#48 – Michael Bentley on Euler, credit, and natural selection
Jan 10, 2025
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In this conversation, Michael Bentley, co-founder and CEO of Euler Finance, shares his insights from his background in dynamical systems at Oxford to revolutionizing DeFi. He reflects on the 2008 financial crisis and its impact on innovations in decentralized finance. Bentley discusses interest rate design using control theory, the critical role of credit in economic systems, and the unique features of the Euler protocol. He also draws parallels between natural selection and the evolution of lending protocols, highlighting the importance of cooperation in both finance and biology.
The historical context of DeFi showcases its evolution as a response to the 2008 financial crisis and recent pandemic challenges.
Michael Bentley emphasizes the need for adaptable interest rate mechanisms in DeFi, allowing rates to dynamically adjust based on user behaviors.
Drawing on evolutionary theory, Bentley highlights cooperation and competition as essential dynamics for fostering resilience in decentralized financial systems.
Deep dives
The Philosophical Foundations of DeFi
The podcast delves into the philosophical underpinnings of decentralized finance (DeFi), highlighting its historical context and role in reshaping traditional financial mechanisms. The conversation emphasizes how DeFi has emerged as a revolutionary force, particularly during the pandemic, when many sought innovative solutions to finance while being confined at home. Michael Bentley shares insights on how the urgency of the moment fueled experimentation and innovation, with projects like Yearn Finance radically changing the dynamics of financial transactions. This shift reflects a broader societal challenge to reimagine existing financial systems and explore decentralized alternatives.
Understanding Interest Rates in DeFi
The podcast explores the complexities of interest rate mechanisms within DeFi and how these rates can be determined without central oversight. Early in their discussions, the idea of letting interest rates emerge organically from user interactions is presented, citing Compound as a notable example. While this method offers a degree of autonomy, it prompts questions about who ultimately sets the parameters that govern these rates. Bentley proposes the application of control theory as a means to dynamically adjust interest rates based on real-time borrowing activities, striving for a more efficient system that minimizes human intervention.
The Dangers and Dynamics of Market Behavior
Michael Bentley highlights the interplay between human behavior and DeFi market operations, emphasizing the roles of irrationality and emotional responses in financial decision-making. The discussion reflects on how market sentiments can drive exuberance or despair, complicating the efficient market hypothesis within DeFi. This volatility can lead to rapid shifts in market confidence, whereby DeFi is perceived as a potential replacement for traditional finance one moment and deemed obsolete the next. Bentley underscores the importance of adaptability in such a fluid environment, where understanding human responses to market conditions becomes crucial.
The Interconnection of Crypto and Evolutionary Theory
The conversation takes an intriguing turn as Bentley draws parallels between his PhD work in evolutionary theory and concepts within DeFi. He articulates how evolutionary principles, including cooperation and competition, can mirror the behaviors of market participants and their interactions in decentralized systems. He references the importance of designing systems that promote cooperative behaviors among actors while leveraging competitive instincts for overall market benefit. By applying these evolutionary concepts in a financial context, Bentley illustrates the potential for a more resilient and adaptive DeFi ecosystem.
The Future of Decentralized Credit Markets
Lastly, the podcast addresses the vision for Euler and its role in advancing decentralized credit markets, stressing the importance of flexibility and customization in lending solutions. Bentley elaborates on how Euler enables the creation of a diverse array of lending products while allowing for user-defined risk parameters. He advocates for a market-driven approach, where participants can select their preferred lending structures and collateral types. The conversation concludes with optimism about the innovation potential within DeFi, as various projects explore new avenues for efficiency, transparency, and adherence to smart contract governance.
This is my conversation with Michael Bentley, the cofounder and CEO of Euler and previously a dynamical systems postdoctoral research associate at Oxford.
Timestamps: - (00:00:00) intro - (00:01:11) early DeFi and experiencing the 2008 crash - (00:06:52) interest rate design and PIDs - (00:20:40) risk management - (00:28:27) sponsor: Splits - (00:29:10) macro view of the world - (00:32:27) the fundamental importance of credit - (00:35:47) Euler protocol design - (00:39:08) modularity and integration - (00:54:40) network topology - (01:10:55) natural selection and dynamical systems - (01:26:33) outro
Links: - Michael on X: https://x.com/euler_mab - Michael on Medium: https://medium.com/@euler-mab - Michael Bentley on the evolution of lending protocols: https://youtu.be/TW9Tv2Y0fkw - Euler: https://www.euler.finance
Thank you to our sponsor for making this podcast possible: - Splits: https://splits.org
Into the Bytecode: - Sina Habibian on X: https://twitter.com/sinahab - Sina Habibian on Farcaster - https://warpcast.com/sinahab - Into the Bytecode: https://intothebytecode.com
Disclaimer: this podcast is for informational purposes only. It is not financial advice nor a recommendation to buy or sell securities. The host and guests may hold positions in the projects discussed.
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