We are ready for our next talk, and for this one I'd like to bring on Jonathan from Euler to tell you about the credit layer and how they think about their version of managing vaults and credit at scale for DeFi. So, please give Jonathan a big round of applause.
[applause]
Hi, everyone. Uh this is Jonathan, uh CEO of Euler Labs. Uh super excited to be here and uh talking to you guys a little little bit about DeFi borrowing and lending, and also uh what's happening with institutional adoptions, RWA, um that's currently taking place uh cuz a lot of I think it's currently uh getting a lot of interest and attention from um Web2, Web3 native crowds um how the two worlds can merge together, and how borrowing and lending protocol like us play a role in this broader shift. Um so, I did prepare a few slides, and I do have more text on my slides than the previous speaker, so uh bear with me a little bit. I will try to uh not make it too boring cuz I mean, it's DeFi and finance terms, so sometimes can be a little dry.
Um Yeah, so today I'm going to be focused a little bit about the credit layer, um vaults, lending markets, and next phase of DeFi. Um a lot of the time I think I will be focusing on institutional adoptions, um and also uh the use case of RWA uh that's currently happening in DeFi. Uh I will spend a little bit more time on RWA cuz uh it's a little bit more complicated in terms of concepts, but also more innovative. Uh there's a lot of problems and bottlenecks are currently solving um DeFi community as a general, um and there's a lot uniqueness um of technical uh innovation that's currently happening on the on the lending protocol and the vault infrastructure. Uh Um So, there are a couple of um issues that we have to solve to onboard um large amounts of TradFi uh institutional and RWA capitals onto DeFi uh leveraging the current tech stacks that we have.
Uh there I would say there are a couple of key categories um that has to happen that's a little bit new uh to the if you're Degen, if you're crypto-native users on DeFi for many years. Uh these are a couple of new innovations that has to happen uh for us to get ready, all right, to onboard this next phase of uh different different capital asset classes, including private credits, uh treasury yield bonds, uh uh public equities, uh commodities like gold, uh different new type of asset classes, uh not just ERC-20 tokens or crypto-native assets. So, a couple key categories I do want to spend a little bit time on about uh compliance requirements. Um tokenization platforms like Securitize, Ondo, many others have innovated and engineered a legal wrapper around traditional assets to tokenize them and bring them on chain. Uh so, users from different countries and jurisdictions will have different rights um and legal holding powers and or even sometimes even voting powers to these assets, but a lot of them do require KYC, uh KYB compliance gating, uh sanctions screening, all that.
So, that's a new thing that come on chain uh especially for our vaults. Uh how do we engineer a way that these can be implemented at the smart contract level uh instead of a like a hacky implementation that requires 10 different tools to build on top of existing uh stacks. So, that's something that we're focusing on. That's one thing. Um another thing we're focusing on is risk isolation.
So, Euler it is natively it's well suited for this use cases cuz our vaults are built built on modular infrastructure, meaning the markets are isolated from each other. So, the risk is kind of only contained within each market. This is super relevant to RWA, especially when you're talking about different durations of private credits and treasury yield bonds. They all have different redemption period, onboarding time, settlement time, um in price to mark mark to market kind of frequency, um and also different interest rate underlying. So, each of these assets needs to sit in their own markets.
So, this is why a modular risk isolation model works really well. And the last one is pretty obvious. It has to be very composable. The whole point of bringing these assets on chain is we can utilize them and use them as collaterals to make sure it is also fully integrated with the the DeFi primitives with the stablecoin ecosystem and other blue chip assets on the blockchain. Um one thing I do want to double to click a little bit is there are currently two popular this modular design on borrowing and lending protocols.
One is modular, which is Euler. You also have the monolithic model. Um for RWA, I think the modular project protocols are uniquely well suited for this use cases. A couple of risk that can face with monolithic architecture is um it doesn't scale with um when you're talking about very unique private credit assets. So, each has to be uniquely approved by risk curator and risk managers at the market level.
With the monolithic model, sometimes you have to have a very convoluted doubt structure to prove these assets cuz once the asset's inside the system, the risk can the risk can spread out very quickly into the entire market, which we should have seen before. So, um the risk usually comes with the NAV delay. NAV stands for native asset value. So, this is how we value some like illiquid assets like private credits for example and long duration assets. Regulatory halts is also another key issue.
Market closure, for example, equities and stock market doesn't trade on weekends, but crypto is a 24/7 market. So, for tokenized equity markets, we have to build some uniqueness gatings and restrictions on top to make sure it will work very well with the rest of the DeFi ecosystem. So, the this is just like some examples on why modular architecture is going to win I think in the future. To summarize a few points that I just talked about, Artela needs isolated markets, Artela needs compliance enforced at the smart contract level to scale. Risk management by domain experts, meaning that risk manager that use Euler's infrastructure needs to understand the unique esoteric risk underlying each individual asset classes and bonds and private credits.
So, often times we work with institutional grade risk managers together to make sure we protect lenders assets and collateral assets, making sure we set the right risk parameters and we continue to monitor these risk in real time cuz as the macroeconomic shift, these assets value can also shift in real time. So, we work with institutional grade risk curators on that front. You guys probably have heard like curators like Centaura, Bitwise, Apollo, all those are all coming on to blockchain to be on chain asset managers bringing traditional finance expertise combined with crypto knowledge to make sure we are well set to onboard the trillions of traditional financial assets through RWA and tokenization technology. Um Um and the last point that I think RWA really needs is permissionless deployment. Um we need to make sure creators work closely with permissionless infrastructure like us to make sure assets can get listed in a permissionless fashion, meaning that we don't have to go through a DAO proposal asking the auto token holders to vote if a particular private credit bonds can be added to the market cuz it doesn't really make sense cuz a lot of the token holders probably don't have financial like financial find the traditional financial um backgrounds, right?
So, it doesn't really make sense for them to decide each assets addition. So, what we do is we open we work very closely with risk managers. Once we feel comfortable that we have right due uh due diligence, risk measurements, and a liquidation mechanism, then we can open these markets on the lending markets for the users to select and have access to a lot of the traditional financial instruments that they are being kept out of the way, right? So, that's what the power of RWA really is. Um a lot of often times people cannot get access to US stocks if you live outside of the US.
Uh you cannot get access to a lot of like Apollo's private credit fund or private equity funds if you're not a high net worth individual. Those tools are usually only available to institutions and high net worth investors. Through RWA, everyone can get access to and it's our role to build a secure and um reasonable infrastructure uh for users to interact with. Um quickly touch on this. Um Order's architecture solve all these three problems at the same time.
Module infrastructure solve the risk isolation problem and we have native compliance uh hooks and smart contract solutions to solve the compliance bottleneck. And composability, we have the EVC Ethereum Vault Connector technology to connect markets together to make sure these RWA uh assets are well connected to the rest of DeFi ecosystem and with multiple stablecoin issuers. So, uh assets can work in a very capital-efficient manner throughout Euler's uh tech stack and uh ecosystem. Um on how the vaults is isolated. So, through the ERC uh 4626 standards, uh which is what we've been building on, uh the vaults has separated accounting.
It also has independent liquidation mechanism. So, for example, um before we open a market on Euler, open a vault, uh we have to make sure liquidation can happen in efficient and uh quantitative way, uh meaning that if we have to liquidate in sizes, it can be handled smoothly. Right? So, um and also it happens at the per vault, per market level, um cuz for for example, a private credit assets versus a tokenized equity market, we need to find different liquidation partners to handle these volumes. Uh these these liquidation partners usually already trade these assets on chain and off chain in volumes.
So, they feel comfortable they can take over these assets when needed. Uh so, this this what I mean by in- independent liquidation, meaning that we I each market level, we need to solve that individually. Um per market per vault caps, uh so, different risk parameters including like uh supply borrow caps, loan-to-value ratios will all be set at each market level um by risk creators that we work with. Um these These are set based on their understanding of how risky certain collaterals are. Uh and they will update those numbers in real time as they continue to monitor how the macro and crypto the healthiness of entire crypto ecosystem.
Um and no shared states. Yeah, meaning like if the vault is launched on Euler, it's not shared globally, meaning that if it's not connected to EVC intentionally, then the risk won't spread and become contagious if if certain market is compromised on Euler. Yeah. Uh on the compliance gaining, uh we recently launched a partnership with Securitize. Uh we're one of the first uh lending borrowing markets to work with Securitize DS token.
DS token is uh innovation that Securitize team worked on to allow investors to to have legal holding rights of the direct underlying assets. Uh you guys probably heard there's different ways to tokenize assets on chain. Some of them you have to direct ownership legal rights to the underlying. Some of them it's a wrapper. You have to own you have the legal rights to the SPV that holds a back basket of assets.
So there are different ways to tokenize assets. Uh the way Securitize tokenize it is more stringent. Uh so they require like first-class like compliance engine. Um and we have we are one of the first lending borrowing protocol to to build that on the uh to and allow that at the smart contract level. Meaning that these policies can be updated and modified at the smart contract level in a very graceful way and also can be be kept up to date in a very timely manner.
Uh this includes KYC, KYB, includes sanction screening, includes geo-fencing, uh jurisdiction-based access control, uh also include transaction rate limits and position size caps if if need be. So um this is what institution been asking for. Uh so for them to feel like they can interact with DeFi ecosystem in a very compliant way. Uh so, I think this is like a huge bottleneck that we currently unlocked for institutional adoption. Um this is a demonstration of how these markets are isolated and also how through EVC uh on Euler, uh the market can be highly efficient.
So, if you hold tokenized equity, if you hold tokenized treasury, these two collaterals sit in different markets and they can get access to the same USDC liquidity pool. So, this is the market isolation on the collateral side, but you can tap into our large USDC or other stablecoin liquidity pool to allow uh capital efficiency without uh without risk contingent. So, this is what EVC is uh unlocking uh for RWA. And I do want to touch a little bit on the curator model. I think a lot of um the users are still not fully familiar with the concept.
So, Euler is a infrastructure provider. We build vault tech infrastructure, but we're not the risk manager of these assets. We don't set the We don't set the gatings and also risk parameters like loan-to-value ratio, supply demand cap, leverage cap, all that. Um that responsibility lies with risk curators that we work with. For example, a couple of names you guys probably are familiar with, for example, Centaura, uh Concrete, K3.
Uh you guys probably heard other institutional grade risk curator coming out to the market uh like Bitwise recently and also Apollo. I think there is a lot more in the pipeline uh from traditional finance bringing decades of um asset management expertise on chain. Um I think this is a really great development and we as infrastructure provider actively in conversations with large institutions to educate them on how our lending technology can work and how does DeFi handle uh liquidation? How does DeFi handle KYC, KYB, right? Cuz they are more familiar with the trap traditional finance, but they're less familiar on the web three way of handling things.
And also the 24/7 environment that we're currently we're we're familiar with 24/7 markets, settlements in seconds, but a lot of traffic partners, they have so many middle layers, middle men, and also they don't have some some of the assets don't have weekend markets. So there are a lot of new things that we're solving with them and making them feel comfortable, but also having them bring large amounts of high-quality risk management professionals onto DeFi to make sure these these markets are are secure and safe for users, right? So if certain the quality of certain collaterals RTWs has been deteriorating, they can react very quickly and making sure user can users' funds don't stuck within the vault, right? So that's their role. And a little bit further, they do select Oracle, they do make sure there's no unnecessary hard coding press Oracles, and validate the Oracle can work at all time, sometimes even weekend markets for tokenized equities, which I will talk on a little bit after this.
And also supply borrow caps and ongoing ongoing chain monitoring. If there's a hack like there's an unfortunate hack happened with Drift, right? So one of the risk creators is working on Solana where EVM, but yeah, they sent me a message be like, "Hey, we're working through the Solana ecosystem." Right? So these things can happen.
So it's their it's their role to make sure the healthiness of the vault and they react quickly to make sure the damage is being contained and managed in a very timely fashion. One example I do want to kind of give you guys is tokenized equity, which is obviously very much talked about, very popular among RTW communities. We are one of the first to launch tokenized equity markets with Ondo in February. We launched S&P 500, NASDAQ, and also Tesla to to start with. We're adding a lot more stocks.
And also we're looking to non-US stocks as well. Working with Asia-based tokenized equity providers and also some European as well. So, make sure users have a lot of access and selections through this. And this is definitely a multi-party coordination to make sure these markets can can work on DeFi. To give you an example, Ondo handles the tokenization process.
They have the legal wrapper. They have the NAV tracking mechanisms. This is part of the Ondo's tokenization process. And then Chainlink provide price oracles. Currently, these markets are 24/5.
We are actively talking to Chainlink, RedStone, and a couple other providers to to unlock 24/7 markets. Still under the work as we want to make sure the weekend the weekend data is accurate in real-time, updates frequently, and we have a liquidation partners that can handle potential liquidation events on the weekend as well. So, that currently is on 24/5, but should be on 24/7 soon. Stay tuned. Centauri is the risk curators.
So, they look at the volatilities of these stocks. They underwrite the risk and they set the risk parameters through Euler's toolkits and they will update them as stock volatility continue to change. For example, if there is a war happening, they will probably lower the amount people can borrow with stocks cuz the volatility will probably spike US indices, right? So, that's just example. Euler provides the underlying lending and borrowing vaults infrastructure.
So, all these party has to work together to make sure these RWA markets can work. Um and by the coordination with the broader crypto ecosystem with TradFi professionals as well as asset issuers, this really unlocks multiple new asset classes on chain including tokenized treasury, tokenized equity, private credit, uh permissioned and permissionless vaults. Institutions are more interested in the permission version of it cuz they want to be very much compliant. We are used to the permissionless vaults in uh implementation as a crypto native community, but I think both are becoming available um through the through our delayed through DeFi innovations. And we want to to maintain permissionless deployments, meaning any assets can come on our orders infrastructure and ecosystem as long as it's a high quality assets and we have risk curator that feel comfortable about uh underwriting these risk for the users.
Um and I yeah, I think the potential for our delayed markets for DeFi is huge. We're unlocking huge amount of TVL potentially high quality, diversified collaterals onto DeFi borrowing and lending markets. Um and I'm super excited to kind of build this together with you guys. So, yeah, thanks for listening. Yeah.
[applause]
Automatic transcript — names and jargon may be misspelled.