Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Euler: The DeFi Super App - Michael Bentley

Episode Date: September 14, 2025

Euler is a DeFi lending protocol built around the idea of permissionless modularity, enabling users to lend and borrow almost any crypto asset with flexible, permissionless pools, tailored to individual risk profiles. Moreover, Euler Vault Kit (EVK) and Ethereum Vault Connector (EVC) enable the creation of custom lending vaults which, in turn, can be used as collateral for other vaults. Earlier this year Euler also announced EulerSwap, a new DEX with a built-in AMM powered by Euler’s lending infrastructure and integrated with Uniswap v4’s hook architecture. EulerSwap integrates directly with Euler’s lending vaults, allowing assets to be used across multiple pools. This turns the lending protocol into a shared liquidity layer, improving capital efficiency across the ecosystem via swaps, lending yield or collateral for borrowing other assets.Topics covered in this episode:Michael’s backgroundThe history & vision behind EulerThe Euler hackEuler V2Euler vs. other lending protocolsDiversifying offeringsVariable vs. fixed ratesHow Pendle worksEuler’s futureRWAsPrivacy in DeFiEuler roadmapThe impact of AI in DeFiEpisode links:⁠⁠Michael Bentley on X⁠⁠Euler on X⁠⁠Sponsors:Gnosis: Gnosis builds decentralized infrastructure for the Ethereum ecosystem, since 2015. This year marks the launch of Gnosis Pay— the world's first Decentralized Payment Network. Get started today at - ⁠gnosis.io⁠Chorus One: one of the largest node operators worldwide, trusted by 175,000+ accounts across more than 60 networks, Chorus One combines institutional-grade security with the highest yields at - ⁠chorus.one⁠This episode is hosted by Brian Fabian Crain.

early lending and borrowing protocols were restrictors and just like the short tail of assets. So like ETH and USC 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, 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 two hundred dollars, whereas the cost of it on another platform might be literally hundreds of thousands or millions of dollars. When the type is draining

protocol, a lot of the assets come back in terms of like UUSDC or UST, right? And circle and tether, if they get a request from law enforcement or they know that funds have clearly been stolen, they have the ability to put freezers on asset. A lot of attackers will just effectively auto-convert any stolen funds into E or an asset that's like more. decentralized and more difficult to kind of freeze basically. So that's what this guy did. The recovery where we were tracking down and negotiating the recovery, the price of Eath rallied. And so actually it was kind of like the attack upon a long position on behalf of all of our users. Welcome to Eppercenter. The show which talks about the technologies, projects and people driving decentralization

in the blockchain revolution. I'm Ryan Crane and today I'm speaking with Michael Bentley, who is the CEO and co-founder of Euler Labs, Euler 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, we'd like to share a few words from our sponsors this week. If you're looking to stake your crypto with confidence, look no further than course one.

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Restake your assets on eigenayer or symbiotic or use their SDK for multi-chain staking in your app. Learn more at chorus.1 and start staking today. Hey guys, I want to tell you about NOSIS, a collective of builders creating real tools for real people on the open internet. NOSIS has been around since 2015. In fact, it started as one of Ethereum's very first projects. And today, it's grown into a whole ecosystem designed to make open finance actually work for everyday people. At the center of it all is NOSIS chain. It's a low-cost, highly decentralized layer one that's compatible with Ethereum and secured by over 300,000 validers. So whether you're building a DAP, experimenting with defy, or working on autonomous agents,

NOSIS chain gives you a solid, neutral foundation to build on. But NOSIS is more than just infrastructure. It's also tools that people can actually use. Like circles, for example, lets anyone issue their own digital currency through networks of trust, not banks. And then there's Metri. It's their smart contract wallet that makes it easy to access circles, manage group currencies, and even spend anywhere Visa is accepted, thanks to their integration, with NOSUSPA. All this is governed by NOSISDAO, where anyone can propose, vote, and help guide the network.

And if you want to get involved, running a valider is super easy. All you need is one GNO and some basic hardware. To learn more and start building on the open internet, head to NOSIS. I.O. NOSUS building the open internet one block at a time. Cool. Thanks so much for coming on, Michael. I'm really excited and looking forward to this one. I'm curious, tell us maybe a little bit about yourself and how did you get into crypto first? Yeah, so first thing, thanks for having me on. Yeah, looking forward to it. How did I get involved?

Well, I used to be, before this life, I used to be a research scientist. He used to be an academic. My specialism was evolutionary game theory. So I used to do lots of population modeling of biological systems and how they change over time, effectively. I was more on the math side, but I used to collaborate a lot with like computer scientists, biologists, other people. I started as a bit of a script, cryptoskeptic when I first heard about in 2015. Didn't think it's that very cool. I just mistook it. Mustook Ethereum for like some kind of boring database like solution or something. I just, yeah, I wasn't, wasn't interested.

But by 2017, like maybe late 2016, early 2017, like 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 trading bots and things for some of the primitive decentralized exchanges at that time. There's something called Idex that I used to trade on and EtherDelta, I don't even remember that one.

These were like literal order books on Ethereum. So quite slow and quite plunky, but they were kind of like a good introduction to like markets and how Ethereum 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, an early 2020. Like, DFI was sort of starting to emerge as like this kind of force to be reckoned with.

It was like Unislaw and and Yearn and things like that would become popular. And that's when I got sucked in and started studying interest rates and things. And so I actually started Euler off the back of doing a hackathon project where I create a novel interest rate setting mechanism that was more decentralized, less dependent on third parties than the ones that were being used on compound at the time. What was the original vision for Euler? So we wanted to make something where you could lend and borrow any asset. A lot of the early lending and borrowing protocols were restricted to just like the short tail of assets.

So like Eith and USDC and Bitcoin and maybe a handful of others. And yeah, 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 a like a slow process of governance or third party like changing interest rate models. So we wanted to see, yeah, could we could we let lending and bargain 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 lending borrowing markets for all of all things. Didn't actually work out like that. We had to pivot a few times as the Pontchay Group, but that was one of the early visions, I think. yeah okay okay and then i'm curious is this it sounds like something where maybe your evolutionary game theory uh was that background knowledge very applicable here oh i mean massively right it's um yeah i mean in that day job you're often like what was what was it actually doing you know how do you build these models, you consider like a set of things, our 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, like, equilibrium state of, 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 people striving to optimize profitability or optimize 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, a D5 protocol

that can facilitate, like, markets and designing a model about how, yeah, populations change in response to their environment. It's, yeah, if you just abstract everything, then 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 imagine you're pretty unique among the FI 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 a different protocol design because of that background you had. I think, yeah, I think it's, I mean, yeah, I mean, D5 founders tend to come from really varied backgrounds, right? And there's like tradeoffs having different to all those backgrounds, you know, like, I think famously at OILA were very like engineering driven. and 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 oil I think we have the best liquidation engine in in all of Defi a lot of a lot of liquidations when they happen on other learning growing protocols effectively the borrower just has like some of their collateral like slashed and sacrificed and sacrificed. and then that's used as a reward for the people that are performing their liquidations. And it's often really costly, really, really costly, especially if you're a big borrower, you've got like, you know, tens of millions of dollars at risk.

These bonuses, you know, these kind of slashings can be, and they can be worth like hundreds of thousands of dollars or millions of dollars. On Euler, we use a different mechanism. So we don't take like a fixed amount of the collateral. Instead, we have this like auction that plays out, it's a Dutch auction that plays out on bonus that's distributed. What's neat about that is that if you get liquidated on oiler, 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 borer on oil and you get liquidated, the actual cost of it might be a few hundred dollars, whereas the cost of it on another platform might be, yeah, literally hundreds of thousands or millions of dollars. and to 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 Euler, which is effectively just a team of engineers or scientists.

Yeah. All of our backgrounds have like a strong influence over how oil is architected. I think it's, yeah, certainly, certainly always been a bit different to other platforms in that regard. And so 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 original vision.

And then as we adapt to as we grew over time, we realize actually allowing anything to use this collateral is there are other factors that come into play, right? even if you could do that, you need to find like counterparties or willing to take 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 meme 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 other side of that trade?

There's just not really anyone available. And it's kind of like, you know, that's true in real life. Some assets just make really good collapsible 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 some things just, you know, don't make for good collateral, even though their paper value might be quite high, I 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 have like product market fit is a very different question.

So if you kind of go back to, you know, sort of history of boiler, right? So you talk about this hackathon and then how do they, involved 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, 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 the oil protocol being like growing very rapidly and taking market share from incumbents at that time. Oiler v1 was like a very, very heavily audited platform. Like we'd had more audits than most people. We did we know, we worked with Satora who do formal verification. We had the largest bug bounty of anyone in that kind of vertical. So 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 minor bug on oil.

So there's this smaller issue that first depositors, 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 good on paper and we had it re-audited. So we were with a security partner as they audited the fix.

But I think ultimately the fix probably when you do a full audit the first time around, you're considering absolutely everything. You know, you're not just looking at a small part of a protocol. And so when, you know, full audits are fantastic, right? But when they were auditing this smaller fix, and when we were developing this solution for this much smaller issue, it was much more of a contained, you know, it was more like a focus on that thing.

And 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 large amount of funds from what a living one,

which brought down the entire protocol. What was that error that you guys introduced? So the solution to the problem, well, just very briefly, I mean, the problem itself was caused by an uninitialized exchange rate. the very, where the very, very, brand new markets created and there's no users yet or anything, there was one, one exchange rate between the receipt token and the deposits that was uninitialized. It turns out that for technical reasons, that an exploiter could potentially front run a deposit, if they set up a bot 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 deposit as funds. So the fix that we developed was, well, 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 code base called Donate to Reserves. And the Donate to Reserves function was only intended to be used as a way to initialize to initialize this exchange rate.

And, you know, first deposit wouldn't even know it's happening. Now, what it turns out, so someone realized, unbeknownst to us, was that you could use donate to reserves as a borrower. If you donate your collateral to the reserves, if you do it 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 liquidate the account.

And so you might be thinking, well, why would anyone want to lose money? It turns out, we've talked about those liquidation bonuses earlier. Turns out that there was some, like, parameter space effectively where you could lose less money on the liquidatable account than you could make as 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 the losses and the gains. And so with this looping strategy, they're able to withdraw a lot more, drain more funds from the protocol than normally it would allow. And so that was, yeah, that's how it happened. What was it like TVL back then? And how much did the hacker manage to steal? So we had, I think total deposits were sort of around five, six hundred million. The taco was able to take out 200 million from the protocol.

Yeah, big numbers. And, you know, I can talk about like the recovery process, but we did, I should say, up front, 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 all the stolen funds. Oh, so, yeah, to tell us about that.

Like, how did you guys track the guy down and how did you buy did they agree to return these funds? There could be an entire, like, I am not kidding, like an entire documentary series 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 T-Py history, I think. So, yeah, I mean, firstly, the 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 weekend, my son was born, like, you know, the early hours of Friday morning. By Friday afternoon,

there was a banking crisis in the US and Circle asset USTC was depegging. So it was called into action to like deal with this crisis issue with USTC 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 USC depeg event, but it turns out it was actually an oiler specific attack. And so, yeah, my, uh, yeah, the next few weeks were, 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. Um, the actual, I mean, there was so many twists and turns the exploiter like tried to, uh, yeah, well, you know, we track them down through various means that I can't, can't really reveal all of them, but you know, you have to do a lot like a huge amount of data gathering and, uh, so because you figured out the identity of the person. And eventually, yes, although not initially. I mean, we had like a, I think we had a list of around 10 candidates. I can't remember, but like we developed a list of people that we quite quickly over about 24 hours, we had a list of people that we thought could be involved based 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 wanted them to believe that knew who they were but we didn't actually know which person they were out of our list or whether they're on our list at all in fact um but yeah they were they they started getting i mean they tried to do a donation to the a north korean address to make it look like it was a north korean uh exploit because uh if north korea exploits a protocol the funds don't come back right you don't then they're they're gone forever to negotiate with north korea no no i mean uh So it's over.

So I suppose he was, his gambit there was, hey, if they think it's North Korea, then maybe they'll just like go away. But at that point, there was already like strong indications from our side that we knew it wasn't off career.

So we were kind of able to call his bluff on, 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 batch of batches of like,

I don't know, yeah, maybe like eight 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 do all sorts of like really crazy stuff. So it was a wild goose chase. and it lasted for weeks. Yeah. Wow. Wow.

Interesting. And then in the end, he said you recovered more than what he had stolen? Yeah. And I mean, in dollar terms, because the, he,

when the type is draining protocol, a lot of the assets come back in, in terms of like U.S.D or USTT, right? And circle and tether, 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 convert any stolen funds into E or an asset that's like more decentralized 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 him down and negotiating the recovery, the price of Eath rallied. And so actually it was kind of like the attacker put on a long position on behalf of all of users on heat

yeah whilst it was going up in price so when when we finally recovered all all of the funds the users got back there was an extra there was a surplus

a 40 million dollar surplus 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 all paid out to users I mean it's a very complex

calculation figuring out how much users, you know, have in a protocol, you know, a lending-boring protocol, like, they uses how like a net asset value, right, at a snapshot point in time, but that net asset value changes a lot over a period of three weeks that can, depending on what kind of positions you've got, have you got loans, and you just got deposits, use lending and so on, but yeah, it was all distributed back to the users. So that was the recovery period, which itself took, you know, a long time and was very, very, very, very, very, very, very, you know, difficult. And because the TBL went down to, when did he went down to three or zero, 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, uh, the, the option was effectively, it turns out by the way that there was the way to prevent this was like a single single thing missing for this donate to reserves function the donated reserves by itself wasn't the wasn't the biggest wasn't wasn't the issue it's just there was a missing like a check in this in this function and so 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 continue from there we could have

just made that that that fix to donate to us and then relaunched oil of 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 floor but we 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 it took us a while to come to that decision like a few weeks but um you know did you guys also think of like just shutting down or oh yeah yeah of course i mean it was uh extremely

traumatizing for the team um and uh and obviously going to be really hard to recover from that but uh we had a very good reputation in defy i think up to that point you know it wasn't like uh this had happened out of carelessness or because uh you know there was we hadn't got the audits or whatever. We were like, 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 defyed community and from the security community and so on to, to continue. And the question was, could we, could we restore the faith of like potential users, right? Like, it's one thing having a security reaches that researchers say, well, yeah, they,

you know, they did their best and 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 reputationalally from this. But yeah, we talked about it a lot and decided that we all liked each other and wanted to work in Defi still

and try and try to keep moving the space forward and that we had kind of a special team. And so we thought we would rather than disperse and go and join new projects or and try and rebuild a new project, we thought we'll give it. ago. 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 of B2 at that point. And what were the biggest changes in V2? Yeah, quite a lot to be honest. I mean, V1 was, we had a lot of, we learned a lot about from V1 about like the market and the product market fit. we discussed earlier about, you know what, but it's one thing to just build something, but like does, does it really have demand? The main thing we learned, I think, was that there's not just like a one-size

fits all in D-Fi for lending and borrowing. Like, every single user has a slightly different risk-reward preference. You know, some people, like, really conservative, like simple markets that are lower yielding, but they do one thing and do it really well. Others like things like Rave, 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 one perfect way to do credit markets that fits all users. There's, there's diversity of preferences. And so we thought, how can we,

and by the way, also like an increasingly like diverse number of assets as well. So it was like lots of, you know, new stable coins and like steak 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 particular product for a specific user set, 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, uh, where you could have these like plug and play pieces that you could fit them together effectively to then rebuild products. And so you can rebuild oil of E1 using this toolkit 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. There might be more conservative on the risk spectrum or whatever. And then the idea

with V2 is that other people can then come and build products in their own image and tailor them to the user basis that they have in mind and the risk reward demands that they have on the protocol. So oil V2 is not a product, a single

product. 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 different operators as well for those products. There's lots of entities called risk curators or curators that come and build their own credit market and oil. And that wasn't really something we had in V1. So does it make sense to think of like today if you think on like lending credit protocols you have like are there that's, you know, of course the best known and which is a very simple protocol and then I guess morpho is a bit more flexible and then you guys are even more flexible and even more modular is that like a reasonable

way of or like how do you compare oilers sort of in the landscape of different defy lending protocols yeah I think um I think I would say like at its core it's a toolkit for making defy protocols so you can build Morpho with Euler or you can build Arvee with Euler or build something in between those two but that's not true the other way around right you can't

you can't build the primitive using their toolkit so like morpho fundamentally has these things called markets and markets in Morph are just like collateral debt pairs they're simple isolated pairs and then they have 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 boroughs 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 they're cross-collateralites and so on. So it's more capital efficient, 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 Avey has like One pool of USC And you know And there's like one borrower rate And Whereas like

For example Morpho There would be like Various different types of UTC pools And maybe some are like Used to the Max And some others are barely used Some

Exactly Yeah Kind of Yeah Yeah So on Morpho I mean just like the, if you think about the design tradeoffs there a little bit, like there's,

there's, there's fragmented USDC pools. Now, Morpho tries to solve that for the lenders by effectively having, like, a higher level allocator ball. So most lenders deploy into the like allocator ball 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 borrower is, on the borrowing side, it still means you have this huge, huge amount of fragmentation, which means to leads to like variable rates. 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 re-hypoticated at all. In Ave, the market's cross-classified. And often if you're taking a loan, let's say you're using ETH to borrow USDC, the ETH is re-hypothicated, which means that somebody else can be borrowing the ETH from you whilst you're using its collateral. And that makes it more capital efficient because there's a, as a, borrowing a USD on Rave or a rehypothecated market like we have an oiler as well it means that I'm earning interest on the on the east side and then paying interest on the

debt and like sometimes the two car cancel each other out sometimes it's actually even profitable to kind of take loans like that whereas a morpho your 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 average, if you look across all possible positions, of like the amount of, you know, basically the fraction of the fraction of assets which are borrowed.

On oil of the fraction of assets, which are borrowed is around 50% or above. On morpho by contrast, it would be like low 30s. So there's a big gap between the capital efficiency of markets which have re-application or enable that as a feature and the ones that don't. And that's one of the trade-off and design decision differences between oil and morpho. And so Euler, you also have re-hypropocation like in Avey.

Yeah. So on Euler, 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 basically connect two volts together. You have one vol which does the lending and borrowing, and one vault which just sold the collateral. It's got a single connection.

But on Euler, you can, because it's a toolkit and it's the modular toolkit, you can actually extend that. You can say that I'm going to accept multiple collapsibles, and then I'd have like, you know, different types of classful for my lending and borrowing roll. But you can go, you can also do the relationship both ways. So you can say that A can borrow B and B can borrow A. So if you start to build up markets where you have lots of volts, which all cross-referenced one of those as collateral,

that's effectively what Arvei is. So, yeah, under the hood, you can reconstruct an Arveh. The simplest possible Arvee would be something where you have just, yeah, people can deposit ETH and borrow USDC, and people can deposit USC and borrow ETH, right? That would be like the simplest possible arvee with rehabification. there's a protocol called silo which allows those kind of markets to be developed

and yeah, OILA has those too, right? We have some markets which are just that simple. They're like the simplest possible Avae's. But we have some markets where there's also many assets and they start to, you know, the market gets much bigger and starts to resemble more like Avey itself. And where do you see the most traction today?

Main net in terms of networks where we're deployed across 12 different networks and ETH Mainnet, I think, is the home of finance today, or the home of Defi today. But we've got a lot of traction on Avalanche more recently as well, recently deployed to Linneo, which is growing quickly and arbitrium. Yeah, it depends on which network you're on, what the asset base is there.

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, yield-bearing stable coins and stables, more generally, has been the thing that's driven the explosive growth of both Euler and also Morpho, I think. There's just a diversity of yield-bearing assets and 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 u sde or like what are the top yield gang stable coins in in orla

i think uh usde will be like a massive one uh we also have like some open need and stuff as well lots of pendle tokens so i mean the the basic trade that's super popular these days uh on oil and other lending protocols is you debaurs that you're yield bearing stable let's say it's paying 10% and then 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 lose that. And then you lose that, yeah.

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, you amplify your exposure to the interest rates. And you take on board risk if the stable coin depegs and it falls in price,

you collateral decreases in price. and you risk liquidation. But assuming you're, yeah, assuming you're not worried about that risk, then you can effectively amplify the interest rate you earn by kind of looping a yield bearing stable against a non-year-bearing stable and try and perform what's called like a carry trade.

It's very popular in TradFi as well as Defi, but in Defi, this has been the big trade of the past year, I would say, is 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 the traditional financial market, right, like fixed rate lending is a huge part. I mean, I would guess probably the majority of debt is fixed,

although you probably know better what the breakdown is there, whereas in I think defy, 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, we've got new products coming on oiler, which are more targeted to fixed rate, you know, fixed rate borrowing. We've got two products coming actually in that regard, but we're not alone, right? I think the other competitors have products coming to.

The reason why they're in such huge demand, I believe, is that it's not so much, you know, lenders probably fairly happy with variable rates. 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 it out that time so I think for lenders they're fine with it but for borrowers these carry trades uh become a bit unwieldy uh to carry out if uh if the thing you're borrowing is very variable right you you might have your yield bearing stable that's at 10 percent 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 thing you're using is collateral. So now you're in like this negative carry trade where you're actually losing money on a loop as well. So you're actually like amplifying your losses. And so that's, you know, borrowers are getting increasingly frustrated with that, right?

They would much rather maybe pay a premium initially to kind of lock in at a fixed rate. So maybe they started, maybe the variable rate pool 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 borrow side, I would say, for borrowers to be able to lock in,

lock in fixed costs borrowing positions for short to medium term, amount of time. Okay, and then I guess on the lender side, they would also then accept or have to accept the fixed rate. Yeah, and this is the question, right? Is the, are the lenders going to be just as happy with this? The fixed, fixed rate products are definitely favorable for borrowers.

Are they favorable for lenders? And do you have product market fit on both sides of the, on both sides of the plane here? I think on the, for lenders, they would expect a premium, right? because they're also sacrificing, like, the sacrifice, sacrificing this, like, fair rate that they're getting.

The borrowers should be prepared to pay this premium because it's clearly a advantage, you know, providing an advantage for that party. So they, yeah, they're effectively trading, like, the playing a premium to, like, lock in, lock in a profit.

So, yeah, that premium goes to the lenders, and maybe that premium's enough, but maybe it's a not. The other, the lenders forego, 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 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 you lock in at a fixed rate, however, you typically kind of get locked into more of a fixed term as well, which means you're losing that flexibility to access your capital when you need it. So, yeah, there's that, like, clear tension between lenders and borrowers. And one thing we know is that markets a really good way to, like, find, like, a resolution for that tension. So it'll be interesting to see when these products shit. I think, I think it sounds like all, all protocols are developing slightly different types of fixed rate products. It's interesting to

see which ones get the best product market fit and satisfy the need. And 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 more long-term debt? 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. You can probably optimize you 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 a, it is like gas cost, but like your time, like planning, like then the added risk of like repetitively rebalancing. Like you might make a mistake.

one of those things. So rebalancing too frequently is kind of not something people tend to do. So yeah, usually borrowers, in my opinion, we'll be looking to lock trades in for weeks or maybe like several months at a time. So yeah, we see this kind of thing with a Pendle, right? Pendle offers fixed rate products and allow borrowers typically or like more like lenders, I suppose, to kind of 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 timeframe. So that like, yeah, one month to six-month sort of range will probably be where I put my money on being the most popular.

So you mentioned Pendle, right? I mean, Pendle is not a Defive protocol that has gotten like a lot of traction. And my understanding of Pendle is that it's a lot of around, you know, points. And basically, you know, someone will earn some, unknown amount of some other token and then they basically they basically sell those for like some fixed some fixed interest

and then they get these PT tokens out with a specific maturity 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 do that with the kind of fixed rate products we've got coming. But like you say, I think pendels, where pendels are exceptionally powerful is it allows people to effectively convert intangible, intangible, like incentives and rewards

into like a concrete fixed rate. So 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 for kind of like lock-ins and like make it real basically like 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 pendle 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 coil where they'll come in and use collateralize a 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 seeking, 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 kind of protected and they're protected through,

effectively the over-collateralization of the borrowers. That's been the big. popular trade, I would say, on that front. But yeah, you can build pendle and oiler, but it's not like where there's no plans to build that pendle that product in oil, frankly. It's a different kind of fixed rate that I think people want to lock in for. What do you see as the future for Euler?

I mean, I think all the finances coming. So I've been saying this for years. I think all the finances are going to come on chain. I think if you use swap products and you're a swapper, you have no loyalty to who you use, right? You just put it through one inch or cow swap

or wherever 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 one winner. There's going to be a diverse selection 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 there's this saying, right, that the only free lunch in finance is like diversification. So I think Hoyler 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 other big protocols too, but certainly we'll be up there.

And over time, I imagine that we'll all slightly, specialize. Usually what happens in markets is you find specialization. So Euler will develop a specialization for certain classes of trades probably and do those better than anybody else, whilst other competitors end up specializing on other things as well. Yeah, in the short term, I think right now 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 oil is very well set up as

the architecture of Euler is very welcoming for real world assets I would say and so that that's something that I think we'll be pushing forward on in the months and years to come. So you think in terms of you mentioned that different protocols will specialize in different ways

so you think for Euler will be more around RWAs? I think real world assets would be a big part of it yeah. We also have like a swap protocol that's built on top of Euler oil of swap, which works extremely well with real world assets and can open up growth

opportunities for real world assets that aren't really there today. So yeah, I think that's today, that's something 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, there'll be in the short term, I think, like, defy has always been a very risk on environment. I think, like, tokenizing credit funds will be popular because they will be, they'll generate more yield. And those yields then get, we'll get passed on to lenders through looping, where we get, like senior, junior trenches. Just like we have with the defy assets today. I think initially that's where credit funds, where people basically, I don't know, for example,

lend a font that. then 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 those kind of things. They're definitely higher up the risk spectrum.

But that's the kind of, defies a very risk on environment generally. And I think like with the people we have here today, that will probably 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 much, much lower risk types 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. We like see Biddle. It's, um, yeah, tokenized, uh, tokenized T-bills, all those kind of things. Like they, they don't provide juicy yields. Uh, and they're, for they're not that popular to trade among in D5 protocols today. And there's friction to using them as well. There's like extra constraints with moving these assets around. OILO and OILA 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, you know, TadFi, 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 DFI today to support those kind of trades. But increasingly that's changing.

I think that will, that will be very popular in the years to come as the space matures. I know one of the things that was often discussed as a big bottleneck to getting more financial institutions on chain is like privacy. Do you have, what do you think is the role of privacy in future? of D-5. I think it's going to be, it's an interesting one. There's a huge tension, right, between the desire for privacy, but then the desire for transparency as well.

And 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 DFI. It's been fairly heavy use of, like, illicit finance by bad actors. And 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, with, with, with, with, funds that were taken in, in, in hacks and, like, you know, mixing with other sorts of illicit finance. So that's one form of privacy that's, yeah, I think he's going to struggle to get adoption, honestly. But on the other hand, institutions also don't want 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. know where it will resolve. I don't think it's like it's not that 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 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, um, yeah, I just don't know in like most regulations in in TradFi 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 want more privacy, right? And that's only right. So, yeah, there's this huge, huge societal 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 DFI on the transparency of DFI is also much easier to assess where the risks are. Yeah. I mean, hard enough, but at least the information is there and someone can try to do it. But then if you add more privacy, that that probably also makes it much harder to understand where the risks are. And if this fails, what else does it result in? Yeah, I mean, I was, I entered the like labor 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 I 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 actually went wrong, what was the trigger and like whether, you know, whether the funds flowing all the rest of it. It was very hard to like, process it. And I think that at least in Defi, that's all easily mappable on chain. And if someone wants to do it, they can. It's 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 see technologies emerge, which actually are able to kind of balance that all that tension out where, yeah, you, you,

you can kind of have 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 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 don't know. I mean, it's not something that I'm working on personally at the moment. We're working with what we've got,

which right now is mostly like max transparency, I would say. on open public blockchains. What's your biggest focus right now? I mean, personally, we have new products coming. We've discussed on the 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 meeting, meeting new types of users.

like institutions and other people and talking to them about how oil works effectively and educating them about 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 just a massive, massive shift

in the past year. And growth opportunities absolutely everywhere in defy right now, I'd say. what do you think about the impact AI is going to have on Defi? Ooh, I mean, as we mentioned, I think one thing that's 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 AI. we've already like internally like play with some some like machine learning algorithms for like optimizing yield basically by like redalancing like lending positions and so on.

I think you could do that with AI as well. I have like smart oaring basically where you rather than you having to sit at the computer and like with all your spreadsheets like the financial analyst going through things pouring over data. Like right really intelligent bots that can basically under some constraints move the funds on your best. on your behalf to either optimize the yield as like the senior challenge or to optimize the lending and boring positions as the kind of junior branch of thing. So I think that will be, you know, we'll change things a lot and lead to a more efficient markets overall. There's huge inefficiencies in defy today. Rate optimization is not really a thing. It's

there's this post calls like iPur and others and that's, you know, do it. Like it's the kind of what you earn introduced like when I first started back in 2020. like I think we're doing this kind of thing but 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 oil earth and yeah I think I think what you've pointed out before like you know with Tratfi and RWA is coming on chain a lot more capital on coming on chain

this is going to be and I think T5 will continue to be an extremely interesting space. So I'm really excited for where you guys are building. Thank you. Yeah. Thanks for having me on. It was a really good chat. Lots of different topics. It was great. There's just so much to do right now.

It's a very, very exciting time.