Last month, blockages welcomed his Digital Asset Summit (DAS) at the Royal Lancaster Hotel in London, England. During this event, builders, financiers and enthusiasts came together to talk about the new world of finance and cryptocurrency which are still in development.
At the time, markets were still picking up the pieces after an algorithmic implosion of stablecoins that resulted in heavy losses for people like Capital of the Three Arrows (3AC), a fund that turned to now defunct companies digital travel for assets to borrow and reinvest in the ecosystem.
It turns out that these events were just the beginning.
Just last week, FTX and Alameda Search also filed for bankruptcy. Alameda and FTX were very connected, which was not always communicated. According to some reports, Alameda may have used FTX’s utility token as collateral when borrowing client funds from FTX.
Overall, the events of the past few months are a bad look for the industry with former Treasury Secretary Lawrence Summers comparing the event at Enron.
Some are calling for regulation, but Summers said the events that unfolded are “probably less about the complexity of the nuances of the rules of crypto regulation and more about some very basic financial principles related to the financial scandals that have taken place. place in ancient Rome”.
Another lesson was discussed at Blockworks’ DAS event. For too long, there has been “too much emphasis on the assets themselves” in the ecosystem, according to Nickel Digital’s David Fauchierand not enough attention to “what technology facilitates”.
After a month, Benzinga thought it would be good to revisit a conversation he had with Euler Laboratories‘ Head of Risk and Product Management Seraph Czecker.
Czecker talked about solving real-world problems when it comes to banking and money using crypto. Here is the conversation that took place.
The following text has been edited for clarity and brevity.
Q: Hello Seraphim, nice to meet you. Do you want to start with an introduction?
Czech : I used to trade currencies and emerging market yields at Goldman Sachs Group Inc. GS before. I got a little bored and started looking at decentralized finance (DeFi). I thought they were building something.
When did you pivot?
Last year in February. I took time off – about four months – to research and do things, and then I contacted Paradigm, the venture capital firm, and they said they had just invested in Euler Labs.
Euler had just finished an A series and I chatted with the guys there. At the time, it was three people. Eventually I joined them in August 2021. We have almost 30 people and we are one of the biggest loan protocols right now.
What does your role consist of?
There is the Euler Protocol, which is the decentralized software running on blockchains and Euler Labs, a British company. We rely on the Euler protocol and I do business development and partnerships, market stuff. Pretty much a bit of everything.
Do you like working here more than in traditional finance (TradFi)?
One hundred percent. It’s more exciting. Asset classes are interesting. A lot of things are happening. Lots of pricing errors too.
Can you tell us a bit more about your offer?
Euler finance is a lending protocol, and it’s a way to express your views on the DeFi market, without permission. Of course, you can earn returns on assets by depositing them.
However, there are more interesting things to do. The protocol is used to do these things, like trading interest rates based on leverage on Ethereum ETH/USD. Basically, you can use it for basic, shorting and long trading. This is all done by smart contracts, entirely.
How are you growing and showing that you are possibly more valuable than your competitors?
You have to have some key differentiators, I guess.
We are probably the largest two-way market on staked ETH. On Aave AAV/USD, you can take advantage of long stake ETH against ETH. Let me explain this further:
There’s this popular trade where people take ETH, and they stake it in a staking contract. They will get a return. You also get back a staked ETH token, and it’s like a liquid IOU that people like to deposit into Aave, borrow ETH against it, sell ETH and convert it back to staked ETH, and they will several times . This way you get delta hedging but leverage on long interest rates.
Aave only allows this on the long side.
Let’s say you want to do it both ways. Go short and long. Because of the way things work when you borrow, you have to pay a certain amount of interest. It is the cost of financing. You’ll pay the lenders that, and the lenders on Euler, on average, will earn more interest because of it.
Why? This is because, when you lend, you not only earn your interest on the staked ETH, but you also get paid by the borrowers who sell it short.
So, on average, people will earn an extra percent or two.
With regard to liquidations, when people are liquidated, they are subject to Dutch auctions. On average, you lose less money each time you get liquidated. Things like that set us apart.
How many people are working on this idea with you, and how long did it take you to turn the idea into reality?
Almost 30; 26 or 27, right now. Nothing existed when I entered. The smart contract did not exist until December of last year.
Has the recent volatility affected you?
It was cool to see things working well during the worst times. The pricing worked well. Liquidations also worked very well. People lost, on average, less money than with other protocols. We haven’t lost any money and no one has been hacked.
There were a few signs that the crypto needed a correction, weren’t there? We had kids buying houses with the return they were generating from their stablecoin exposures. Just madness, right?
When choosing assets as collateral, you must be extremely careful. So, UST I never liked it. I never thought UST was a good idea for collateral. You need cash. They are more difficult to handle.
How did you learn all this?
It’s just really doing it. Interestingly, I learned more about finance doing DeFi than when I was at TradFi. Indeed, in DeFi, it is about creating simple rules managed by code.
When you are in traditional finance, you get lost in subtleties and conventions. When you look at DeFi, it’s so simplistic. You understand the entire financial ecosystem much better.
For example, look at what happened in the UK with pension funds and margin calls. It is a classic DeFi strategy.
You take your bonds and borrow money against them. Then you put it back in links and loop it several times. This way you have exposure to leveraged interest rates. It’s the same principle of lending staked ETH, borrowing ETH, and doing it multiple times.
If you think, Celsius exploded for many reasons, one of them being staked ETH falling in price. Like they go into DeFi on Aave and lend their staked ETH that they have on their balance sheet and borrow USD Coin USD/USD against.
Long story short, this is basically leverage on long ETH versus short USDC. And when the price of the staked ETH went down, they started being liquidated on their business. It’s quite similar to what happened a few weeks ago in traditional markets. It’s the same dynamic.
We’re in London right now, about a week after the pension fund debacle here. These are the same issues we have in crypto, aren’t they, to some degree?
It’s the same problem. It’s just in DeFi, there is no ultimate buyer. In traditional finance, you have central banks that can step in and buy assets.
What happens to Euler in case of standard deviation movement of 10 or 15?
Ideally, even if that happens, Euler is fine. In reality, it comes down to the liquidity of the assets. If you were to liquidate, because liquidations are decentralized in DeFi, anyone running a bot can settle the debt for you.
Suppose you have loaned staked ETH and borrowed ETH. Suppose the price of your warranty drops and you go into liquidation. Anyone can remove your debts and some of your assets. They will likely repay the debt by buying ETH on the market. To unlock your collateral (the staked ETH) and have to sell that staked ETH on the market, they charge a fee.
The point is the following. If the market for your collateral is sufficiently liquid, you can unload these assets quickly. So even if there is a move of 10 or 15 standard deviations, liquidity will allow it. This is why you need to ensure that your collateral assets are extremely liquid.
How do you spread the word about the great job you are doing, in the face of all this turmoil in the crypto market which, arguably, is a pushover for many?
Word of mouth, especially. People have told their well-heeled friends about it. It’s also about attending conferences like Blockworks’ DAS and talking to fund and liquidity providers in DeFi.
What do you see for yourself and for the company in the future?
We think it’s a good idea to create an isolated environment where you can do a lot of more risky things, but it doesn’t put the core protocol at risk. To do this you will probably need to create another version of Euler. Inside you can do whatever you want.
say we do shiba inus SHIB/USD warranty or something. It’s really risky for the main application of Euler. However, if it is isolated in this separate Euler and it explodes, the main Euler does not explode. There is a product market for this sort of thing.
It is a direction. And, another creates Euler’s own decentralized exchange. We are going to focus on pricing oracles, a reliable way to achieve decentralized pricing in DeFi.
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