The Big Whale: 2023 has been a dark year for you and the Euler Finance team with this hack of nearly $200 million. The funds were recovered, but you've been off the radar for a year. How are you doing and where are you now?
Michael Bentley: Everything is going very well, in any case much better than a year ago. Even though we haven't made much noise since then, the team has been working hard to get us back soon.
In February we announced the launch of version 2 of Euler, which has been very well received by the community. It's pleasing because what happened a year ago was a shock for many of us.
The hack of Euler did indeed leave its mark, both in terms of its scale and the fact that you were one of the most 'serious' players in decentralised finance (DeFi). What is the main lesson you have learned from it? What have you changed?
There are plenty of lessons to be learned from such an episode, both on a human and technical level, but I'd say the main lesson is that creating a smart contracts platform is extremely complicated, especially when it comes to loans.
We've always been very good at security, everyone recognises that. Since Euler was launched in 2020, we've been audited several times by the best security experts.
We also had even more extensive bug-hunting programmes than the market leaders like Aave and Compound, so we were really on top of security, and yet there was a flaw that the hacker exploited.
The hacker was what we call a "white hat", i.e. a "benevolent" hacker who eventually returned the funds to you in a very tense atmosphere. Are you still in contact with him?
The hacker was indeed a white hat, and things ended well, but I prefer not to say too much on the subject. The most important thing is that we have recovered the funds on behalf of our users.
The Euler hack ended well, but that's not always the case. Above all, we have the impression that hacks are multiplying in DeFi. Isn't that the main problem in the sector?
Yes, of course, but I think that in recent years things have improved, and few people realise it because the media only talk about what's wrong.
We also talk a lot about what's going well!
I'm not thinking particularly of the crypto media, but more of the general media who only see problems in our industry. Obviously, there are still too many hacks, far too many, but we're working every day to improve things.
Let's talk about what's going well in this industry. What do you think has improved in recent years?
Code auditing has become a must and I think a lot of things that have happened won't happen again. We launched Euler in 2020 and back then code auditing and security competitions were pretty rare. There weren't as many white hats either.
You'll soon be launching V2 of Euler. How can you be sure that there won't be any problems in the code?
We're going to launch a code audit in a few days' time (on 20 May) with over $1.2 million in rewards for those who find the flaws, which is unheard of in this industry.
The hack competition will last four weeks, i.e. until mid-June. I think Euler V2 will be available in July.
Is V2 a new system or is it just a more secure V1?
We had started work on V2 long before the 2023 hack. You learn a lot from launching a product and a V1, and I think what we learned with V1 is that the optimism around DAOs (Decentralized Autonomous Organization) and their governance is far too exaggerated. Managing risk via a DAO raises many questions, and the aim is to reduce uncertainties as much as possible.
How are you going to manage these uncertainties?
We're going to manage them through our new structure. Unlike V1, V2 has two components: the "Euler Vault Kit" and the "Ethereum Vault Connector."
The "Vault Kit" is a kit for creating and deploying vaults where you can lend and borrow assets.
The Ethereum Vault Connector is an immutable protocol that connects these vaults together. It's a kind of communication protocol like TCP-IP for the Internet.
Today, we have a new infrastructure, the code is online, it has been audited by top experts like Spearbit. We can't wait to be available again.
Everyone got their money back after the hack. Do you plan to work with your former customers again?
We've spoken to all our former users, and everyone recognises the work we've done. I'm optimistic about that.
There's a lot of competition between protocols. Even though you've been working on infrastructure, you've also spent a lot of time on security. Haven't you fallen behind in terms of innovation?
It would certainly have been better to avoid the hack, but we have managed to improve Euler. Now, the protocol works with lots of little bricks that can be used to create more or less complex products.
With this brick system, we have created a system that is easier to audit, and therefore more secure. Paradoxically, it is by simplifying Euler that we have made it more secure.
How will this V2 work?
The design of the new protocol is quite simple. We have this unchanging protocol, and on top of that, you're going to have all these building blocks that allow you to create new loan products.
The advantage with this modularity is that we're able to adapt to changes in the sector. Take for example Real World Assets (RWA) : our users will quickly be able to create safes that correspond to their needs.
What is your objective with Euler? You have a lot of partners in the crypto world, but isn't the aim to open up to more traditional finance?
The whole industry agrees that the aim of DeFi is to create a global financial market to which everyone will have transparent and fair access.
Before I got into the crypto world, I worked in a bank in Scotland. This was right at the time of the 2008 financial crisis, and I saw the financial system from the inside. The reality is that there has been no innovation in traditional finance for decades. The financial system needs to be updated.
The interesting thing is that today, most of the world's banks are working on DeFi. They are not necessarily very advanced on the subject, but they have invested and are starting to test the protocols and launch their tokenised funds as we have seen in the United States.
I think the vocation of lending protocols like Euler is to be the basis of future capital markets. In a few years' time, people will be able to lend and borrow without authorisation from a trusted third party. And they will be able to do this not only for crypto-assets, but also for all tokenised assets such as shares, bonds and of course all real-world assets. I think all these assets will be tokenised and will be available onchain, 24 hours a day.
Are you already working with traditional finance players?
We are working with banks as part of experiments. I think we'll have live products on real-world assets by the end of the year with traditional players.
What do you think about the French company Morpho and their new Morpho Blue protocol? Your vision is very similar to theirs, which is to say that we need to recreate finance on new foundations.
I really like the Morpho team. They're really very good. They too have effectively identified the fact that monolithic protocols like Aave are not scalable and pose problems in terms of governance. This model is fundamentally broken.
Like them, we are convinced that you need a very simple basic protocol on which you can create bricks according to the needs and players in the market. You have to be able to tailor your solution to your needs, and you have to be more flexible. Euler V2 offers these possibilities with the Euler Vault Kit and the Ethereum Vault Connector.
What are the differences with Morpho Blue?
With Morpho Blue, each market works with a pair of assets that you deposit and can borrow from a vault.
With Euler, in addition to being able to deposit and borrow in each vault, you can connect these vaults to each other, which allows you to rehypothecate the collateral and thus reduce the cost of borrowing.
From this point of view, I would say that Morpho Blue is a bit like a first step in what we have developed. With the Euler Vault Kit, you can make more combinations and I think that in the long term, our solution is more powerful.
The problem with Morpho Blue is that it's a very fragmented protocol. That's actually why they launched the MetaMorpho Vault, which is very good. I just think that we can provide this level of efficiency from the first layer.
With your V2, you're going to be in direct competition with Morpho Blue?
Yes, but it's very healthy competition.
The market has changed a lot over the last year. There are players like Morpho who have made a name for themselves on the market with over a billion dollars in TVL (Total Value Locked). What is your target in terms of market share and TVL?
At present, our market share is obviously zero, but before the hack, we had a TVL of around 500 million dollars. It would be great to get back to levels of this order.
To achieve this, in V2 we brought back features that users really liked; for example, a user could increase the return on their ETH staked by depositing them as collateral that another user could borrow from them against a return.
Aave launched the GHO, Curve launched the crvUSD . It would seem that having a stablecoin is something that is important to the bigger players in DeFi. What are your views on this? Are you going to launch your own?
We have actually been working on our own token, based on USD. It was due to be launched in 2023, but the hack stopped everything. Today, it's no longer topical.
What is the strategy for returning to the market?
Many projects have an incentive strategy with tokens, which is an interesting strategy, but our approach is different. The aim is more to attract new projects to Euler so that they create their own strategy, token and financial incentives.
How did you get into crypto?
I started in 2015. A friend told me about Ethereum, and at first I didn't really understand what it was all about. I dug into the subject anyway, and it was in 2017 that I really started getting interested, investing and working on the beginnings of decentralised finance.
The turning point came in 2020, when I took part in a hackathon in Oxford whose aim was to develop an interest rate model that was more decentralised than what was being done on Compound in particular. That's where I met my two co-founders. We worked together and won the competition with what was to become Euler!
One last question before I leave you: how do you pronounce the name of your protocol?
That's a very good question (laughs)! When we launched the project in 2020, I was doing a lot of maths, and Euler is a very famous Swiss mathematician who contributed a fundamental formula: that of compound interest.
During the 2020 hackathon, we started calling the project Euler, and it stuck. But it's true that a lot of people mispronounce the name. At the same time, it allows us to identify the real 'mathematicians'.
Some people say we should change the name with the arrival of V2, but I don't agree. We shouldn't be ashamed of the project and what we've done. The hack happened, and it's now part of our history. In 10 years' time, it will all be forgotten.
