Last month, Blockworks hosted its Digital Asset Summit (DAS) at the Royal Lancaster Hotel in London, England. During this event, builders, financiers and enthusiasts gathered to speak about the new world of finance and cryptocurrency that’s still developing.
At the time, the markets were still picking up the pieces after an algorithmic stablecoin implosion which resulted in heavy losses for the likes of Three Arrows Capital (3AC), a fund that looked to the likes of now-defunct Voyager Digital for assets to borrow, and re-invest in the ecosystem.
As it turns out, these events were just the beginning.
Just last week, FTX and Alameda Research filed for bankruptcy, too. Alameda and FTX were very intertwined, which wasn't always communicated. According to some reports, Alameda may have used FTX’s utility token as collateral when borrowing customer funds from FTX.
Overall, the events of the past months are a bad look for the industry with former Treasury Secretary Lawrence Summers comparing the event to Enron.
Some are calling for regulation, but Summers said the events that transpired are “probably less about the complexities of the nuances of the rules of crypto regulation and more about some very basic financial principles that go to financial scandals that took place in ancient Rome.”
Another lesson was discussed at Blockworks’ DAS event. For far too long there’s been “too much focus on the assets themselves” in the ecosystem, according to Nickel Digital’s David Fauchier, and not enough focus on “what the technology facilitates.”
After a month, Benzinga thought it would be good to come back to a conversation it held with Euler Labs’ Head of Risk and Product Management Seraphim Czecker.
Czecker talked about solving real-world problems with respect to banking and money using crypto. Here’s the conversation that transpired.
The following text was edited for clarity and concision.
Q: Hi Seraphim, nice to meet you. Care to start off with an introduction?
Czecker: I used to trade emerging market FX and yields at Goldman Sachs Group Inc (NYSE:GS) before. I got a bit bored and started looking at decentralized finance (DeFi). I thought they were actually building something.
When did you make the pivot?
Last year in February. I took some time off — about four months — to research and do stuff, and then I got in touch with Paradigm, the VC firm, and they said they just invested in Euler Labs.
Euler had just completed a Series A and I chatted with the guys there. Back then, it was three people. Ultimately, I joined them in August of 2021. We have almost 30 people and we are one of the bigger lending protocols at the moment.
What does your role entail?
There is the Euler protocol, which is the decentralized software working on blockchains and Euler Labs, a U.K. company. We build on top of the Euler protocol and I do business development and partnerships, some markets stuff. Pretty much a bit of everything.
Do you enjoy working here more than in traditional finance (TradFi)?
One-hundred percent. It is more exciting. The asset classes are interesting. Lots of things going on. Lots of mispricings as well.
Can you talk a little bit more about your offering?
Euler finance is a lending protocol, and it is a way to express your views in the market in DeFi, permissionless. Of course, you can earn yields on assets by depositing them.
However, there are more interesting things to do. The protocol is for doing those things, such as leverage basis trade interest rates on Ethereum (CRYPTO: ETH). Essentially, you can use it for basis trading, shorting and going long. That's all done by smart contracts, entirely.
How do you grow and show you may have more value than competitors?
You have to have certain key differentiators, I suppose.
We are probably the largest two-way market on staked ETH. On Aave (CRYPTO: AAVE), you can go leverage long-staked ETH versus ETH. Let me explain this further:
There's this popular trade where people take ETH, and they stake that into a staking contract. They will earn a yield on it. You also get a staked ETH token back, and it's a like a liquid IOU that people love to deposit into Aave, borrow ETH against it, sell ETH, and convert it back to staked ETH, and they’ll do it a couple of times. This way, you’re Delta-hedged but leveraged long interest rates.
Aave only allows for that 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. That’s the cost of funding. You’ll pay that to the lenders, and lenders on Euler, on average, will earn more interest because of that.
Why? It’s because, when you lend, not only do you earn your interest on staked ETH but also you're being paid by the borrowers who short it.
So, on average people will earn an additional percent or two.
On the topic of liquidations, when people get liquidated it's subject to Dutch auctions. On average, you lose less money every time you get liquidated. Things like that differentiate us.
How many people are working on this idea with you, and how long did it take you to turn the idea into reality?
Nearly 30; 26 or 27, right now. Nothing had existed when I joined. The smart contract didn't exist until December of last year.
Did any of the recent volatility impact you?
It was cool to see that things working fine during the worst of times. The pricing worked smoothly. Liquidations worked really well, too. People lost, on average, less money than they did on other protocols. We didn't lose any money, and nobody got hacked.
There were a few signs that crypto was due for some correction, right? We had kids buying homes with the yield they were generating off their stablecoin exposures. Just insanity, right?
When you choose collateral assets, you have to be extremely careful. So, UST I never liked it. I never thought UST was a good idea as collateral. You need liquid assets. They are harder to manipulate.
How did you learn all of this stuff?
It's just doing it really. Interestingly, I've learned more about finance doing DeFi, than when I was in TradFi. That’s because, in DeFi, it's creating simple rules run by code.
When you are in traditional finance, you get lost in the intricacies and conventions. When you look at DeFi, it's so simplistic. You understand the whole financial ecosystem a lot better.
For example, look at what happened in the UK with the pension funds and margin calls. That is a classic DeFi strategy.
You take your bonds and borrow cash against them. Then, you put it back into bonds and loop it a couple of times. That way, you have a leveraged interest rate exposure. That’s the same principle of lending staked ETH, borrowing ETH and doing it a couple of times.
If you think, Celsius blew up for many reasons, one of them being staked ETH going down in price. Like they would go into DeFi on Aave and lend their staked ETH that they have on their balance sheet and borrow USD Coin (CRYPTO: USDC) against it.
Long story short, it's basically being leveraged long-staked ETH versus short USDC. And when staked ETH went down in price, they started to get liquidated on their stuff. That's pretty similar to what happened a few weeks ago in the traditional markets. It's the same dynamics.
We’re in London, right now, about a week or so after the pension fund debacle, here. These are the same problems we have in crypto, right, to an extent?
It's the same problem. It's just in DeFi, there's no ultimate buyer. In traditional finance, you have the central banks that can come in and kind of buy assets.
What happens to Euler in case of a 10 or 15 standard deviation move?
Ideally, even if it happens, Euler is fine. Really, that 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.
Say you lent staked ETH and borrowed ETH. Suppose your collateral value falls in price and you are in liquidation. Anyone can take away your debts and some of your assets. They will repay the debt by buying ETH in the market, probably. For unlocking your collateral (the staked ETH), and having to sell that staked ETH on the market, they get a fee.
The point is as follows. If the market for your collateral is liquid enough, you can offload those assets quickly. So, even if there’s a 10 or 15 standard deviation move, the liquidity will allow for that. That's why you need to make sure your collateral assets are extremely liquid.
How do you spread the message about the great work you’re doing, in the face of all this crypto market turmoil which, arguably, is a turn-off for many?
Word of mouth, mostly. People have been telling their well-capitalized friends. It’s also about attending conferences like Blockworks’ DAS and talking to funds and liquidity providers in DeFi.
What do you see for yourself and the company looking forward to the future?
We think it's a good idea to create an isolated environment where you can do a lot of riskier things, but that doesn't endanger the main protocol. To do so, you probably have to create another version of Euler. Inside it, you could do whatever you want.
Say we make Shiba Inu (CRYPTO: SHIB) collateral or something. That's really risky for the main Euler app. However, if it's isolated within that separate Euler, and it blows up, the main Euler doesn't blow up. There is a product-market fit for that kind of stuff.
That's one direction. And, another one is creating Euler's own decentralized exchange. We go focus on pricing oracles, a reliable way to get decentralized pricing in DeFi.
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