From the Fed to Euler Labs

Having spent a decade at the Federal Reserve Bank of New York, Euler Labs COO Brandon Neal had a front row seat to the workings of the traditional finance world. Managing the U.S. Treasury Auction Desk, he was in the thick of operationalizing central bank monetary policy before deciding to join Euler Labs in January this year.

Neal got excited by the potential of Decentralized Finance (DeFi) following a discussion with Dave White of Paradigm Ventures, an investor in Euler Labs.

Working at the Fed made him realize how important borrowing and lending markets are to the health of the monetary system. He believes the permissionless aspect of DeFi has the potential to solve a lot of the problems associated with traditional lending markets.

“I really believe in the promise of DeFi for disintermediation. The entire financial system is meant to be the oil that greases the wheels of commerce. But it’s a wheel itself now and it’s a big wheel - and it’s quite bloated. I think DeFi can solve a lot of these issues,” Neal said.

He said that DeFi could be “the new financial plumbing” which serves the underbanked and delivers fairer market mechanisms that disincentivize the “rent-seeking” behavior of financial institutions.

Taking DeFi to the Masses

Euler.Finance, the first app launched by the company on Ethereum in December 2021, is a permissionless lending protocol built to help users lend and borrow almost any asset. Neal recognizes that Euler is “standing on the shoulders of giants” - building on the back of the first and second (V1 & V2) generations of lending protocols dominated by Compound and Aave.

Even during this bear market, Euler has been growing.

Brandon Neal attributes Euler’s success to its carefully constructed products and thinks DeFi is really in need of “thoughtful, serious” builders who can help raise the level of trust in the industry.

Euler’s app is designed with risk management as a primary concern. Industry watchers believe DeFi is currently in a “testnet” phase and will certainly evolve further - but what does the Euler COO think are the changes that will attract a critical mass of people to move from TradFi to DeFi - both at the retail and institutional level?

“There is a broad public perception of crypto that oscillates quite a lot. Price appreciation got people excited at one point but it’s in the other direction now. There is also an element of fear whereby a lot of protocols have been hacked and people have lost assets because of poor design or malicious actors,” Neal said.

In these still-early days for the industry, those kinds of crosscurrents are impeding further adoption. He views the bear market as a benefit for the sector in the long run - because “two-way markets are healthier” than markets that always go up. “For broader adoption I think there need to be real-world asset use cases,” he said.

Elaborating upon the larger TradFi-DeFi debate, Neal refers to his analogy of finance as the oil greasing the wheels of the economy. He asks what is the oil greasing right now?

“In the distant future if you close your eyes and imagine, say 500 years into the future, we are probably not going to be using the same methods of transactions and the same types of currency,” he said.

A vision of the future where everyone can access financial markets is what makes DeFi’s role crucial:

“If you plot that future as a dot on a graph that shows utility to humans over time - there's going to be some dots that connect us from here to that point in the future. DeFi is most likely one of those dots. I’m betting my career on it,” Neal said.

Having real world assets interface with DeFi is going to be valuable, he believes. Jurisdictions such as Wyoming are already experimenting with tokenized mortgages, helping to blur the boundary between TradFi and DeFi.

Another major use case where DeFi can play a potential role is concerning digital content creators and artists, etc. Content creators who rely on the giant tech platforms to host their content have helped the Web2 tech giants to grow into very powerful middle men.

“If you could do this without a middle man then you could have a potential use case for building financial infrastructure around that,” he said.

Next Gen DeFi

Neal views Euler as the third generation (v3) of DeFi and outlines the differences that have helped Euler improve on v1 and v2 platforms. Euler is betting that what will make their protocol stand out is building products with safety and risk management practices used in traditional finance.

“There's the permissionless aspect of Euler that's actually not there in Compound and Aave. With v1 and v2 DeFi, you can't just go from the protocol to the app and activate a market in any token you want. With Euler you can activate any market. Euler’s users have so far activated 101 markets on their own - a multiple of what Compound and Aave have,” Neal said.

Both Aave and Compound use a static linear interest rate model, which Neal says doesn't respond to natural market forces: “That actually worked for the v1 and v2 stage of DeFi. Reactive rates are a lot more akin to the natural market rates you see in money markets or bond market.” Reactive rates are a new feature to Euler that hasn't yet been activated.

Further, the liquidation mechanism on Euler Finance uses a Dutch auction method which he says are “extremely efficient price discovery tools which are used in the Fed and Treasury all the time.” Euler’s white paper explains a number of other significant risk management they have introduced, including asset tiers, protected collateral, decentralized price oracles, risk adjusted borrowing capacity, and deferred liquidity, to name a few.

For TradFi institutions to adopt DeFi, Neal said it was important to Euler to prove that their protocol has been “battle-tested.” Before they could launch a mass marketing campaign and release more products like their upcoming Euler.Swap app, the lending protocol “had to live for a few years.”

Euler, the Serious Builders

In closing, the Euler Labs COO is happy with they have achieved so far while maintaining a modest public profile. The team prefers that Euler be viewed as a serious company building well-thought-out products.

Neal said, “We are able to confidently say we have passed all the audits and this is an extremely well-constructed product. Hopefully we're at an inflection point now where we can now make some noise about our achievements.”