things just, you know, don't make for good class.
Well, even though their paper value might be quite high,
doesn't mean that they're strong collateral.
So, yeah, I think there were a lot of learnings we made in
those early years as well about like actually there's some
things you can technically do, but whether or not they they
have like product market fit is a very different question.
So if you if you kind of go back to, you know, sort of the
history of Euler, right? So you talk about this hackathon
and then how it evolved into this vision of having this, you
know, very flexible lending protocol.
I know at some point you guys had a big hack.
I don't know when did that or like can you tell a bit like how
did things progress from that point onwards?
Yeah. So we there was a, there was a
big exploit unfortunately and yeah, in 2023.
So it was actually at the time when all the protocol being like
growing very rapidly and taking market share from incumbents.
At that time Euler V1 was like a very, very heavily audited
platform. Like we'd had more audits than
most people. We did.
We, you know, we worked with Satora who do do formal
verification. We had the largest bug bounty of
anyone in that kind of vertical. So we, we took security really
seriously. But what happened effectively
was that we had this, we had this bug bounty open and
somebody came and reported a pretty smart and a bug on all
this. So there's this smaller, smaller
issue that that first depositors in a brand, whenever you open a
brand new market, the first depositor has some funds at
risk. And because it was a funds at
risk bug, we awarded them a bounty, a pretty small bounty
because the amount of funds at risk wasn't huge.
But because there were some funds at risk, our security
partners when we talked to them said, yeah, you could probably
fix this, right. So we developed the fix and it
looked, it looked good on paper and we had it re audited.
So we were with the security partners, they audited the fix.
But I think ultimately the fix probably when you, when you do a
full audit the first time around, you're considering
absolutely everything. You know, you're not just
looking at them a small part of the protocol.
And so when you know full audits are fantastic, right.
But when when they were auditing the smaller fix and when we were
developing this like solution for this this much smaller
issue, it was much more of a contained, you know, it was more
like a focus on that thing. And then we weren't both
ourselves and the auditors weren't seeing that bigger like
holistic vision. It turns out that by developing
that fix, we'd actually inadvertently introduced a much
more fundamental error of much more fundamental issue into the
protocol. And that's how nine months after
we deployed that fix, somebody was able to come in and
effectively exploit a large amount of funds and take a lot a
large amount of funds from what I love everyone, which brought
down the input type protocol. What was that error that you
guys introduced? So the the solution to the
problem, well then just very briefly, I mean the, the problem
itself was caused by an uninitialized exchange rate.
The very when a fair very brand new markets created and there's
no users yet or anything, there was 11 exchange rate between the
receipt token and the deposits that was not initialized.
It turns out that for technical reasons, an exploiter could
potentially front run a deposit if they set up a bottle or
something, they'd have to do quite a bit of work for it, but
potentially they could like front run the first deposit and
only that deposit and then use that to to take some of the
first depositors funds. So the fix that we, we developed
was, well, you know, why don't we take the first depositors
deposit and we will, before they actually add the deposit to the
account, we'll use like one way or like some really small amount
of that deposit to initialize the exchange rate.
So there was this function that was added to the, the code base
called donate to reserves. And the donate to reserves
function was only intended to be used as a, as a, as a, as a way
to initialise this exchange rate.
And, you know, first deposits wouldn't even know what's
happening. Now what, what turns out, So
what someone realised, unbeknownst to us was that you
could use donate to reserves as a borrower as you donate your
collateral to the reserves, if you do it in, in some unique
circumstances, you could drive yourself towards like a less
collateralized position. And then if you can force
yourself into a liquidatable state, you could then lose money
and, and, and, and liquidate the account, right?
And so you might be thinking, well, why would anyone want to
lose money? It turns out we remember, we've
talked about those liquidation bonuses earlier.
Turns out that there was, there was some like parameter space
effectively where you could lose, lose less money on the
liquidatable account than you could make as the, the person
liquidating. So the person liquidate would
get the bonus. And so it wasn't a huge
difference, but it doesn't need to be because it turns out that
the attacker could then effectively kind of like loop to
amplify the amplify both the losses and the gains.
And so with this, this looping strategy, they're able to to
withdraw a lot more and drain, drain more funds from the
protocol than normally it would allow.
And so that was, yeah, that that's how it happened.
What was it like TBL back then and how much did the hacker
manage to steal? So we had, I think total
deposits were were sort of around 5600 million.
The the Taco was able to take out 200 million from the
protocol. Yeah, like big numbers and and
you know, I can talk about like the, the recovery process.
But we did, I should say upfront, we recovered all of the
money and more. So we were able to recover 240
million from the exploiter over a period of several weeks
following the attack. So we were able to track them
down and negotiate the return of of of all the stolen funds.
Oh, so yeah, to tell us about that, like how did how did you
guys tracked the guy down and how, how did you, why did they
agree to return these funds? There could be an entire, like,
I am not kidding, like an entire documentary series on on this
exploit. It's one of the most harrowing
moments of my life. But also retrospectively now, if
you look back on it, one of the most interesting sort of the
exploits in TV history. I think so, yeah.
I mean it firstly, we reason it was particularly awful.
I mean, it's awful for everybody involved when something like
this happens. But for me personally, it was
only four days after the birth of my son.
So I was on yeah like the the weekend my son was born like,
you know, the early hours of Friday morning by Friday
afternoon, there's a banking crisis in the US in circle asset
USDC was de pegging so it's called into action to like deal
with this crisis issue with USDC over the weekend.
So they didn't really get a chance to spend any time with my
son then And then on on Monday morning, I had some alarms going
off and I assumed it was related to the USDC de peg event, but it
turns out it was actually an Euler specific attack.
And so yeah, my. Yeah, the next few weeks were
were then spent with him, my son like in the background and me
like maybe trying to negotiate a return of all this money.
The actual. I mean, there was so many twists
and turns. The exploiter like tried to.
Yeah. Well, you know, we tracked them
down through various means, like I can't really reveal all of
them, but you know, you have to do a lot like a huge amount of
data gathering and. So can you figured out the
identity of the person? Eventually, yes, although not,
not initially. I mean, we, we had like AI think
we had a list of of around 10 candidates, can't remember.
But like we, we developed a list of people that, that we quite
quickly over that over about 24 hours, we had a list of people
that we thought could be involved based on, on available
evidence. And, but yeah, we didn't
actually know the identity of the person until quite a long,
long time after. Like even when we first started
talking to them, we, we, we wanted them to believe that we
knew who they were, but we didn't actually know which
person they were about list or whether they're on our list at
all, in fact. But yeah, they were they, they
started getting, I mean, they tried to do a donation to the
North Korean address to make it look like it was a North Korean
exploit, because if North Korea exploits the protocol, the funds
don't come back, right? You don't.
Then they're they're they're gone from.
Negotiate with North Korea. No, no, I mean, so, so it's
over. So I suppose, I suppose he was
his gambit. There was, hey, if they think
it's North Korea, then maybe maybe they'll just like go away.
But at that point where there was already like strong
indications from our side that we that we knew it wasn't North
Korea. So we were kind of able to call
his bluff on on on those on those donation gambits and and
then try to provoke more of a response from him and then try
and try and just get closer and closer whilst trying to
negotiate the turn. And then the funds start coming
back in dribs and drabs. It wasn't like they all came
back in one big block. Actually, they were probably,
they came back in maybe a batch of batches of like, I don't
know, yeah, maybe like 8 different times, like different
amounts of funds, like would come back.
And he tried to play games like trying to pretend to be multiple
attackers at one point and and do all sorts of like really
crazy stuff. So it was a, it was a wild goose
chase and it lasted for weeks. Yeah.
Wow, wow. Interesting.
And then in the end, he said, he recovered more than what he had
stolen. Yeah.
And I mean in dollar terms, because the he when, when, when
the SAP is draining protocol, they, a lot of the assets come
back in, in terms of like USDC or USDT, right?
And Circle and Tether. If, if they get requests from
law enforcement or they know that funds have clearly been
stolen, they have the ability to put freezes on assets.
So a lot of assets, a lot of attackers will just effectively
auto, auto convert any stolen funds into E or an asset that's
like more, more decentralised and more difficult to kind of
freeze basically. So that's what this guy did.
And then in the period of the recovery period where we were
tracking down and negotiating the recovery, the the price of
East rallied. And so actually it was kind of
like the attacker put on a long position on behalf of all of our
users on East. Yeah, whilst it whilst it was
going up in price. So when, when we finally
recovered all, you know, all of the funds the the users got
back, there was an extra, there was a surplus, a $40 million
surplus of, of assets basically. So yeah.
Wow. So then you guys paid that out
to the users or how did you? Yeah.
I mean, yeah, we, yeah, it was well paid out to the users.
I mean, it's a very complex calculation figuring out how
much users, you know, have in a protocol, you know, lending
buying protocol, like the users have like a net asset value,
right, snapshot point in time. But that that net asset value
changes a lot over over a period of three weeks.
That can depending on what kind of positions you got.
Have you got loans? Have you just got deposits, you
just lending and so on. But yeah, it was all distributed
back to the to the users. So that was the recovery period,
which itself took, you know, a long time and was very, very
difficult. And because the TBL went down
to, when did it went down? Pretty much 0 no or.
I mean, the protocol wasn't viable after after that
happened. I mean, yeah.
So it wasn't like there was it wasn't, it wasn't like there was
a live protocol anymore. It was basically a dead a dead
protocol. So it had to be the, the, the
option was effectively it, it turns out, by the way, that
there was the, the, the, the way to prevent this was like there
was like a, a single single thing missing from this donator
reserves function. The donator reserves by itself
wasn't the wasn't the biggest, wasn't, wasn't the issue.
It's just there was a missing like check in this in this
function. And so had had that function had
the missing check, then it would have been fine.
So in principle, at that point, we could have just, if we wanted
to, to continue from there, we could have just made that, that
fix to donate to reserves. And then we launched Euler V1
because it was a very good protocol.
And I think it's, there's actually a fork of it somebody
else has been using on one of the other networks, I forget its
name, that's been going strong ever since.
So yeah, it's, it's a very good protocol aside from that, that
one crucial flaw. But we decided for, for other
reasons actually to not to not go with relaunching V1.
You know, we decided as a team to stick together after that.
Took us a while to come to that decision, like a few weeks, but
you know, do. You guys also think of like just
shutting down or? Oh yeah, yeah, of course.
I mean, it was extremely traumatizing for the team and
and obviously going to be really hard to recover from that, but
we had a very good reputation defy.
I think up to that point, you know, it wasn't like this had
happened out of carelessness or or because, you know, there was
we hadn't got the audits or wherever we were, we were like
above, we went above and beyond the, you know, with all the all
the gold standards at that time were kind of followed.
And so we had a lot of support from the border defy community
and from the security community and so on to to continue.
And the question was, could we, could we restore the fate of
like potential users though, right?
Like is, it's, it's one thing having a security reach is that
researchers say, well, yeah, they, they, you know, they, they
did their best and, and still, still this happened.
But it's another like finding that faith with the users again.
So there's a lot of concern, I suppose that like, even if we
wanted to, we wouldn't be able to come back reputationally
from, from, from this. But yeah, we, we talked about it
a lot and decided that we all liked each other and wanted to
work in D5 still and try and try and try to keep moving the space
forward. And that we had had kind of a
special team. And so we thought we would
rather than disperse and go and like join new projects or, and
try and like rebuild a new project, we thought, we'll,
we'll give it a go. We, you know, we still had, we
still had the finances to do it. Fortunately from our investors,
we had the backing of all of our investors to go out and rebuild.
And so, yeah, we said, so let's, let's give it a shot.
And so that's how we started building all the all the V2 at
that point. And what were the biggest
changes in V2? Yeah, quite a lot to be honest.
I mean VV one was we had a lot of, we learned a lot about from
V1 about like the market and the product market fit like we
discussed earlier about you know what, well, the like it's one
thing to just build something, but like this, does it really
have demand? The main thing we learned, I
think was that there's, there's not just like A1 size fits all
in D5 for lending and boring. Like every single user has a
slightly different risk reward preference.
You know, some people like really conservative, like simple
markets that are low, lower yielding, but they do one thing
and do it really well. Others like things like Ave.
which are more like larger monolithic protocols, probably
like more capital efficient, but like with an elevated level of
risk. And so like, it's not clear that
there's, there, you know, there's, there's just this like
1 perfect way to do credit markets that fits all users.
There's, there's a diversity of preferences.
And so we thought, how can we, and by the way, although like an
increasingly like diverse number of assets as well.
So it was like lots of, you know, new stable coins and, and
like state teeth and things were emerging and so on.
So lots of different asset types.
And So what we realized was rather than building like this
one protocol that's like designed as a, as a particular
product for specific users that we said, why don't we build a,
why don't we build the, the infrastructure for making credit
market products? So we decided to build more of
like a modular, A modular protocol where you could have
these like plug and play pieces that you can fit them together
effectively to then rebuild products.
And so you can rebuild oil of V1 using this tool kit that we've
got for oil of V2. But you can also build other
types of credit markets as well that might have a different
design that might be more conservative on the respect for
more or whatever. And then the, the idea with V2
is that other people can then come and build products in their
own image and tailor them to the, the user bases that they
have in mind and the risk reward demands that they, they have on
the protocol. So all the V2 is, is not a
product, a single product. It's a, it's a, it's like a
rainbow of products. There's just all sorts of all
sorts of different types of things going on with V2 and, and
different operators as well for the, for those products.
There's lots of thing, lots of entities called risk curators or
or curators that come and build their own, build their own
credit markets Anoila. And that wasn't really something
we had in the new one. So does it make sense to think
of like today, if you think on like lending credit protocols,
you have like are they that's, you know, of course, the best
known and which is, you know, very simple protocol.
And then I guess more for is a bit more flexible.
And then you guys are even more flexible and even more modular.
Is is that like a reasonable way of or or like how do you compare
Euler sort of in the landscape of different define lending
protocols? Yeah, I think, I think I would
say like at its core it's a tool kit for making Defy protocols.
So you can build Morpho with Euler or you can build RV with
Euler or build something in between those two.
But you there's that's not true the other way around, right?
You can't, you can't build the primitive using that their
toolkit. So like Morpho fundamentally has
these things called markets and markets in Morpho just like
collateral that pairs the the simple isolated pairs and then
they have Milton many, many pairs.
And then on top they have allocators.
So capital allocators will then push capital into the different
pair, into the different pair markets and borrowers will will
borrow from those pairs. Are they by contrast, is this
big monolithic market. So it's a market, but it's
rather than having just a pair of assets, it's got, you know,
30 or 40 assets in it, right. And then they're cross
collateralized and so on. So it's it's more capital
efficient, but but higher on the risk spectrum because now you
don't have this yeah, you don't have this isolation essentially.
So if an asset. It makes it more capital
efficient because basically Ave. has like 1 pool of USTC and you
know, and there's like 1 borrower rate.
And versus like for example, Morfo, there will be like
various different types of UCC pools and maybe some are like
used to the Max and some others are barely used some and that
kind of yeah. Yeah.
So on Morfo, I mean just like the if you think about the
design trade-offs there a little bit like there's, there's this
fragmented USCC pools. Now Morfo tries to solve that
for the lenders by effectively having like a higher level
allocatable. So most lenders deploy into
their like allocatable and then that disperses those funds into
these lower level markets. And that's, that's fine for the
lenders to a degree. But on the borrowers, on the
borrowing side, it still means you have this huge, huge amount
of fragmentation, which means to leads to like variable rates
and, and, and less capital efficiency there.
The other thing about Morpho is that the collateral is always
held in like an escrowed state, which means it's not it's not re
hypothecated at all. In RV the markets cross
classifies and often if you're taking a loan, let's say you're
using ETH to borrow USDC, the ETH is re hypothecated, which
means that somebody else can be borrowing the the ETH from you
whilst you're using it's collateral.
And that makes it more capital efficient because as a, as a
time borrowing USD on RV or re hypothecated market, like we
have an oiler as well. It means that I'm earning
interest on the on the east side and I'm paying interest on the
on the debt. And like sometimes the two
cancel each other out. Sometimes it's actually even
profitable to kind of take loans like that.
Whereas a more for your, your ETH would typically just be sat
in in kind of escrow and it wouldn't earn extra yield.
So it might cost you more if you look at the what's called the
utilization rate of these markets, which is like the, the,
the, the average. If you look across all possible
positions of like the amount of, you know, the basically the
fraction of the fraction of assets which are borrowed on all
of the fraction of assets which are borrowed is around 50% or
above on, on Morpho, by contrast, it would be like low
30s. So there's a big gap between the
capital efficiency of of markets which have re hypothecation or
enable that as a feature and the ones that don't.
And that's one of the, yeah, one of the trade-offs in design
decision differences between oil and morpho.
And so oiler you also has have re hypothecation like in our
way. Yeah.
So on, on Oiler, you, our primitive unit is not a market,
but actually even smaller than that.
It's just a single vault. And users can deploy assets into
vaults and then they can use those assets as collateral or
they can lend and borrow them from the vault.
Now if you want to recreate a Morpho pair, you, you basically
connect two vaults together. You, you have like 1 vault,
which does the lending, borrowing and one vault is just
all the collateral. It's got a single connection.
But on Euler, you can, because it's a tool kit and it's the
modular tool kit. You can actually extend that.
You can say that I'm going to act, I'm going to accept
multiple class walls and then I'd have like more, you know,
different types of class well for my learning role involved.
But you can go. You can also do the relationship
both ways. So you can see that a can borrow
B&B can borrow a. So if you start to build up
markets where you have lots of vaults, which all cross
reference one of those class, well, that's effectively what
what RFA is. So, yeah, under the hood, so you
can reconstruct an RV, the simplest, the simplest possible
RV would be something where you have just, yeah, people can
deposit ETH and borrow USDC and people can deposit USDC and
borrow ETH, right? That'll be like the simplest
possible RV with rehab publication.
There's a protocol called SILO which allows those kind of
markets to be developed. And yeah, Euler has those too,
right? We have some markets which are
just that simple. They're like the simplest
possible RV's. We have some markets where
there's, there's also many assets and they start to, you
know, the market gets much bigger and starts to resemble
more like RV itself. And where do you see the most
traction today? Main net in terms of networks
where it were deployed across 12 different networks and ETH
Mainnet I think is the kind of is, is, is the home of finance
today or the home of D5 today. But there's, we've got a lot of
traction on Avalanche more recently as well.
So recently deployed to Linnea, which is growing quite quickly
and arbitrary. Yeah, there's, it depends on
which network you're on what, what the asset base is there
that all users have different profiles and different networks
we found. And so you see very different
types of markets developing on different networks.
And yeah, I mean stable coins you'll you'll you'll bearing
stable coins and stables more generally is has been the thing
that's driven the explosive growth of both Euler and and
also Morpho. I think there's like just a
diversity of yield bearing assets and you have demand to
borrow. So yield bearing stable coins
where people will like deposit the yield bearing stable coin
and then they borrow against it. That's right, yeah.
So like USDE or or like what? What are the top yield bearing
stable coins in in Euler? I think USD will be like a
massive 1. We also have like some open need
and stuff as well lots of Pendle tokens.
So I mean the the basic trade that is super popular these days
are on oil and other lending protocols is you deposit your
yield bearing stable, let's say it's paying 10% and you borrow a
non yield bearing stable but from a lending market and maybe
you have to pay 7% to borrow. So yeah, if you.
And then you loop that. And then you loop that, yeah,
you so that you rather than getting just your 10%, you can
effectively earn the 10% plus the number.
You can get that 3% or 4% spread, but on a loop.
So you amplify your your you amplify your exposure to the
interest rates and you take on board risk.
If if the if the stable coin D pegs and it falls in price, your
collateral decreases in price and you risk liquidation.
But assuming you're, yeah, assuming you're, you're not
worried about that risk, then you can effectively amplify the
interest rate you earn by by kind of looping A yield bearing
stable against a non yield bearing stable and, and try and
perform what's called like a carry trade.
It's very popular in Trad 5 as well as D5.
But like in D5, this has been the, the the big trade of the
the past year. I would say it's it's it's some
kind of carry trade on yielding non yielding stables.
What do you think the future looks like?
I'm curious. I mean, I guess in in the
traditional financial market, right, Like fixed, fixed rate
lending is a huge part. I mean I would guess probably a
majority of that is fixed, although you you probably know
better what the breakdown is there.
Whereas in I think D5 right we have vast majority of lending
happens with variable rates. Do you think this is going to
change? I think it will change, yeah,
for sure. I mean, there's, we've got new
products coming on Euler which are more targeted to fixed rate,
you know, fixed rate borrowing. We've got 22 products coming
actually in that regard. But we're not, we're not alone,
right. I think the other competitors
have products coming too. The reason why they're in such
huge demand, I believe is that, but it's not so much like, you
know, lenders probably fairly happy with variable rates.
A variable rate is probably the like the fair rate that you
should be getting at any one point in time.
The rate reflects like the demand to to kind of borrow in
the market and then like compensation you should get a
lot as a lender based on the risk that you're taking at that
time. So I think for lenders, they're
fine with it, but for borrowers, these carry trades become a bit
unwieldy to carry out. If, if the thing you're
borrowing is very variable, right?
You, you might have your yield bearing staple that's at 10%.
And yeah, maybe, maybe you start and you open up a trade and
you're borrowing at like 7% or 8%, but then the rate spikes.
Now it's actually more costly to borrow the thing than the you're
than the thing you're using as classical.
So now you're in like this negative carry trade.
Where you're actually losing money on on, on a loop as well.
So you're actually like amplifying your losses.
And so that's that's, you know, borrowers are getting
increasingly frustrated with that, right?
They, they would much rather maybe paying, pay a premium
initially to kind of lock in at a fixed rate.
So maybe they started, maybe the variable rate falls 7%, but
maybe they're happy to pay 8% as long as they know that they can
lock in and it won't go above 8%.
So huge demand on the borrower side.
I would say for for for borrowers to be able to lock in,
lock in fixed cost borrowing positions for for sort to medium
term amount, you know amount of time.
OK. And then and then I guess for
the on the lender side, they would also then accept or have
to accept the fixed rate. Yeah.
And this is the question right is, is the are the lenders going
to be just as happy with this? The fixed, fixed rate products
are are definitely favourable for borrowers.
Are they favourable for lenders? And do you have product market
fit on both sides of the on both sides of the the plane here?
I think on the falanders, they would expect a premium, right?
Because they're also sacrificing like the sacrifice, sacrificing
this like fair rate that they're getting.
The borrower should be prepared to pay this premium because it's
clearly, you know, I'd find providing an advantage for that
for that party. So they, yeah, they're
effectively trading like the few they're playing a premium to
like lock in, lock in a profit. So yeah, that premium goes to
the lenders and maybe that premium is enough, but maybe
it's not the other. The other thing the lenders
forgo, I guess, is that flexibility to withdraw.
A lot of lenders, yeah, a lot of lenders like to have that
flexibility to just like withdraw whenever they want,
right? A lot of lending protocols are
designed with that in mind. So they, they often have this
unutilized portion of the pool or idle capital in the pool,
which allow the lenders to withdraw at any one point in
time. If, if you lock in at a fixed
rate, however, you typically kind of get locked into a more
of a fixed term as well, which means you're, you're, you're
losing that flexibility to, to access your capital when you
need it. So yeah, there's, there's that
like clear tension between lenders and borrowers.
And, and one thing we know is that market's a really good way
to like, find like a resolution for that tension.
So it'll be interesting to see when these products ship, I
think, I think it sounds like all, all post fields are
developing slightly different types of fixed rate products.
It'd be interesting to see which ones get the best product market
fit and satisfy satisfy the needs of both the lenders and
the borrowers in a way that's like kind of balances out and
it's fair do. You think the demand on both
sides will be mostly sort of short like I don't know a month
or maybe even shorter duration or do you also see markets
developing for a more long term that?
I think initially it's going to be driven by most borrowers are
kind of like traders and they're working on like time horizons
that are like months, not usually years doing.
You know, as a borrower, if you're doing these strategies,
you could in principle be like rebalancing every day and you
can probably optimize yield by like finding the best strategy
every day or you know, rebalancing very frequently.
But then you have like the cost of rebalancing, right, Which is
not just, it is like gas costs, but like your time, like
planning, like then the added risk of like repetitively
rebalancing, like you might make a mistake in one of those
things. So rebalancing too frequently is
kind of not something people tend to do.
So yeah, usually borrowers like in my opinion, will be looking
for to lock trades in for weeks or maybe like several months at
a time. So yeah, we see this kind of
thing with Pendle, right? Pendle offers fixed rate
products and and allow, allow, allow borrowers typically are
like more like lenders I suppose to kind of like lock in for
three months to six month periods as well.
I suspect we'll see fixed rate products that kind of match that
sort of time frame. So that like, yeah, one month to
six months sort of range will probably be where I put my money
on being the most popular. So you mentioned Pendle right
there. In Pendle, there's another Defy
protocol that has gotten like a lot of traction.
My understanding of Pendle is that it's a lot of around, you
know, points and, and basically, you know, someone will earn some
unknown amount of some other token.
And then they basically they, they basically sell those for
like some fixed, some fixed interest.
And then they get these PT tokens out with a specific
maturity. And and I guess they could then
use that as collateral in something like Euler to to
borrow and to loop it. Yeah, exactly.
Would you also think, or I don't know if it's possible to build
something like Pendle directly in Euler?
It would, yeah. I mean, you could definitely,
definitely do that with the kind of fixed rate products we've got
coming. But like you say, I think
Pendles, but Pendles are exceptionally powerful is by it
allows people to effectively convert intangible, intangible
like incentives and rewards into like a concrete fixed rate.
So the the you have people earning, earning points and
other things which are like quite hard to value.
And so they don't really know what they're worth and they like
sell them off. They're kind of like lock in
some like for like make it real, basically like make the make
those points real and turn them into like something that they
can actually trade on a proper secondary market.
And that's where like Kendall services that need.
And yeah, as you said, then once you've once you've converted
that into a kind of like a real kind of yield, then people want
to loop that yield and like amplify it on places like Koi Lo
where they'll come in and use collateralize the Pendle token
and do a carry trade and borrow non yielding stables there.
The loopers end up being kind of like junior capital.
They're taking, they're like seeking higher risk, but like
taking, sorry, seeking more reward, but taking on higher
risks, liquidation and performing all these loops and
all the rest of it. And then the lenders on the
other side of that trade become more like senior capital where
they're, yeah, they're not getting paid as much, but
they're they're kind of protected and they're protected
through effectively the over collateralization of the of the
borrowers. That's been the big popular
trade, I would say on that front.
But yeah, you can, you can build Pendle in Euler, but it's not
like where where there's no plans to build that Pendle up
to, not in all of Franklin. It's a different kind of fixed
rate that I think people want to lock in in for.
What? What do you see as the future
for Euler? I mean, I think, I think all the
finance is coming. So I've been saying this for
years. I think all the finance is going
to come unchanged. I think if you use swap products
in your swapper, you have no loyalty to who use right.
You just put it through one inch or cow swap, whatever else and
just get the best possible swap rate you can.
But on credit markets, people don't do that right.
There's not going to be 1 winner.
There's going to be, there's going to be a diverse selection
of, of protocols because people want to diversify the risk.
If you're putting assets into somewhere or taking out loans
over extended periods, you're exposed to extended periods at
risk. And the, you know, the, there's
this saying, right, that the, the only free lunch in finance
is like diversification. So I think Oiler is going to be
one of the largest credit protocols in the future of
finance, frankly. And I think we won't be the only
one. There'll be others other big
protocols too, but certainly we'll be up there.
And over time I imagine that we'll all slightly specialized.
Usually what happens in markets is you find specialization.
So Euler will will develop a specialization for for certain
classes of trades probably and do those better than anybody
else whilst the other competitors end up specializing
on other things as well. Yeah, in the short term, I think
right now we're we're still dealing with very crypto native
forms of like credit, but I think there's increasing amounts
of more traditional forms of credit coming on chain.
And I think Euler is very well set up.
As you know, the architecture of Euler is very welcoming for,
yeah, real world assets I would say.
And so that that's something that I think we'll be pushing
forward on in the in the months and years to come.
So you think in terms of. You mentioned that different
protocols will specialized in different ways.
So you think for Euler will be more around RWAS?
I think real world assets will be a big part of it, yeah.
We also have like a swap protocol that's built on top of
Euler. Euler swap, which which which
works extremely well with real world assets and can open up
growth opportunities for real, real world assets that aren't,
aren't really there today. So yeah, I think that's today.
That's something that that we see as like a competitive
advantage, certainly. So when you talk about real
world assets, what do you think are the type of real world
assets that will get the most traction?
Well, they'll be the in the short term.
I think D5 has always been a very risk on environment.
So I think like tokenising credit funds will be popular
because they will be they'll generate more yield and those
yields then get will get passed on to to lenders through through
looping where we get like senior, junior tranches just
like we have with the D5 assets today I think initially.
That's like credit funds where people basically, I don't know,
for example, lends a fund that lends dollars to, for example,
businesses like that kind of thing.
And then they somehow like tokenize the fund and put it on
chain. Yeah, that's fine.
Yeah, I think, I think those kind of things they're, they're
definitely higher up the, the risk spectrum.
But but that's, that's the kind of D5 is a very risk on
environment generally. And I think like with the, the,
the people we have here today, that will probably be quite
popular. But over time, I think the space
will continue to mature. We see like all sorts of
fintechs coming on, on and more like traditional institutions
coming on chain as well. And so then we'll start to see
the emergence of of much, much lower risk types of, of real
world assets coming on chain and being popular as well.
I mean, there's, there's already some of those here today, but
they're just not widely used, right.
We like see Biddle, it's yeah, tokenized, tokenized T-bills,
all those kind of things like they, they don't provide juicy
yields and therefore they're not that popular to to trade among
are in D5 protocols today. And there's friction to using
them as well. There's like extra constraints
with moving these assets around Euler and Euler swap helps lower
those frictions, I think makes them more efficient.
But even with those efficiencies, you still need the
types of people that want to trade those assets in, in, you
know, triad fire. You have like repo markets and
money markets and things where you see like really large sums
of money, like changing hands over like short, short periods
of time. And there's just nowhere near
enough liquidity in, in, in D5 today to support those kind of
trades. But increasingly that's
changing. I think we'll that will that
will be very popular in the in the years to come as as the
space matures. I I know one of the things that
was often discussed as a big bottleneck to getting more
financial institutions unchain is like privacy.
Do you have? What do you think is the role of
privacy in the future of D5? I think it's going to be, it's
an, it's an interesting one. There's a huge tension right
between, between the, the, the, the desire for privacy, but then
the, the desire for transparency as well.
And where, where you set on that spectrum, I think depends a lot
on your own personal background, like your experiences, like how
you think it's more like a political thing, right?
I mean, I think if you look historically at like protocols
that are provided like a really high degree of privacy in in D
Phi, it's been fairly heavy use of like illicit finance by by by
bad actors and that that puts traditional finance off
actually. Like they don't then you're not
going to see, you know, institutions mixing funds with,
with, with illicit fund, like funds that were taken in in
hacks and like, you know, mixing with other sorts of illicit
finance. So that's, that's one form of
privacy. That's yeah, I just don't, I
think it's going to struggle to get adoption, honestly.
But on the other hand, institutions also don't want to
you to always know what they're trading, right?
Like especially if it's a directional trade.
I don't want to be putting on a trade on Bitcoin or whatever
else and let everybody else just like pick me off because they
can see that I'm like got, I'm long and I've got certain types
of exposure. So yeah, there's a huge tension
and I don't know where it will resolve.
I don't think it's, it's not like it's not that the we, we
don't have the technical capabilities to make these
protocols. It's more of like a political
thing. And how much, how much, how much
should we trade off between transparency, which tends to
make like fairer markets versus privacy, which is like arguably
fairer for individuals and their personal freedoms, right.
I yeah, I just don't know in, in like most regulations in, in
Triadfi seem to be driving towards more transparency, not
less. But if you ask any individual
person, like should I have more privacy?
I think most people would, would want more privacy, right?
And that's, that's only right. So yeah, there's this huge, huge
societal and and tension there between those two things.
Yeah. And I guess the other thing, I
mean, maybe that is a solvable issue, right.
But of course one of the advantage of D5 on the
transparency of D5 is also much easier to assess where the risks
are. I mean, hard enough, but at
least the the information is there and someone can try to do
it. But then if if you add more
privacy that that probably also makes it much harder to
understand where the risks are. And you know, if this fails,
what else does it result in? Yeah, I mean, I was, I entered
the like labour market in August 2008 and I joined a bank in the
UK called the World Bank of Scotland, just as the entire
system was like collapsing, right.
And I remember hearing from that, you know, after that,
after people like went through the, went through everything
afterwards and they tried to like piece it all together and
it was just like an absolute nightmare.
And I still don't think people completely understand what
happened because like actually mapping it all out and like, you
know, looking at when all these different banks collapsed and
everything like what, what actually went wrong, what was
the, the trigger? And like, whether, you know,
whether the funds flowing on the rest of it is very hard to like
process it. And I think that at least in D5,
that's all easily mappable on chain.
And if someone wants to do it, they can.
It's not not necessarily like easy as you say, but it's much,
much more transparent in that regard.
And I think that will be healthier for financial markets
in the long run, even though it does pose its own challenges.
There may be, you know, we may yet see technologies emerge
which actually are able to kind of balance that tension out
where, yeah, you, you can kind of have like, like privacy is
like the de facto norm, but like it can kind of, you can like
under certain conditions, like reveal certain things or
whatever. If it's, if it's essential to do
so, to make sure that you aren't, you aren't like mixing
funds with illicit finance and so on.
But I didn't, I don't know. I mean, it's, it's not
something, it's not something that I'm working on personally
or at the moment. We're working with what we've
got, which right now is it's mostly like Max transparency I
would say on open public blockchains.
What's your biggest focus right now?
Oh, I mean, personally, we have new products coming or we've
discussed on fixed rate side, we've been working on growing
our swap post call. And from my side, like a lot of
my time is spent like going and, and, and meeting, meeting new,
new types of users, like institutions and other people
that and talking to them about how our oiler works effectively
and educating them about how how the system works and seeing if
they can be encouraged to come and use the protocol, you know,
new types of asset issuers and so on.
There's just almost not enough hours in the day at the moment.
Like it really there's, yeah, there's just a massive, massive
shift in the past year and growth opportunities absolutely
everywhere in D5 right now, I'd say.
What do you think about the the impact AI is going to have on
D5? Oh, I mean, as we mentioned, I
think like one thing that's that's certainly, certainly
likely to happen. You know, we've talked about
like rebalancing strategies and all the rest of it and making
sure that you're able to able to kind of monitor positions and so
on. I imagine that that's something
that's going to be handled by by AI.
We've already like internally like played with some some like
machine learning algorithms for like optimizing yield basically
by like rebalancing, like lending positions and so on.
I think you could do that with AI as well.
I have like smart boring, basically where you rather than
you having to sit at the computer and like with all your
spreadsheets, like the, you know, the financial analysts
going through things pouring over data like right, right,
really intelligent bots that can basically under some
constraints, move, move the funds on your behalf to either
optimize the yield as like the the senior transfer to, to
optimize the lending and borrowing positions as the the
kind of junior branch of things. So I think that will be yeah, or
will will change things a lot, lead to more efficient markets
overall. There's huge inefficiencies in
D5 today. Rate optimization is not really
a thing. It's there's this protocols like
iPod and others and and that's, you know, do it like it's the
kind of what year and introduce like when I first started back
in 2020, like I think because we're doing this kind of thing,
but it's still, it's still a very inefficient market.
You know, by and large, I think AI is going to change that.
Cool. Well, thank you so much for
coming on. It was really cool to dive into
Euler and yeah, I think I think what you pointed out before like
you know, if traffic and and RW as coming on chain, a lot more
capital coming on chain. This is going to be an you know,
I think T5 will continue to be an extremely interesting space.
So really excited for what you guys are building.
Thank you. Yeah, thanks for having me on.
It was a really good chat, lots of different topics and it was
great. There's just so much to do right
now. It's very, very exciting time.