Solving The RWA Trilemma

Transcript

Hey, good morning everyone. Yeah, thanks for coming. Um, hopefully everyone have a good morning. Um, I just arrived yesterday from New York. Um, I'm Jonathan, CEO at Euler Labs. Um, thanks for tuning in and uh, today we're going to spend a little bit time talking about um, how Euler is helping um, creating utility to the RWA markets, but also solving a few bottlenecks uh, from the technical implementation of a lot of RWA assets as they enter onto the blockchain.

Um, and uh, I think I'm going to give a little presentation um, for about 20 minutes, but I'll leave some time at the end for questions, but um, feel free to ask questions at the end of each each slide. I want it to be a little bit more interactive instead of me just talking non-stop for uh, 20 minutes. Yeah, so um, yeah, so a little bit about myself. Uh, I'm Jonathan. Um, I joined crypto full-time in 2020.

Um, initially was um, there's a lot of seats. Uh, feel free to jump in. Yeah, I joined crypto full-time uh, in 2020 to in the venture capital world. Uh, I worked in traditional finance before that. I saw huge opportunities of the the convergence of DeFi and TradFi. And uh, finally seeing that uh, convergence really happening in the last couple years. It's really accelerating. Uh, and working in DeFi borrowing and lending space has been super rewarding and humbling at the same time. Uh, kind of see that come to realization and I think this year is really going to be uh, inflection year for RWA lending and um, we've been talking to all the asset issuers about some very exciting uh, new

assets that's coming on chain uh, that allows user get access to a lot of different asset classes that they're not able to in the traditional way. Uh, but DeFi is a huge unlock, uh, to really, uh, open the access to users on a lot of different investment opportunities, uh, and financial tools, uh, for them to really, uh, realize their financial goals, uh, leveraging all DeFi that can offer. Um, and Euler is definitely part of that. Um, and, uh, assuming you guys already probably heard about Euler already, but yet on on high level, we are a borrowing and lending primitives, being in the space since 2020, um, and, um, it we're ex- yeah, we're working ex-

we're working accelerating with, uh, institutions this year, but has been working very diligently and actively with DeFi native users, uh, for the last four, five years. Um, and, uh, to start off, um, there are a couple of bottlenecks to allow, uh, RWA assets to come on chain. Uh, there are a few, uh, like these are the three main ones, but there are many others. I can kind of dive into a a few, uh, in the later slides, um, but some of the key ones are risk isolation um and composability and compliance.

Most of the lending options right now can do two, um, but not all three of them. So, risk isolation means, um, there's no shared exposure across different vaults and markets. So, if one vault get hacked, uh, or there's an incidence with the collateral, uh, the risk is not, uh, contingent to other markets. Um, this is super relevant to RWA because each RWA assets behaves behaves very independently sometimes. Uh, especially the private credit markets, each private credit structured very, uh, independently, and there is a lot of, uh, esoteric risk associated with each assets. So, having the modular risk isolation module really unlocks the safety

uh, helps with scaling scaling acceleration of the adoption of RWA assets to um to retails and institutions. Um composability, I think this is something you guys already are pretty familiar with. Um this allows capital efficiency, cross collateralization, and a lot really allow RWA to be integrated with a broader DeFi ecosystem. Uh so, if Fidelity issues a ETF on chain with tokenization, um and you wanted to move that effectively on chain, and through composability, um you can borrow against that assets with using various stable coins. And that means yeah, that means we really

taps into the the the full scope of DeFi. And for compliance, uh this is uh a unique requirement for RWA cuz a lot of these assets in different jurisdiction does require different compliance requirements. Um so, for example, uh we recently launched a partnership with um Securitize. Um a user can get uh actual ownership of the underlying assets. Um it's through their they call it digital security token, DS token. Uh but this does require uh a very specific set of KYC, KYB gating, and uh sanction screening, regulatory permissioning, uh and the elegant solution that Order has

built is to allow that at the smart contract level instead of uh adding 10 different add-on tools uh just to um to to make it work, right? So, we can really allow it in a very elegant fashion at the smart contract level. So, these are the three big categories I will probably spend a little bit more time on. Um some of it is really unique to the RWA space. Um this is related to um the risk isolation. Um as you guys know, um in DeFi borrowing and lending there are two popular uh architecture design. One is the shared pool architecture, and another one is modular. So, Euler is more on the modular side. So, on the shared uh pool

architecture, the advantage of that is very highly efficient. Um but, if one of the market is compromised, it means uh massive implication to the entire uh protocol. Um Uh at Euler, we believe risk isolation is really key uh to protect users and also protect anybody that's involved in the uh in the ecosystem. So, if one pool is impacted uh through the collateral or through smart contract hacks, um it's not impacted to the to the broader ecosystem. So, the damage is way much contained. Um this really This is really a already very highly relevant to DeFi.

As you guys know, there are a lot of uh very famous hacks uh throughout the years um that risk isolation is really key. But, with RWA, I introduce a new layer of complexity, uh especially with a couple of a uniqueness that RWA asset has. One is, for example, the NAV delays. Uh one example is um the Apollo Private Credit uh Fund. Uh so, it's uh the Apollo Private Credit Fund is very popular. Uh it's being talked about very frequently with institutions and also retails as a key examples of how RWA assets can come on chain, how top-tier uh institutions are thinking about crypto. Um but, the challenges that come is

uh a few things. One is the NAV delay, meaning that how these assets are marked-to-market. Uh in DeFi, we're very used to uh atomic settlements. Um things can just settle within seconds, um but TradFi moves in a much slower pace. Um these private credit funds are settled on T plus one, T plus three, or even longer. Meaning that if you purchase the fund, it will settle days later that you to confirm that you have the ownership of the fund. So, this really creates a lot of issues on DeFi cuz we need to value the the the the real time value of the the collaterals in real time so that we can issue loans based on the value of your

collaterals. So, and also with the Apollo fund, it has a redemption period of three months. Meaning that if you miss a certain redemption period, if you wanted to withdraw and get out of your position, it can take up to three months, which is a huge problem in DeFi. So, there are a lot of issues like that with unlocking illiquid assets onto DeFi and that we are solving not just us. There are a couple other protocols that allows marketplaces where we can solve the NAV delay issue.

And some of the other product protocols are like thinking about creating market creating a free market for the settlements for also the redemption period. So, there are a few other projects that we're talking to and also for liquidation as well to really solve different pieces to allow DeFi similar experience with these limitations that we are dealing with on the illiquid assets, especially on the fund side. So, this is just on the the shared pool. Um, Yeah, I think I already touched on a lot of these. But in summary, I think to allow illiquid really needs to allow a very smooth user experience, we need

isolated market cuz these assets does move very idiosyncratically. We need to make sure user are protected at the vault level. Two is compliance in form enforced. So, this mostly related to institutions cuz they wanted to be super compliant. They wanted to make sure they feel comfortable entering into DeFi. So, having compliance measurements and tools at the smart contract level is very key to onboard these institutions. Especially with RWAs cuz they already hold a lot of these assets.

So, they can come on chain, use collaterals, and borrow against with stablecoins and other blue chip assets. Um Risk measurement by domain experts. This is what I mean by risk curators. This is widely adopted by Euler and Morpho modular lending protocols like this. And um it doesn't make sense for somebody that's not very well in traditional finance risk measurement to run a DeFi vault's risk to risk parameters. So, we're Euler work with a few top-tier risk curators in the space to set risk parameters. This includes supply borrow caps, loan-to-value ratios, and all these other risk parameters that

Euler's allow these managers to control the risk, which I can expand a little bit beyond cuz you need a deep understanding of each RWA assets and the risk associated with those assets to protect the user, right? So, their role is to make sure we're not lending out too much money, and but we're maximizing the capital efficiency in the vault. Uh four is um we we have to allow cross collateralization at a contained scale. So, this is the uniqueness to Euler's architecture.

We don't just do super isolated modular pools, but we can customize the these modular pools to create multiple cross collateralization in a more safe and controlled way. Um The fifth one is permissionless deployment. So, we're still DeFi, we're open access, so people can list assets in a It's still in a permissionless manner. Um I don't think it makes sense to submit a governance proposal for people to be like, "Oh, hey, should we open a market on the Fidelity 3-year Treasury versus the Franklin Templeton 10-year Treasury?" So, this will create a lot of delay

and create a lot of like unnecessary process uh for users to decide, uh especially retail users who are not like tracking this on a day-to-day basis. So, we will have a permissionless deployment working closely with curators to open these markets as we think as we see market demands and uh risk assessments. Uh any questions so far? Yeah? I know it's a simple question. Yeah. You addressed a lot of the issues. Hi.

Uh you addressed a lot of the issues and you had a point with regards to NAV delay. So, you talked a lot about price discovery and how you see that, but like whenever we're talking about RWAs and we want to bring uh uh DeFi native experience to the RWAs, like would you expand on the NAV delay thing? Like how do you address that so that it is reduced? Yeah, yeah, yeah. So, Sorry if it's a previous point, but No, yeah, this is actually a key point.

Cuz a lot of people are So, I work in traditional finance, but whenever I talk to people who hasn't worked on traditional finance, they're a little bit confused about how these private bonds and private credits are priced in real time. So, for example, a lot of these private credits funds, they issue loans to small businesses. Right now, a lot of it is issued to AI companies to build data centers and to fund these R&D efforts, right? So, small and mid-size enterprises, they are most of the the borrowers in these private credit funds. And the issuers of these private credit funds, they aggregate these loans together and issue a fund and sell it to interested

investors at a higher interest rate than the treasury that you can get. So, the the delay on the valuation of these funds, meaning that the healthiness of these small to mid-size businesses are not a public traded, right? So, their financial performance is not is not super liquid. So, there's a lot of a delay in information in terms of how healthy are these private credits are doing. So, sometimes, if you discover something that's drastic, these private credit funds can get discounted significantly.

So, the value of your collateral, if you use tokenized version of those private credit on chain, can get slashed like 30, 40% if they get downgraded by some credit risk rating agencies. So, that's what we call the the NAV delay and also the sentiments, meaning that if all of a sudden, the rating got downgraded, we will face a lot of utilization pressure on the borrower on the on the lending market because the value of the collateral suddenly dropped and reaching a high utilization ratio on the lending vault. Right? So, it creates a lot of a stress that way. Yeah.

So, so there are we're thinking about ways to kind of smooth the curve and also getting ahead of the game. But yeah, this is a this is a top hot topic right now about onboarding private credit to lending markets. Yeah. So. I have a question to the similar direction. I mean, what you're talking about the NAV delay, it's true for all markets on the weekend. So, how do you deal with like you can't liquidate 20 billion worth of gold over the weekend. Like it's it's it's it's it's an issue for for every asset that's not traded 24/7 right?

Yeah, so the liquidation is one of the key discussion topics. That's why the modular lending design work work makes sense, right? So, cuz each assets to liquidate in a graceful manner, you need you need to work with large liquidity pools organic trading volumes of these assets. So, that when liquidation happens, you the collaterals can be offloaded in a more graceful way. Meaning that there's not huge discounts when we're trying to when the liquidation partner try to sell these assets to offload them, right? And with the liquidity nature of these private credit funds,

sometimes these can be uh user cannot offload these assets in definitely not seconds. Sometimes with hours or even days of delay, right? So, to open these markets, we have to make sure so from the lending protocol side, we have to make sure there are liquidity partners that has they can liquidate at a certain volume on a daily on a daily basis, right? So, this is the active conversation we're having with the curator with the liquidation partner to make sure we can offload these assets. If we cannot, we usually tend to delay the the market launches. Yeah.

Yeah, this is to give you guys a sense like we're solving a lot of the new problems that's coming on to DeFi cuz this is not what we used to. We used to open like Bitcoin ETH markets and these can be settled in seconds, but with these financial instruments, they move at a different speed with different measures that but to really fully unleash unleash their potential, I think there are a lot of innovation that's currently happening. Yeah. I think I already talked about a lot of these. Yeah, this this is give you guys some example of the recent partnership we have with Securitize with a couple of credit private credit and treasury bond assets. We're also discussing with them on the tokenized equity, tokenized stock index products.

So with Securitize, user can actually get the direct ownership of the underlying assets through their tokenization strategies. But if you guys look at other tokenization platform like Centrifuge, like Ondo, they use sometimes use different legal wrappers. You get different legal ownerships of the assets. With Securitize, you do get the direct ownerships, but that means more severe regulatory gating, KYC, KYB. And a lot of lending markets cannot allow that right now. We're one of the few that's able to implement a lot of these capabilities on the left-hand side through at the smart contract level.

This is a point on the cross collateralization. So we do isolate the risk at the vault level. But at from the user's perspective on the your user's account level, we do allow cross collateralization. This is Euler's unique advantages on capital efficiency that's come into play. So if you do hold tokenized equities, you do hold tokenized treasuries or bonds, you can borrow USDC against a portfolio of your assets. And these we have the smart smart routing of different assets at different pools, but we do connect them through the Ethereum vault connector. We have a white paper on that, happy to share with you guys later on how that works. Basically, we route these assets to different isolated pools, but from

the user's experience perspective, you can borrow USDC with your portfolio without without trying to do this manually through 10 different different markets. So this is where the cross collateralization can work. Um This is a little bit about a little bit about the curation model. I think a lot of people are not super familiar with this point. Uh you you guys can think about curator as your asset manager. So in TradFi, um you can think about like JP Morgan or um Franklin Templeton or um uh or Apollo. They are they they are sort of the TradFi risk creator. And some of them are actually coming on to DeFi. Apollo just announced they're being active risk creator on DeFi as

well. So they are managing the risk of these vaults. Uh so we are the infrastructure builder. We provide the bike we provide the the behind the wall uh behind the wall piping um uh on these vaults. But the one that's actually setting risk parameters on each assets that does a lot of diligence uh how risky a certain collateral is are conducted by these uh creators. And us at Euler, we wanted to make sure the risk creators that we partner with really understand how DeFi works, how traditional finance works, and they set the right risk control measurements so that the users' interest are protected uh all time. So um some of the risk creators that's

active on Euler are um uh on the bottom right-hand side. Uh Centaura, KPK, uh Concrete, K3, and a few others. I'm actively talking to um a few others including Apollo, Bitwise, and you guys will see more traditional institutional grade uh risk creators coming on chain cuz they really see their expertise from traditional finance can translate into DeFi, and they're getting themselves educated on how DeFi can work, and we're helping with the education process. And with more higher higher quality risk manager and curators onto the space, I think this will really unlock a lot of the the new RWA assets coming on chain

with people who actually understand them and set the right um set the right guide rails so user feels safer uh that way. So in the future, um user can freely select which risk curator they trust and deploy their assets just with uh at the curator level. So we will have a few options for user at each asset, each RWA, and user can select oh I trust Apollo or I trust uh Centaura because they really do a lot of due diligence on these markets. They have a good track record, never have any incidents, so user have full uh freedom on select which uh risk curator they trust with their money.

Uh another uh another example I wanted to show you is another type of RWA that's coming on chain that is tokenized equity. Um this is very exciting cuz um especially um with uh user outside of the USA, they sometimes wanted to get exposure to US stocks. And once they get the US stocks exposure, they wanted to um borrow against them. Um so that's what we've been talking to a lot of institutions and retails on this point. So we launched with Ondo Finance uh on the S&P 500 Index, Nasdaq, and Tesla. Uh we're onboarding more individual stocks and indices that can expand beyond the US stock market. That can go to um Japanese stock market,

European stock market, and uh Hong Kong, right? So there are a couple of other options that we're um unlocking and uh bringing them on chain. This is another example of how we can open up access to user across the world um to allow them to get exposure to different different financial instruments and borrow against them through the lending protocol design. Yeah. Yeah, and I do wanted to kind of show you how this can work. So, to allow tokenized equities on chain, a few partners has to involved here. So, at the bottom row, you can see Ondo Finance, they tokenize the stock, put the legal

wrapper on top with the NAV tracking framework as well. Then Chainlink help us with the risk oracle. Currently, these tokenized stock markets are 24/5. We're working with Chainlink to unlock 24/7 as well. We're doing a lot of testing on the weekend trading cuz the the data is a little bit thinner on the weekends cuz TradFi does close, crypto doesn't. So, this is another key differentiation with the stock market. That's different from the bonds. Centrifuge is currently being selected as the risk curator to to run these the risk management of the vault on a daily day basis and Euler provides the underlying isolated vault infrastructure.

So, what does it enables, right? So, um So, DeFi borrowing and lending really enables a few of key categories of assets to coming on chain. We used to only be dealing with ERC-20 tokens. Now, we can deal with tokenized treasury. That can includes cash and cash equivalent, treasury bonds, stable coins, tokenized equities, and private credit. But also, while we are bringing all these different asset classes on chain, we build it in a we can build it in a permission or permissionless way.

Permission mostly for institutions. And also to allow permissionless deployment, meaning that we keep the platform open. Any asset issuers can list their assets with us and it just has to be approved and uh go through the diligence process with our risk creators. And you guys probably already know like our real assets is growing super fast and we're super excited about opportunities here. So, uh yeah, I would do want to leave some time for questions. Yeah.

Thanks a lot for the talk. Very very instructive. Um what other asset classes do you see going on chain after credit lending and tokenized equities? Yeah, we're talking about uh so, tokenized equity is a big category. We're doing a ton of diligence on on private credit. There are a lot of issues that we talk about. Right now with a macroeconomic environment, we are being extremely careful with private credits cuz these assets can get uh downgraded um as the as you guys keep following the the news, right? Um but we are allowing shorter duration like um like daily settlements uh bond structure. So, these are marked to market um way more of highly frequent level. So,

that's way more DeFi friendly for us to unlock next. Another type of asset class we're thinking about is commodities. Uh this can include gold um precious metals to start with, but other type of commodities as well. Um but I think we're going to start with some precious metals first cuz they we um there are already already a lot of tokenized gold on DeFi on crypto and we're unlocking that part of first. Uh but we we're constantly talking we're constantly monitoring other type of assets. Yeah. Working with major uh tokenization platforms like uh Centrifuge, Ondo, and all those folks.

Yeah. So. Yeah. Hey thanks. Um thanks for great talk. I just want to also want ask you what's your view on how you going to be uh handling the extended liquidity fragmentation? Because on TradFi, the liquidity is fragmented and here we add another layer of fragmentation with different tokenization issues and that kind of creates another set of, you know, complexity. Yeah, so this is the this is the unique design of Euler that that can unlock, right? So if we can isolate the risks by meaning like if we wanted to open a private credit markets, we don't want it to

connect with other vaults that we have cuz it's it's permission or we think it's too high risk, we can do that. But for example, the token as equity market, you can hold multiple different types of token token as equity like the indexes or the Tesla stocks. We're onboarding a lot of individual stocks and you can have a portfolio of these two stock assets. But you if you just want to borrow for USDC or PYUSD, the it's highly capital efficient that way. Like we allow accepting multiple assets from the same categories to to kind of allow users to borrow the same type of stable coins that way. So multi-asset collateral is currently live on Euler.

We're thinking about working with some large institutions on other capital efficient designs to to allow users to tap into that. Yeah so. I mean different tokenizers like you know, for example, on the X protocol borrowing and cross-lending. Yeah, so that's currently under discussion cuz we're thinking about launching X stock as well like that you mentioned. Once the market is live, we will talk with both of them be like, "Hey, if you're if the underlying stock is the same like can we make it more capital efficient?" So this is this there has to be a coordination between the the the price oracle provider and also the risk creators, right? We have the tools to connect these markets together, but we

do want to make sure the underlying standards are the same, the price feed speed are the same, so there's no like discrepancies across different markets. Yeah, so. Like two-part question with regards to scaling. So, you mentioned the Ondo solution and their wrapper, the ERC-20s, and so that you don't get the underlying asset. Do you Do you see those kind of uh uh structures as not really quick in terms of scaling, and the second part is with regards to new categories. Is there a way or like any vision for the real estate or commercial real estate solutions that can be done?

Uh What's your second question again? >> The real estate. So, is there a possibility of like tokenized real estate or like bringing it on chain or if something can be >> Yeah, yeah, yeah. I think we've actually been talking about real estates for a very long time. Um these These assets actually face a lot of the same limitations with tokenized bonds, sometimes even worse cuz the mark-to-market is very slow. Um and so we're talking about like we're talking to some REITs uh issuers cuz they have more kind of mark-to-market data on daily basis from traditional finance. One of the highlight I do want to mention is Figure Markets. I'm not sure if you're

familiar. They issue a HELOC loan. Basically, if you are real estate owners, they issue a loan to you, and they have a CL kind of credit facilities to aggregate these loans together and um use them as a a credit facility in a private credit kind of structure. That we're actually talking to Figure Markets. They are just publicly listed in the US, and they've been building kind of real estate flavored loans on crypto native layer for many years, and very happy to work with them. Actually, I'm talking to one of the on stage at the outer layer summit tomorrow. So, if you guys are going like definitely tune in, but I can share the high level afterwards on Euler's Twitter. Yeah, so Okay. Um, hi. Great talk, by the way. I

just met a couple a couple of things, but anyways, my question is sort of related to his question about liquid liquidity fragmentation, right? Um, I'm curious how the settlement works if you have to like move borrowed values value across chains. So, I don't know if that's something you can talk about. Yeah. Yeah, so a lot of the liquidity currently is on Ethereum main chain. We are working with a couple of L2s and um, layer zeros uh, protocols like that to make sure cross chain uh, capital efficiency is being solved.

Uh, actually, there is a lot of encouraging conversation with layer zero right now, especially with their announcements with the zero chain. Uh, we're designing some custom solutions leveraging their cross chain solutions. But right now, a lot of the liquidity is is on Ethereum main chain. Uh, we launched um, the token as equity and a and a few other like markets currently on the main chain, but yeah, we're in active discussion with a lot of L2s because they they do want to onboard on Euler's, but they are still a little bit early, I would say, those conversations. And initially, I do think there are some level of uh, liquidity fragmentation.

Um, but I think Ethereum will always be I think a huge liquidity hub for us. And yeah, actively talking to um, kind of uh, interoperability protocols to solve that. Yeah, so. Yeah. Uh, hi Jonathan. Thank you very much for your presentation. Uh, I got a question about the potential systemic risk uh, of bringing on chain instruments I mean traditional on chain credit instrument on chain.

We've seen that with the issue we've resolved of having a hard hard coded Oracle on the on the protocols. And my question would be about the fact that we could have potential risk in borrowing I mean allowing people to borrow against illiquid assets because on chain traditional credit instrument brought on chain don't have marked to market price. And they are basically hard coded with redemption Oracle.

I don't know the time frame on which the the update is made. But couldn't we have any systemic risk about this matter given also we don't have any secondary liquid markets to for protocols to liquidate those assets. So it could incur bad debt at the protocol level. Yeah, so a good good question. I think um the current solution is we're actively looking working closely with risk creator to access how we can gracefully liquidate or how can we gracefully have frequent mark to market data on these assets. Working with some other protocols like 3F if you heard about them who who is actively solving a lot of the

issue that you're talking about. So I would say the approach right now is if you if we don't feel like that we have enough liquidities with our liquidation partner to offload these assets in volumes, we would delay the market launches for now until like we have other tools to have a active marketplaces to onboard multiple market makers and hedge funds who actively organically trade these assets that can offload them in a in a free market way. Right? So right now yeah, there's a lot of limitation that like you mentioned, especially with the some of these longer duration private credit bonds.

Right now, we are delaying them. We're talking to a lot of these bonds that's already tokenized. They wanted to launch with us, but we feel like to protect users' interest, we have to Yeah, we have to kind of delay the launch for a lot of these. But yeah, definitely stay tuned. We are focusing a little bit on the shorter duration markets that have less of those issues that you talked about. But we're also working very actively with other protocols. So, hopefully we can have a counter solution very soon. Also, macro macroeconomic environments hopefully improve a little bit, too.

Yeah so. All right, I think we're at time, but yeah, thanks for your question. Yeah. And I will be around this area. So, if you have other questions, just come find me. All right, thank you. Yeah.