TLDR

In this episode, Jason speaks with Michael, founder of Euler Protocol, about how Euler bounced back from a major hack to reach $1B in TVL. Michael explains how their modular lending architecture, curator-led markets, and capital efficiency attract both major assets and long-tail markets. They discuss Euler’s liquidation system that minimizes penalties, their rehypothecation model, and how vaults boost yields for both lenders and borrowers.

Euler is now expanding cross-chain and preparing to launch two new products: EulerSwap, a novel DEX that turns lending accounts into just-in-time liquidity providers; and Euler Earn, an aggregator vault system similar to Metamorpho but with broader access. While revenue is not the top priority, the team expects both products to significantly boost usage, lending demand, and consequently its TVL and take-rate, potentially ultimately driving Euler token buybacks and sustainable protocol growth.

Chapters

00:30 Introduction to Euler Protocol and Its Journey

03:22 Technology and Liquidity: Key Drivers of Growth

06:28 Capital Efficiency and Liquidation Mechanisms

09:31 Market Flexibility and Customization for Curators

12:15 Future Growth Strategies and Cross-Chain Expansion

15:37 Incentives and Revenue Generation in Euler

18:28 Funding and Financial Sustainability of Euler

33:36 Funding Operations and Token Management

38:36 Introducing Euler Swap: A New DEX

53:44 Euler Earn: Asset Management Innovations

Transcript

<Jason Kam (00:00)>:

I don't expect this to be ridiculous. Probably got a couple of people on, GM, we're live. Today is April 15th, 5 PM Hong Kong time. BidCast is being live streamed to BidClub members. Questions are from members and my own. Welcome to our episode of BidCast. Today we're speaking with Michael, the founder of Euler Protocol. Michael, welcome.

<Michael (00:08)>:

GM.

<Michael (00:30)>:

Thank you very much for having me on. Yeah, it's great to be here.

<Jason Kam (00:33)>:

Yeah, yeah. I mean, after all the crap that was thrown at you, mean, you guys are up to a billion dollar TVL now. Why don't you tell us about things like, how did you come from a debt from, you know, you know, hacked and then now to a billion, what drove that growth? Tell us more about that.

<Michael (00:41)>:

Yeah.

<Michael (00:52)>:

I mean, yeah, it's been incredible. I'm just absolutely delighted that we've been able to pull it back like this. We had high expectations, but maybe not this high, this quick. I think there's been a lot of different factors. Firstly, we'll get into probably at some point what we've built. I think it's fundamentally extremely good technology that's superior to competing technology in a variety of ways.

<Michael (01:21)>:

Technology alone isn't, isn't good enough. Sometimes you can build a 10 or 20 % better product. And if you don't have everything else in place, then that's not enough to, to overcome competition. I think like particularly liquidity is king in this, in these markets for a lot of different protocols. And so even if you've got 20 % better product, if somebody else has got the liquidity and you don't, then they can't use your 20 % better product. Right. So overcoming that challenge has been tough. Think Euler's model naturally lends itself to.

to kind of growing liquidity because it uses this curator model, which is similar to some of the competition, Where rather than just build, have the Euler-Dao or Euler-Dao associates build a lending protocol, we have different risk curators that come in and build their own products in their own image. And they bring with them their own networks and their own contacts and their own reasons for growing these markets, many of which we're totally unaware of, right? So like some people ask me.

<Michael (02:18)>:

Why is it going so well on the X, Y, Z network? Or why is this market so big? And sometimes we just have no idea. I mean, the Resolve market, for instance, was one big driver in the early days. It's sort of slowed a little bit recently, but still doing quite well on Euler. But that was one, one market that went extremely well. It was curated by a team called Apostro. They knew the, they knew the resolve team. They knew.

The fundamentals of that project seem very strong. Honestly, they knew a lot more about it than we did and that market really, really grew quite quickly on Euler. So that's just one example, one really nice example of something that took off and that's not because of us in a way. You know, we built the technology and facilitated it but we didn't directly have a massive hand in it. would say it's all down to Resolve themselves and Apostro for knowing that team and bringing it on board.

<Jason Kam (03:10)>:

And you would say that most of the TVL just happens organically, like you didn't do BD or anything.

<Michael (03:15)>:

Well, I mean, we have, yeah, we have one BD person at Euler who works extremely hard, who knows everybody, you know, he goes around and talks. So I wouldn't say we don't, it's not like we don't do BD, but yeah, a lot of projects, I'm sure everybody knows that a lot of projects start by going out. They have, maybe don't even have a live token yet and they'll secure, you know, some kind of headline figure TVL, which then comes in through some kind of private, private deal. And Euler hasn't had the liberty of doing that, right? Because we had a liquid slash liquid.

token after after everything that happened and you know I think at the time we relaunched the fully diluted valuation of that was just was pretty much on the floor so it's not like we had the option to go out and offer somebody you know silly money to go out and bring TVL so in the end yeah we did some another driver was we decided to say well there are people who still believe in Euler there's a lot of uncertainty around the project can we pull it back so we decided to do a locked Euler

reward campaign and that has been a big driver. So that uses public incentives where we essentially sort of wrap the Euler token up into a linearly vesting wrapper and then we distribute that. So I think that's been an important driver, especially to help new markets where there's a bit of a chicken and egg problem emerge and grow spontaneously. If you look at the dollar value of the public incentives we've done, it's still less than three million since launch year.

<Jason Kam (04:39)>:

It's not that much. It's not that much. And so most of the teams that onboarded you through the curation model, they basically thought, we need to create the market here. And this is just about the only solution in WIFI 2 that allows us to build or do what we want to do. And that's why we're building. Is that roughly the right line of idea?

<Michael (05:02)>:

I think so, yeah. I mean, you can't just add any old asset to something like an RV and establish lending and market, right? It's tricky, but a lot of new assets out there do need utility in lending facilities. So the other option is to kind of go with an isolated model that has been tried many times. It's partially the way that things work on things like Morpho, but it's often inefficient. And on Euler, the...

protocol itself is just way more flexible than any of the protocols out there. So you can build more efficient capital markets on Euler than you can elsewhere. And so oftentimes that's one of the main reasons why people come to Euler is that there's just things they can do on Euler that they can't do elsewhere. And that's, yeah, so a lot of these new assets, been a massive proliferation, now, stable coins recently and things like that, that are seeking credit markets.

<Michael (05:58)>:

to help themselves grow and so they come to Euler to build. Yeah.

At least as far as I understood it, the mechanism of V2 and your coding and design mainly benefited your collateral and lending in two ways. One of which is that your liquidation mechanism is a bit more advanced, which allows you to push the collateral requirement to be lower than your competition. And the other one is that

Because of this hybrid model that you offered, the folks that deposit the assets are able to accrue slightly higher yield versus an isolated model, for example. Is there any way you can quantify for us? Well, first of all, am I missing anything aside from those two things? And then secondly, can you quantify for us what that really means for, let's say, a $100 deposit into your platform? How would it translate to like,

some more additional yield or additional benefits to the depositor or borrower.

<Michael (07:05)>:

Yeah, sure. I did say they probably are the two key sort of capital efficiency drivers. And one of the things, you know, just to say upfront, what that means is when you're more capital efficient you don't have to spend and heavily bootstrap like others have done. Yes, but others have had to spend tens of millions of dollars in incentives to grow these markets. But if you have natural drivers of efficiency, then you can grow faster organically. So let's say the liquidation model first. I mean,

<Michael (07:34)>:

borrowers on lending protocols sometimes get liquidated. And on other markets, they typically pay essentially a penalty on their collateral when they get liquidated. That penalty essentially provides the incentive for the liquidator to provide the liquidation service to perform the liquidation. If you have a very big penalty, then there's a very big incentive. If you have a small penalty, then there's a smaller incentive. the penalty is always a percentage of the collateral.

And so actually that doesn't really make sense, right? If I'm liquidating a hundred million dollar position, then a 5 % penalty could be absolutely enormous, both for the liquidated party, but also for the person, the incentive is just massive. $5 million for liquidating this position. It's just way more than any bot runner needs. These are all just bots willing these liquidations, right? So why do we need a 5 million penalty? It's insane. But 5 % on a hundred dollar position, you know, we're now talking $5.

Is that even enough to pay the gas cost of liquidation? Possibly not, right? So the point is that the percentage penalty, the percentage penalties don't really make sense. What there is is like a fixed cost of liquidation. And then after that, there should be a kind of auction that runs to determine how much incentive you need to liquidate somebody. And that's essentially what Euler does. has this Dutch auction that's based on something called the health score of a borrower. And what it means is that large borrowers get liquidated at very low percentages.

percentage penalties. I posted about this on Twitter recently, know, some of the, I think, off the top of my head, I think the penalties way less than half a percent if you've got, you know, if you're borrowing tens of thousands of dollars, which is at least an order of magnitude better than if you get liquidated on something like Morpho or AAVE In some cases, we were two orders of magnitude lower on the penalties charged, you know, if you're borrowing millions of dollars, then

You definitely want to get liquidated. you are going to get liquidated, you'd much better off getting liquidated on Euler than on other platforms. So yeah, so just better for borrowers, I would say in that regard. But it also means things are better for lenders as well, by the way. You people often miss this. If you're taking someone's collateral and handing it, taking it out of the system to the, you know, to the MEV bots that run these liquidations, that means they're less collateralized than they were before, which means you push the system closer towards

<Michael (09:57)>:

insolvency than it previously was, right? So it's not just better for borrowers, good efficient liquidations are better for everybody in the system. And Euler has, in my opinion, the best in the business. I've posted about this many times.

<Jason Kam (10:07)>:

 Yeah. And since that is the case, are you able to push the leverage that a borrower can undertake so they have higher efficiency?

<Michael (10:16)>:

I think so. I mean we often get asked about this. Most of Euler's markets are relatively conservative on LTVs. I would say, and I'll explain why that is in a second as well when come to the next point you raise. I think if you were to run isolated markets like they have on more flow flowed, you could really push those LTVs much, much higher. But we tend not to have too many isolated markets on Euler even though it's possible to create them.

Euler is very flexible in that regard. You can replicate more for all fluid type markets on Euler very easily, but most most curators tend not to build those markets. And the reason reason for that actually leads into the next point, which is what, why, why are things more efficient in terms of the, the class usage on Euler? It's because on Euler, you can essentially our primitive unit is a single vault and a single vault can be either used for lending and borrowing, or it can be used for as collateral or both.

And so when you use it as both and you have effectively rehypothecation on the markets, that means you're earning interest whilst you're using something as collateral at the same time. That's exactly how things work on Aave. So you deposit ETH in Aave to borrow USDC, possibly to go long ETH. God forbid anyone does that anymore. You will often earn interest on the ETH you've deposited from somebody else who's actually borrowing that ETH, possibly to go long on.

liquid staking token yield or whatever else, right? So that makes the cost of borrowing lower. So you going long ETH on something like Aave, then it does on something like Morpho. If you were to go long ETH versus USDC on Morpho, your ETH would be just locked in earning no yield. It would essentially be what's called escrowed and held in a vault, not earning anything. But on Euler and on Aave, the collateral often earns users extra yield.

And so that, that extra yield makes the whole system more efficient. means that there's, you know, you don't have to, grow it, to grow a market like an ETH long position. You don't have to, you don't have to subsidize it as heavily with rewards. You know, I was looking recently and they just aren't, there's nobody going long ETH on, on more for on mainnet for example. I think there are markets on base like that, but there just isn't on, on mainnet. And I think it's cause it would be very expensive to bootstrap a market like that perhaps or.

<Michael (12:45)>:

Yeah, it's just a very different value proposition than it is on Aave or on many of the markets on Euler. So rehypothecation obviously comes with additional risk as well. I should emphasize that. It's not a free lunch by any stretch, but in many cases, a lot of markets, it does make sense to have a degree of rehypothecation and many curators want that. And then those markets tend to grow faster and liquidity tends to be stickier in those markets because the capital is just used more efficiently.

<Jason Kam (13:15)>:

And the yield generated on a collateral is certainly higher than a Morpho, but is most of the time not higher than that of Aave, assuming a similar level of utilization for borrowing.

<Michael (13:29)>:

on Euler, it tends to be a little higher than AAVE at the moment. I think AAVE I mean, it depends on the market conditions. would say. Frankly, AAVE is, is kind of underutilized at the moment. You know, there's the, the market's gone more risk off. You've seen the interest interest rates on AAVE have dropped below, you know, on, on, on dollars, they've dropped below, even the T bill yield, which is kind of insane that you, you earn less on AAVE than on, on T bills. So it depends heavily, but there's no reason why they should be any less.

<Jason Kam (13:32)>:

Mm-. Mm-.

<Jason Kam (13:44)>:

I see.

<Michael (13:59)>:

the yield should be any less on Euler markets than it should on AAVE. It really depends how the vault curators configured their markets. Some opt for more conservative parameters, some opt for more risk-on parameters, and which give higher yields. as always, there's no risk without reward, and it's up to the vault curators and the people who use those markets to determine, know, it's up to the market essentially to determine what people want. It's not a constraint of the technology in Euler like it...

<Jason Kam (14:13)>:

I see.

<Michael (14:28)>:

perhaps is on other products. It's a constraint imposed by the risk curator and then by the market itself on what it wants.

<Jason Kam (14:38)>:

. So for anybody who is like borrowing, instance, they are, it would seem like their collateral would earn well, they earn a higher yield and collateral at the moment thanks to high realization because AAVE given a sheer size is potentially reutilized. And then their liquidation, they will feel a little safer in cases of like extreme market conditions. And that plus the flexibility that it's offered to curators is what you would say.

basically helps you get from standing start to a billion today.

<Michael (15:12)>:

I think so. mean, and that and the ability to heavily customize the markets, you can just build things on order that can't be built elsewhere because of the underlying flexibility of the technology. we built in this, you know, we say it's sort of the modular lending protocol, because what we did was we abstracted all the core properties of lending markets into discrete modules, which then the curators themselves can compose and build back together markets in their image. If you look at Aave, it's very opinionated.

a very opinionated product, but on the more complex, more capital efficient side of things. If you look at Morpho, it's kind of on the other extreme. It's very opinionated, but it's on the simplicity side of things. Well, Euler isn't neither, right? It allows you to build either simple markets or more complex ones. And there are just all sorts of more advanced features that you can add. are advanced access controls for risk-curators to play with if they want more security or risk management control.

<Michael (16:08)>:

There are, you know, hooks for complaints and, and like, you know, trade, changing the way that markets work. One of the big markets on Euler was built by the Usual team. And it was the, it was, Euler was the only place in town that they could build this usual stability loan that they've got, right. They couldn't build it anywhere else. And so they built it on Euler using some of the more advanced, you know, features that the Euler vault kit provides them, that they can't get on, on another, on other,

<Michael (16:38)>:

Yeah, protocols

<Jason Kam (16:39)>:

Yeah. There's about 30 billion of TVL on Aave and then maybe five billion on Morpho. You're at a billion and the compound for Robert is pretty checked out building super state. like there's maybe like 40 billion up for grabs. How do you get from one billion to five billion? Like what are you building and what are you working on to get you there?

<Michael (17:04)>:

I so there's a few things coming down the line. mean, firstly, I think it's important to go to where users are and there are different types of users across DeFi, different networks. Euler's been moving cross chain quite rapidly to different networks and meeting users where they are. yeah, that helps for multiple reasons, not just because there's TVL on those networks, but it means that a user that possibly uses one or two of those networks gets more familiar with Euler across.

across that. So you might, you might pick up a user that really enjoys using Euler on base for instance, and that's also a user of mainnet. And so they now, they might not have found your mainnet. They might have been an Aave user on mainnet, but they find you on base and now decide to, you know, so you pick up loyal customers and sticky TVL that way, I think. So it's important to go, go across network and yeah, we're launching on BNB today in fact, but we've had several other big chain launches over the past few months.

<Jason Kam (17:58)>:

Nice.

<Michael (18:03)>:

So that's one part of things. I think consistent growth and just lendy is really important. There's nothing better than just proving over time that things are secure. I mean, obviously all is like perhaps the most audited protocol in DeFi or close, it's right up there at least. But yeah, nothing beats lendy being live. I think AAVE proves that right.

<Michael (18:33)>:

AAVE V3 has been around for a long time. It's had its own issues in the past, but it's now been robust for quite a long time, I would say. And so people trust it for that reason. Just being, being secure and safe for a long period of time is really important. You see, you know, you mentioned Compound, they've been, they've kind of been checked out. think there's some, some efforts to recover their growth from the DAO from within the DAO, think, but as a

<Michael (19:00)>:

They've probably been lacking leadership for some time, but their TVL is quite high because ultimately it's an old protocol at this point and it has that lendy and has that trust, I think. And then the other thing I would say is, you know, it's no secret that Euler has been building a dex for some time. And so we're excited to launch that in the near future. That's actually going into audit at the moment. yeah, it's already had several really good audits come back and...

<Jason Kam (19:09)>:

.

<Jason Kam (19:22)>:

Okay.

<Michael (19:27)>:

Yeah, we'll hopefully have an announcement out about that in the very near future. But I think that's important because the way that the debt works will naturally drive more volume through the Euler lending market. It's not some separate product. You people ask why have we built this thing? It's not disconnected from Euler at all. It's in fact heavily dependent on it and a core part of the main Euler lending protocol. And that will increase capital efficiency even further.

<Jason Kam (20:00)>:

We'll be sure to talk about it. But it seems like it's more so about going on different chains at the moment and letting the long tail enablement do its own work. But you're not actively introducing incentives or, is that fair to say?

<Michael (20:19)>:

It's not that we don't have incentives. I mean we definitely do every new  chain deployment. We typically do a hundred thousand dollars of Euler incentives in this, this reward or token as a minimum and see, then, and then I think the incentives tend to be quite dynamic. So we see, you know, what works, what doesn't, what assets come on board. Sometimes there's incentive matching. depends on, what kind of proposals come through the DAO

<Michael (20:46)>:

So they definitely are part of it. It's not like we don't have incentives. Yeah, a lot of people come to Euler for those. Yeah, I think new networks are quite an important part of it. I mean there isn't that... I'm not a person that thinks that Euler should be on 100 networks or anything daft. I think there are probably going to be a handful that succeed over the...

<Michael (21:11)>:

over the next few years, I think we will, we've had this big proliferation and now we will probably consolidate on networks that can specialize and offer users something, a unique experience. So it's hard to predict ahead of time, which those networks will be in my opinion, you know, there are lots of great builders out there and it won't necessarily be the best builders that end up winning of course. So it's really hard to say, but I think, yeah, it's important that Euler's on those early. think if you,

<Michael (21:40)>:

If you try to grow somewhere a bit later, it's often much harder than it is if you're kind of a first mover on those networks. So yeah, that's definitely a key part of things.

<Jason Kam (21:45)>:

down.

<Jason Kam (21:48)>:

So being all chains, like BSC and BASE, and then there are more L2s launching, would you be compatible with the faster ones, like MONAD and MegaETH and those higher throughput ones, eventually?

<Michael (22:05)>:

Yeah, absolutely. Yeah. I mean, I expect things, the defocus systems there will be, will be a little different, I suspect, because of the things you can do once you have that, once the latencies, you know, change by orders of magnitude, that kind of changes the way that things like MEV work and so on. So I think there will be, there will be differences, but it shouldn't, shouldn't affect the value proposition of overclassed, Icelandic and boring, in my opinion. I think it's more, more likely to impact Dex's. Yeah.

<Jason Kam (22:07)>:

Okay.

<Jason Kam (22:18)>:

Mmm.

<Jason Kam (22:30)>:

Yeah. And just to understand, yeah, we're going to talk about the majors for a second, because I'll be pretty curious on how you incentivize the TVL there to grow. But it would seem like you really narrow it into a niche, which is none of the new launches of new tokens would get on Aave, because it's a common pool. if those collateral rug, everybody kind of there gets hurt. So it's a very rigorous process.

But at the same time, doesn't seem like Morpho is flexible enough. It doesn't offer you a lean collateral And it doesn't sort of, it's this almost curated process. even opening a pool there takes a bit of effort. And the tech there may not support this kind of flexibility. So you're kind of the only game in town when a new protocol, this kind of long tail needs to offer bar lending markets. And is that the right way? And that's why you're gaining this share so rapidly. Is that the right way to think about it?

Because you sort of hit on a market. Yeah, yeah. I wonder where else they could go.

<Michael (23:27)>:

Yeah, think that's partly true. mean, some of the Euler is biggest markets are in majors though. It's not like it's just a sea of sort long tail projects. I would say there's actually more long tail markets on Morpho perhaps than there is on Euler. So Euler has...

<Michael (23:52)>:

It has a kind of, you know, often when people curate the market, they recreate something that's a bit like an Aave and inevitably that tends to consist of major type assets. So yeah, we have two DAO control markets that are governed by Gautner and Objective, two risk curators on Euler and they're governed by the DAO much like, you know, Aave has its model with Chaos and Llama Risk and others.

<Michael (24:22)>:

And yeah, they're very much consistent majors of premium tier blue chip assets, I would say. yeah, it's not just long tail. would say there's probably less long tail, really long tail than there is on Morpho where they have these ungoverned. Ultimately, most curators on Euler tend to retain governance control. On Morpho, there's obviously the lower level markets, the Morpho blue markets are.

<Michael (24:50)>:

of all ungoverned, they're sort of permissionless. And that brings with it its own unique risks and reputational risks. When people build and curate markets in order, they have the option to deploy those ungoverned, isolated pairs, but most of them prefer to, it seems to us, prefer to create their own governed markets where they have greater control, access controls, and an ability to, for instance, pause a market or take action in the event that the...

<Michael (25:19)>:

know, interest rate model needs changing or the economic environment shifts and so on. And so when you govern markets, you tend to, I think they tend to, those curators tend to take on board more reputational challenges, right? And so they don't necessarily want to go out and just deploy markets for absolutely anything. And so the really long tail stuff, I think is still, not really on order, I would say.

<Jason Kam (25:33)>:

Yeah.

<Jason Kam (25:44)>:

. Do you have any plans to incentivize the quality on majors, like BTC and all the other major coins, or is that not a priority?

<Michael (25:55)>:

We have done that. mean, on Euler Prime, which is the kind of DAO government market I mentioned, there's incentives on liquidity there on things like on some of the major Bitcoin mappers, CbBTC, we've done CbETH, USDC, Tether incentives and so on. So some of the majors have definitely been incentivized on that kind of Euler Prime based market and on other networks as well.

<Jason Kam (26:10)>:

.

<Michael (26:24)>:

You know, we've got a big market on base, for example. Yeah, the thing I would say is that incentives, you know, if you're a shiny new project and you've got some low float high FDV coin to distribute, you can kind of incentivize USDC markets. You can maybe grow 100 million USDC market just by distributing tokens.

Euler hasn't had that. if it can't like, there's only so much you can incentivize a hundred million dollar USDC market or 200 million dollar market, right? You, you if you want to boost the APY by five, five percent, let's say, and you want to get a $200 million market, you're looking at $10 million in incentives alone. Well, that's three times the total amount of incentives, more than three times the total amount of incentives we've done in, you know, however long, seven, seven months now, whatever it's been.

<Michael (27:22)>:

across every single network, across every single market, right? So it just wouldn't be sustainable for Euler to grow massive markets using incentives alone. It's just not feasible. But what we do do is find that they're successful using incentives in the first few months of a new market. When a market is born, people need a reason to deposit. If there's no depositors, there's no...

<Michael (27:51)>:

people can't borrow and so on. you can, you can actually, I think incentivize deposits of USDC up to maybe a five or 10 million or maybe even 20 million sort of size, just using incentives alone. And then that gives the opportunity to kind of see like seeds, the market gives the opportunity to grow organically from there. If it can't find a reason to grow organically from that 10, $20 million starting point by itself, then is it really worth bootstrapping and paying for anyway? I would say probably not.

<Michael (28:21)>:

There might be some cases where it needs to get bigger before it's more useful, but yeah, that's generally the philosophy, I think, for us and our strategy for growing things with incentives.

<Jason Kam (28:30)>:

So that's not the major plan at the moment. Okay. just off the math, usually it's a spread model that you clip a fee and the sort of bar and lending that occurs, especially on the borrowing and there's a tick rate. On a billion TVL, is it roughly $3,000 to $4,000 a day and roughly like a million dollars a year of revenue to the protocol? Is that roughly right?

<Michael (28:33)>:

We couldn't even do it if we wanted to. Yeah, so no. I mean, yeah.

<Michael (28:58)>:

Um, I think, , I think it's a little higher. Um, it depends on the, it depends on the fees. So yeah, the, the, way that the fees are set on order is, , it's essentially the, the, curator chooses the fee. Whatever fee they choose, they, , the protocol gets half. So they set a 10 % fee, 5 % of that will go to their, you know, half of it will go to the curator half that will come back to the protocol. Um,

<Michael (29:26)>:

Some curators set higher fees on some of the markets, so that I've seen fees as high as 15 or 20 % on some markets. So obviously all we get 10 % there and it depends what the interest rates are. So some of the interest rates are way higher than a 5%, right? When Ethena was yielding crazy amounts, it was much, higher. So yeah, I think what we've seen is it's probably closer to two and a half million.

<Jason Kam (29:36)>:

huh.

<Jason Kam (29:45)>:

Yeah.

<Michael (29:55)>:

revenue across the billion TVL annualized yeah and then the thing to say as well is that on the Euler-Derivative markets which are some of the biggest markets on Euler there's obviously no there's no there's no curator to pay there however much like Morpho which is obviously has a fee switch turned off at the moment they would take 10 % on all their markets if they turn their fee switch on

<Michael (30:22)>:

Our strategy essentially was to turn the fee switch on for anything that's long tail, just by default. So the fees were already being charged today and the revenue's coming in. So Euler's already generating more revenue than Morpho today. You know, it's probably on track to generate several million dollars, I think, over the course of a year already, but it's switched off for the majors. And that's because just like Morpho, we're trying to grow and it makes sense to subsidize the growth. You know, you could either do that with token incentives, which we've discussed a very...

<Michael (30:52)>:

hard for a little bit, but rather than do it with incentives, then you just say, well, we'll take no fee on USDC or Tether or WETH or like, know, Wrapped Bitcoin, or cbBTC. So some of the majors just are just completely switched off to kind of incentivize growth.

<Jason Kam (31:01)>:

Yeah.

<Jason Kam (31:07)>:

And that fee is auctioned, and you can bid on those fees based on with Euler. that's how if, and that sort of Euler that gets bid sort of get burned, I'm guessing. That's how you sort of execute it. Okay. Makes sense.

<Michael (31:20)>:

Yeah, so the, yeah, they exactly. So fees, no matter what, what currency they would get bought in on a kind of auctioned off using this module called fee flow. And the way you buy the way you bid on the fees is through, through Euler tokens. if someone, someone auctions, let's say if there's a $5,000 auction, then typically around $5,000 of Euler token will be sent in to bid and purchase that. It's obviously there's a little spread there because people want to profit. So.

<Michael (31:47)>:

Yeah, it's a heavily bought option at this point, I would say, though, and we tend to see it's quite efficient. So, yeah.

<Jason Kam (31:52)>:

. And how is the team funded at the moment? Like you raised dollars historically, I'm guessing that's still a run rate that you're burning through and you can sell tokens to fund your operation.

<Michael (32:03)>:

Yeah, it's we have we have I think we're a runway if we take takes it if there's zero revenue, zero sales or anything. Obviously none of that would be true. I think is currently takes us to at least the end of December next year, 2026. I suspect that might be a little might be pushing into 2027. And yeah, most of the most of the funding we

<Jason Kam (32:21)>:

Mm. Yeah.

<Jason Kam (32:29)>:

huh.

<Michael (32:32)>:

We've raised three rounds of funding, right? Historically, our last funding round was back in 2022. That was led by Horn Ventures. Before that, we had a Series A with Paradigm in 2021. And before that, a Seed round with Lemnis Gap. Yeah.

<Jason Kam (32:35)>:

Uh-huh.

<Jason Kam (32:50)>:

Yep. But sorry, just so I'm aware, all the fees being generated by Euler and protocol gets auctioned and then directly goes to burn. So allegedly, the equity box should have no revenue going into it.

.

<Michael (33:06)>:

I see, yeah, I mean, some of the fees don't go into auction. For instance, the ones on the usual stability loan don't go into auction, so they could be used to fund protocol operations. it's governed and it depends on the individual market. But yeah, most of them currently are, the ones that are being generated currently are being used to buy back the token. So in principle, if that were the case forever, you know, in every market, then indeed you would have a model where...

you bought back the token and then you would effectively sell the tokens in order to fund operations. That's how the DAO would have to operate. So I don't think there's a free lunch there. You either have to, you either take the fees and use those directly to fund operations or you take the fees and then sell tokens to fund operations. think it's, yeah.

<Jason Kam (33:54)>:

Yeah, and roughly off that two to three, how much is directed towards buyback versus going to the equity?

<Michael (34:01)>:

Currently, when you say equity, mean...

<Jason Kam (34:04)>:

I mean going directly towards paying the team and salaries and whatnot.

<Michael (34:07)>:

Hey, and the team. Well, at the moment, think, yeah, I think essentially all of it would have to, you know, if we, we assume that it was all just coming, there was no buyback, right? It would, yeah, I think our, burn rate means that we would, yeah, we wouldn't be profitable at the moment at the current, current situation. I think we had a

A DAO proposal recently, there was requesting somewhere between five and seven million for another year of operations. So that's how much we cost. That's inclusive of absolutely everything. it's all, it's the cost of Gauntlet and Objective, all the audits, all the legal, like it's absolutely everything associated with the project. It's probably a

<Jason Kam (34:51)>:

So there's a treasury got it. there's a treasury basically and then the two to three million dollar goes in but you're requesting five to seven million a year that is going out. So how much go so how much goes towards to burn?

<Michael (35:00)>:

Exactly.

Well, right now the tokens go when they're in the fee flow auction that's happening right now, I think that basically the tokens aren't being burned. They're just deposited back in the treasury. So the DAO can choose what it wants to do with those tokens. They could be burned. If the DAO votes for it, I mean, we could just switch that on and just burn whatever's been accumulated today if it wanted. Alternatively, there's some...

<Michael (35:32)>:

alternative views on this, right? mean, one view is that you would just burn it. Another view is that you can kind of buy back and redistribute. One thing I would say is that when rewards are distributed on Euler through this reward Euler contract, anybody that breaks vesting, they can break vesting at any point and they can claim what's due to them through vesting at that point. But any remainder,

the term that it's a six month term basically and any remainder that's not claimed is then burnt. So there is some token being burnt at the moment through early claimants essentially. I'm not sure. think, yeah, last I checked is about $150,000 have already been burned through just early claimants essentially just unlocking. But that's the only real burn that's happening today unless the DAO votes to burn some of the buybacks that are being brought back in.

<Jason Kam (36:25)>:

Right. And just to be very clear, when you say there's $2 $3 million of revenue from the fees being generated based on the tick rate of the curators, not all of that is burned. In fact, goes into a treasury which you have claims to. And you do propose DAO proposals so that those fees actually go to you to company the equity.

<Michael (36:46)>:

Yeah, to well, not just to us, but to all service providers, right? Yeah. But yeah, yeah. So right now, yeah. So clearly right now we're not the project isn't profitable yet. It's not too far away, but like, if you just look at the amount out versus the amount in, there's probably still a two to three million dollar gap there that needs filling. So Euler is still needs to grow. And once it grows a bit more or it cuts costs a little, let's say, then it would become profitable.

<Michael (37:16)>:

Maybe it would become profitable if it either doubled TVL let's say, or was to half its costs.

<Jason Kam (37:23)>:

Yep. And it's fair to assume that after you have sort of started breaking even, then the additional fees that come to the Treasury will be sort of aggressively burned. Or that will be approval. OK.

<Michael (37:37)>:

I think so. mean, yeah, it's up to the DAO really. mean, like there's, there's, differences of opinions on these things. One way is to burn. So you just give, that's one way to give value back to token holders is to just pure, to do pure burns. I mean, a lot of the best companies in the world that don't, don't give value to shareholders that way. Right. If like Amazon had just been burning, buying back and burning Amazon stock years ago, that probably wouldn't be Amazon today. Right. So they've, they've, buy back and grow. So.

<Michael (38:06)>:

There are opportunities to do that, I would say, with protocols. So you can, you don't always have to burn, but certainly that will be on the table and up to the DAO.

<Jason Kam (38:12)>:

Yeah. Tell me more about Euler Swap and Euler Earn, the timeline of those things, like what they can do to the protocol in terms of revenue and the product itself.

<Michael (38:24)>:

Yeah, so EulerSwap is a DEX that's built on top of Euler. It's been coming for some time. We've been building it for many years, in fact. But yeah, it's heavily dependent on the base Euler lending protocol working well, first and foremost. And I'd say I don't want to give too much away on this call, but.

<Jason Kam (38:47)>:

<Michael (38:49)>:

What it does is it allows people to turn their accounts on Euler. So somebody with an ordinary lending and borrowing account allows them to turn those individual accounts into essentially a discrete AMM. And the AMM itself then allows swapping to take place against the account. And uniquely, this provides a way for people to provide just-in-time liquidity for swaps. And we think...

The mechanism here essentially allows somebody with, let's say, a professional market maker with, let's say, one million dollars margin collateral in Euler could facilitate the same depth of liquidity that you would get on, let's say, a 40 to 50 million dollar curve pool or Uniswap pool. So you see remarkable increases in capital efficiency. The other big gain I would say is that the way the swap accounts work

<Michael (39:48)>:

they take advantage of the cross-collateralization of Euler markets, you know, on more for things for only pairs, fluid that, you know, deal with pairs. On Aave and Euler, we have cross-collateralized markets. That means that a USDC pool on Euler that's cross-collateralized, that we have one in a market called Euler Yield, where it's essentially USDC that's cross-collateralized against 10 plus other stablecoin type assets.

<Michael (40:15)>:

Essentially people will be able to build AMMs that function a little bit like say a curve 10 pool or something, you know, if people are familiar with a curve three pool where they connect like USDC, USDT and die, imagine that but for, but for curve yeah, 10 pools or whatever, all built on top of the Euler and yield market. So yeah, it's a, there's, there's no decks out there that's quite like it today. It's extremely novel. I'd say the closest thing is probably Fluid

<Jason Kam (40:22)>:

Yeah.

<Michael (40:44)>:

people be familiar with the success they've had. On Fluid, they came up with this concept where people's collateral and debt could be used to swap liquidity. So for instance, you had USDT debt and I had USDT and wanted USDC, I would send the USDT to you, repay your debt, and then I would borrow on your behalf some USDC and send that back to myself.

<Michael (41:11)>:

And that's how liquidity inside lending markets can operate as just-in-time liquidity for swappers, essentially. yeah, Euler uses relies on a similar principle there, but it operates in quite a different way, I'd say, overall to Fluid.

<Jason Kam (41:30)>:

I suppose if it operates in similar ways and because of the TVL there can start generating swap fees effectively. Do you expect most of the volume to come through aggregators or would you sort of push a lot of effort to the front end and the marketing group?

<Michael (41:48)>:

100 % through aggregators, I think. I mean, we will probably ship a front end for this, I think they were very, yeah, it's very hard to compete by providing a bespoke, unique front end experience. A lot of the volumes on swaps generally goes through aggregators these days. So we've been working really closely with a lot of the major solvers and a lot of the big aggregators out there. We've also been working with another large

<Michael (42:17)>:

well-known DEX and collaborating with them on something. yeah, our go-to-market here is dependent on people not even knowing that they're effectively not even knowing that they're routing trades through what we're calling Euler swaps. It will mostly be aggregator flows. And one thing it does is it not only generates fees for the swappers but.

<Michael (42:42)>:

It also increases the borrowing demand on markets. so in some ways drives up the capital efficiency of the underlying lending markets because the borrowed demand will be higher, meaning obviously higher yields for lenders. Yeah.

<Jason Kam (42:46)>:

Yep.

Interesting.

<Jason Kam (42:59)>:

Heuristically, on the same bill in TVL, let's assume there's no additional TVL that came through this. Obviously, there's dependency on how active people are swapping for you. Heuristically, how should we think about this effort bringing to the impacting of revenue? I mean, it should be higher, but is there a scale that would make you satisfied?

<Michael (43:23)>:

Honestly, no, think I don't know how much other teams think about this, but what we think of as the primary objective is growth and flows. I, yeah, I'm sort of anti-fee. think Euler's barely, you know, nowhere close to being even a year old now. And I think my, my emphasis would be on growth and flows and user activity. the main metrics we care about, I would say is.

<Jason Kam (43:37)>:

Mm-.

<Jason Kam (43:42)>:

interesting.

<Michael (43:51)>:

Are, do we have users that really like, do we have loyal users? Do we have sticky liquidity? Do the vault curators come and make things that are meaningful or are they just creating markets that are kind of transient? They exist for people to leap for little bit and then disappear. Like we don't want any of that. want the, the, the KPIs here are real users. Once you, once you capture flows and real users, then you can think about like revenues later. So it's not the main.

<Jason Kam (43:56)>:

.

<Michael (44:18)>:

I wouldn't say it's the main objective for us is to focus on revenues, but naturally I would expect there will be an increase in revenues if it's successful. It's very new, so we don't know, but hopefully it's successful and that will naturally lead to growth and revenue growth.

<Jason Kam (44:25)>:

Got it so so Yeah

<Jason Kam (44:34)>:

So I guess, as opposed to the 0.1%, 50 bits, 1%, 3 % fee of Uniswap, one, it seems like you will not have additional fee on the swaps. You will not charge 0.35%. And secondly, is it fair to say that the fees that you charge, as if Uniswap would charge one, it will be significantly lower in day one?

<Michael (45:01)>:

I would, mean, ultimately it will be up to the LPs themselves, you know, the people running these swap accounts, what kind of fees they're setting. There won't be any protocol fee on by default, you know, similar to Uniswap. So it'll be up to them and that they will have to find a balance and figure out what works. It's a little bit unknown, frankly, how, what swap fee they should set on this because they haven't, as an LP here, on the one hand you have, we have much...

<Jason Kam (45:09)>:

Mmm... Mmm...

I see, that's cool.

<Michael (45:29)>:

lower capital requirements for LPing and other other DEXs. know, Euler Swap will be instantly liquid on day one, as long as we have a handful of people running swap accounts. It's not like we need to do massive liquidity mining campaigns or anything, or like private deals to bring in huge amounts of LP capital like you'd see on other DEXs. Because there's already TVL in Euler that can be can be used, right? There's liquidity there that can be can be utilized.

<Jason Kam (45:43)>:

 that's cool.

Because they're just TVLs already.

<Michael (45:58)>:

And, but yeah, then it's up to people to kind of balance the costs of running these accounts and they're not cost free to run. There's all sorts of things like permanent loss and like borrowing costs and things that they have to factor in additional risk perhaps on the new protocol and so on. So we'll see what they create. I think that EulerDAO should maybe run itself some swap accounts, perhaps even at a loss as a kind of loss leader.

<Jason Kam (46:12)>:

Mmm. Interesting.

<Michael (46:26)>:

to stimulate growth. But yeah, that's on my view.

<Jason Kam (46:29)>:

But I guess, yeah, sorry to cut you off. Basically, on the fees that they set, you would not be taking a part of it. Like, it will be a zero-tick rate business. And for a while, I guess how it benefits you would just be more TVL, potentially, if people like this, or increased solidization, driving more tick rate through the back end.

<Michael (46:50)>:

Yeah, exactly. Exactly. I mean, there will be a fee, will be a fee switch and there'll be more about that. I think when, when some of the collaborations we've got become apparent, like more to say about that. but, but yeah, the fee switch, I would say the, the, the initial driver's say, you know, if you imagine, you said, you just never, you said there's no fee on this thing, no fee whatsoever. Then effectively all the money would go to the LPs, right.

<Jason Kam (47:01)>:

Gotcha.

<Michael (47:18)>:

then the LPs will be the ones in competition. So how would they better compete? They'd probably try to lower their fees. And as they lower their fees, that drives more swap volume through them, which then brings more volumes and flow through the lending protocol, which should bring on board more TVL, which in principle then should mean that the benefits of swapping through Euler are even higher because there's deeper liquidity, which then should mean more swap volume. so there's a potential here for quite a strong positive feedback leap, I would say, given the capital efficiency.

<Michael (47:47)>:

gain, potential gains of capital efficiency. But it's all of them needs to be seen.

<Jason Kam (47:50)>:

And Yeah, and what's the timing on this?

<Michael (47:57)>:

well, it's, it's, it's, it's going into audit. yeah. as we speak, it's already had a couple of audits. It's been, yeah, a couple of changes we've had to, make not because of audits, just because, yeah, I've go to market plans. which yeah, again, will be become more obvious as we, as we launch, but I, I'm, we're not talking sort of months and months. think we're, yeah, maybe weeks or months or maybe another month or so.

<Jason Kam (48:11)>:

.

<Jason Kam (48:15)>:

Got it.

<Jason Kam (48:27)>:

I think that's as much as I can get from you on this call. And I guess this will be a pretty market maker heavy effort. Any LPs would have to deal with both the IP as well as any swap that occurs. They're effectively being forced to borrow or lend, if I'm not mistaken. So it seems like a complex formula if you're managing a lot of positions.

<Michael (48:29)>:

Yep.

<Jason Kam (48:53)>:

I guess, is that right? market makers mostly dealing with this? And secondly, I guess the BDF for there is you and your team actively talking to the winter means of the world. Is that fair to say? OK. OK.

<Michael (49:04)>:

Yeah, I think that's fair to say. When does this go live? Like it's live now, isn't it? But yeah, there's, I don't know, there's some things that... Okay.

<Jason Kam (49:10)>:

Well, it's only live to members. And I guess you can pick an embargo time.

<Michael (49:16)>:

I went and pick an embargo time, maybe give it a couple of days.  I think we're going to a couple of, yeah, 17th. I think we'll, we'll have a, yeah, an announcement there to make about some of the market, a market maker that you might have mentioned. Um, yeah. So yeah, we'll be, , well, we will, yeah, I mean, as you said, it's, it's not for, this is not a retail LP product. wouldn't say this is not for, for people to come in a couple days.

<Jason Kam (49:23)>:

Okay, we could do that. We could do that.

okay. Interesting.

<Michael (49:46)>:

not understand what they're doing. It's definitely a sophisticated, sophisticated tool and people need, will need to understand the risks and fortunately they have, they have the ability to adjust the fees, right? To, to, to hopefully factor in these costs. And so there will probably be some experimentation as they work out how much does it cost me on aggregate across all the different costs I might face to run these things. And I want to position my fee accordingly. And hopefully that fee is still leaves.

<Michael (50:12)>:

a lot on the table and then that makes it competitive in the market. If ultimately the costs weren't too high, then it will have failed as a product, I suppose. But we're hopeful that won't be the case.

Yeah. Do you have a, I mean, this is the cooler part of the thesis. How would you define success by your end if this worked? You know, like, I guess, is there a benchmark in your mind that you want this protocol to get to? Like, boy, if the swap had worked and then the flywheel really started spinning, like going from 1 billion to X would make me happy.

<Michael (50:51)>:

I think, yeah, think if the, just purely on the swap, I think it's about market share. So I'd like to see it doing similar, having a similar impact to Fluid on the market share of Dex's. I mean, yeah, hats off to that team because they've done exceptionally well and managed to take market share in a very, very difficult market to take market share from people. It's been, yeah.

<Jason Kam (51:17)>:

Yeah. And what would that mean for the TVL if you get there? Sorry to cut you off.

<Michael (51:23)>:

Yeah, I mean, in purely TVL terms, maybe double doubling or tripling the, the, markets on which these accounts run. So that wouldn't be, that wouldn't be total TVL I would guess I'd like, yeah, it could, it's very, very hard to, hard for us to say. So we're not trying to set, you know, we're not trying to set the expectations too high on our side. And so we see it's just such a novel, like experiment, I suppose, but

<Michael (51:52)>:

My guess is it could really have quite a big impact if you turn a single USDC pool into now the main go-to place where people are swapping and lending and borrowing. It could be significant, but it could, yeah, it's unpredictable. It's hard for us to do tests on this thing. So we've had a few people trying to.

<Jason Kam (52:04)>:

Swap is huge. Yeah.

<Michael (52:20)>:

run small tests in production, until you go live and really see how well it's, how well it's, it picks up volume, I would say, yeah, the, it's a little more gas expensive than other exchanges. And how, how, how important is that these days? I mean, it used to be the be all and end all when we first started building a DEX we're like, how do we get swaps down below a hundred K gas? Because yeah, that it's the main, the main competitive edge you would have.

<Michael (52:47)>:

These days, I don't know if that's necessarily true, especially as we move more liquidity to L2s. It's less important there. Even on main net, gas costs have come down dramatically and that gas costs just a fixed absolute cost on every swap, right? So if that's smaller, then the capital efficiency and the fee start to weigh more heavily on the swap volume you get.

<Jason Kam (53:11)>:

Are you going to Solana anytime soon? Sticking with you, yeah, OK. So we talked about the swap. Is there anything else that really excites you on the horizon in the next three or six months?

<Michael (53:14)>:

enough.Yeah.

<Michael (53:28)>:

So we've got Euler-Earn coming, which works a little bit similar to the way that, well, it's essentially like Euler's version of metamorpho. I think these kind of models are quite important actually for the way things work. for comparison, on morpho you have individual markets or individual pairs essentially. then, you might, means you might have, I think as they do like 50 or 60 plus different USDC.

markets where you can borrow USDC. Now, obviously alone, that's very capital efficient, but the key insight, I guess, with Morpho is that you could have an aggregator that sits above that and rather than people depositing liquidity into individually each of the 60 markets, they have somebody like a Gortner or a Stakehouse or whoever that essentially manages this asset map.

aggregator asset management vault at the top and retail LPs into the asset management vault. And then the asset manager allocates capital to these lower level markets. And that helps reduce the capital inefficiency of pairs. So it's quite important. I think it also helps the velocity of capital and finding a place where it's needed in a

<Michael (54:52)>:

time efficient manner. If you just run the pairs, then technically the free market, if some new market comes up where there's clearly demand to borrow USDC, technically the market should find that. But I think historically we saw that didn't happen. There was a protocol years ago called CASHI that was almost identical to Morpho Blue in many ways. It had reactive interest rates and it was permissional pairs, immutable permissionless pairs, very, very similar at its core.

<Jason Kam (55:13)>:

Ugh.

<Michael (55:21)>:

it didn't do very well and that's because there was no capital allocation layer, there was no asset management layer above on which, you know, where capital could find new opportunities more efficiently. I think that's why those types of vaults work well. Euler currently doesn't have those because it's still, we've had a lot of the innovation on more of that base layer, whereas, you know, we've said instead of pairs, we have more capital efficient sort of clusters of markets.

<Michael (55:51)>:

But still there are, you know, there are still obvious opportunities for growth there. So Euler & Earn is an asset management layer that can sits on top of all the different lower level markets on Euler. And it works quite similarly to Metamorpho. One of the main innovations though is that we've decided to make it more of a free market model on, you know, Metamorpho is a little bit protectionist, if you would. It sort of only allows you to deploy into Morpho Vault.

<Jason Kam (56:03)>:

Yeah.

<Michael (56:21)>:

and so, the Euler earned product will allow you to allocate to Euler or God forbid Morpho or Maker or, know, or whoever really. And, yeah, exactly. Yeah. So we, we, might end up helping some, you know, caps to go to other, other competitors, but at the same time, it's more useful product and it should be strictly better because in the worst case scenario, you could just have all the set, you know,

<Jason Kam (56:30)>:

It's cool. No curse. You just get more users on your platform. That's cool.

<Michael (56:48)>:

It could exactly match like the asset management, like going into the Morpho Vaults. But if there is, does happen to be a better opportunity today on, on Euler or Maker, then you could also allocate to that. So yeah.

<Jason Kam (56:55)>:

Yeah, that's cool.

<Jason Kam (57:01)>:

 I might have some interest for you because I think a lot of these, there are these credit card companies or crypto native debit cards that are popping up and they're occurring TVL. Those TVL are spendable. They just spend with card and they almost invariably deposit those TVL into say Morpho to like earn yield. Yours seems like a better way to deploy USDC and USDT in that regards. Just like we'll touch base on the offline.

<Michael (57:27)>:

Yeah, hopefully. Yeah, sounds great.

<Jason Kam (57:31)>:

Any questions from the group? Give it three seconds. I don't think so. Michael, thank you so much for your time. This is really helpful.

<Michael (57:44)>:

Yeah, thank you very much. Yeah, it's been great to chat. Happy to answer any more questions offline. People feel free to reach out, get in touch with me if they have any. Great, thanks.

<Jason Kam (57:53)>:

Perfect. Thanks guys.