A significant challenge in decentralized finance (DeFi) is liquidity fragmentation across isolated lending and borrowing platforms. A solution addresses this issue by enabling permissionless creation of independent vaults. These vaults can leverage assets from any other vault within a broader ecosystem as collateral. This interconnectedness, facilitated by a unique cross-vault communication mechanism, provides enhanced flexibility for various participants. Lenders, borrowers, developers, and traders benefit from this modular design, fostering a potentially more efficient and dynamic financial environment. This system is known as Euler.

What is Euler Finance (EUL)?

Euler Finance was conceived by Michael Bentley and his team at Euler Labs, including Anton Totomanov, Dariusz Glowinski, Kasper Pawlowski, and Doug Hoyte. Bentley brought experience in fintech and blockchain, while Totomanov, Glowinski, and Pawlowski contributed expertise in software engineering and blockchain technology. Hoyte added value with his open-source contributions. Initially developed by Euler Labs, the project is progressively decentralizing, incorporating contributions from both the external developer community and Euler Labs.

Recognizing the limitations of Decentralized Autonomous Organizations (DAOs) in formal legal contexts, the Euler Foundation was established as a non-profit to represent EulerDAO in real-world interactions, enabling legal contracts and service engagements.

In March 2023, Euler Finance faced a significant setback with a code exploit resulting in a $200 million loss, prompting a renewed focus on security.

The second quarter of 2024 saw the launch of Euler v2, featuring enhancements and a code audit competition with Cantina. Finally, a collaboration with Token Terminal provided enhanced analytics and transparency.

How Does Euler Finance Work? Vault Kit and Ethereum Vault Connector

The Euler Vault Kit (EVK) forms the foundation of Euler v2’s modular architecture, providing a best-in-class experience for both lenders and traders. It addresses the need for diverse risk/reward opportunities, new collateral options, lower borrowing costs, and advanced risk management tools. The EVK is a custom-built toolkit designed for creating and managing ERC-4626 compliant credit vaults, which are passive lending pools with added borrowing functionality. Unlike typical ERC-4626 vaults that generate yield through active investment, credit vaults earn yield through interest paid by borrowers. This modular approach allows for single-asset lending, a key differentiator from other DeFi lending protocols that often require multiple assets. This single-asset functionality provides users with greater control and customization over their lending strategies.

The EVK empowers users to construct various types of vaults tailored to specific needs. These include escrowed collateral vaults, which hold deposits used as collateral but do not accrue interest; governed vaults, where a DAO, risk manager, or individual manages risk parameters and interest rates, suitable for passive lenders; and ungoverned vaults with fixed parameters, catering to lenders who prefer self-management. Ungoverned vaults are further categorized into 0x vaults, with zero exposure to governance through their collaterals, and nzx vaults, with non-zero governance exposure. A special class of governed vaults, yield aggregator vaults, aggregates passive lender assets and directs them to various underlying ERC-4626 vaults, both within and outside the Euler ecosystem, allowing the vault governor to manage risk and reward.

Source: docs.euler.finance

The EVK’s modularity extends beyond traditional lending and borrowing, enabling the creation of collateralized debt positions and synthetic assets. These benefit from Euler’s deep collateral liquidity, advanced risk management, and trading features. Furthermore, the EVK facilitates permissionless reward streaming through the RewardStreams module, allowing users to earn rewards without transferring vault shares to a staking contract. This allows suppliers to earn rewards while simultaneously borrowing. The EVK also integrates with the FeeFlow module, which uses reverse Dutch auctions to manage fees, providing the Euler DAO with greater control over fee generation and maximizing ecosystem growth. Finally, the EVK incorporates a free market liquidation mechanism, defaulting to Euler v1’s reverse Dutch auction system, which offers cost-effective liquidations for borrowers and helps maintain pool solvency.

Ethereum Vault Connector

The Ethereum Vault Connector (EVC) is the critical interoperability layer within the Euler v2 ecosystem. This open-source project, supported by Euler Labs, empowers developers to construct new lending products by seamlessly connecting vaults and recognizing existing deposits across the Euler network as collateral. It transcends being merely an internal module for Euler and serves as a powerful primitive, inviting anyone to launch innovative products on its foundation.

A core objective of the EVC is to streamline common credit protocol features, allowing developers to focus on crafting unique product functionalities tailored to specific user needs. This fosters the creation of diverse financial products, including lending protocols, stablecoins, yield aggregators, margin trading applications, and more. In the long term, the EVC is poised to usher in a wave of lending innovation, extending support to products backed not just by ERC-20 tokens but also by unconventional asset classes like real-world assets (RWAs), non-fungible tokens (NFTs), synthetic assets, and beyond.

Source: evc.wtf

For developers building on the EVC, a range of advanced features catering to sophisticated lending protocol users are readily available. These features include batching similar to multicall functions, facilitating efficient loan refinancing through flash liquidity, simulations for risk assessment, and even transactions without gas fees. A particularly powerful feature is account manager functionality enabled through a designated smart contract called an operator. Operators can be either smart contracts or user-controlled accounts (EOAs) delegated to act on a user’s behalf. This functionality opens doors for implementing advanced trading and risk management strategies, including conditional orders like stop-loss and take-profit options, custom liquidation flows, or even intent-based systems. Developers can even construct their own operator smart contracts, allowing users to leverage automated risk management and position management strategies as separate products.

The EVC is designed as a multicall contract with a unique user authentication layer. This enables developers to call upon any external contracts without the need for additional adapter contracts. This not only ensures accessibility of all functionalities for both user-controlled accounts and smart contract wallets, but also paves the way for limitless ecosystem expansion through the permissionless development of new EVC-compatible products. While the EVC currently allows for only one outstanding liability at a time, it empowers each address with 256 virtual addresses (“sub-accounts”). These sub-accounts provide a gas-efficient approach for users to isolate and manage risk without the burden of maintaining multiple separate wallet accounts.

The EVC also offers an alternative approach for creating collateral-only assets through ERC20Collateral tokens. This token standard is a simple extension of ERC-20, specifically designed for EVC compatibility. Projects utilizing this extension unlock a new wave of composability. Users can leverage their tokens directly from their wallets as collateral, eliminating the need for prior deposits within vaults. This approach empowers users to retain governance rights and other token privileges associated with their holdings while potentially minimizing taxable events. Additionally, a simple modifier can be implemented to defer account status checks until the completion of a batch of operations, allowing users the freedom to utilize their tokens within a batch as long as their account remains solvent.

Euler Finance Use Cases

Euler Finance provides an innovative DeFi platform designed to maximize utility and flexibility for borrowers, lenders, and traders. Euler enables novel financial strategies to address diverse use cases while leveraging its advanced modular architecture. Below are four notable use cases:

• Leveraged Yield Strategies: Euler allows users to chain Liquid Staking Tokens (LSTs), Liquid Reward Tokens (LRTs), and ETH vaults. Users can borrow LSTs or WETH against deposited LRTs, enabling yield optimization through re-depositing and leveraging. This setup drives significant borrowing demand, making Euler’s WETH vault one of the most sought-after in DeFi.
• Leveraged Liquidity Provision: With Euler, liquidity providers can use their WETH/LST LP tokens as collateral to borrow more assets and amplify their positions. This streamlined process enhances capital efficiency, allowing LP token holders to generate additional yields via automated market maker (AMM) protocols.
• Impermanent Loss Hedging: Euler offers specialized WETH/USDC LP vaults, allowing users to hedge impermanent loss risks. Token holders can borrow LP tokens against their assets, earning extra yield to mitigate potential losses while maintaining exposure to liquidity pools.
• Stablecoin Carry Trades: Euler facilitates carry trades through custom vault pairs like USDC and USDT. Users can exploit APY differences by borrowing and re-depositing assets, hedging against stablecoin depegging risks, and engaging in interest rate arbitrage for profit.

Euler Main Features

Euler Finance introduces innovative features designed to enhance capital efficiency, decentralization, and user control in the DeFi ecosystem. Its unique architecture supports secure and scalable financial operations, setting new standards for decentralized lending protocols.

Permissionless Listing

Euler empowers users to list assets independently, using Uniswap v3’s WETH pairs as a foundation. To mitigate risks inherent in permissionless systems, Euler implements a tiered asset classification: Isolation-tier assets can only be borrowed in isolation; Cross-tier assets can be borrowed together but not used as collateral; and Collateral-tier assets allow borrowing and collateralization, ensuring flexibility and security. This structured framework ensures a balance between accessibility, innovation, and security, enabling efficient capital deployment while safeguarding the protocol against systemic risks and encouraging broader participation from developers and decentralized finance enthusiasts.

Source: euler.finance

Feeless Flash Loans

Euler innovates by offering feeless flash loans, enabling users to temporarily bypass liquidity checks and perform uncollateralized transactions within a single block. This facilitates arbitrage, position rebalancing, and advanced DeFi strategies without incurring fees apart from gas costs. Unlike traditional platforms, Euler’s fee-free mechanism encourages widespread usage and experimentation, driving innovation in decentralized finance. By lowering entry barriers for users and developers, Euler fosters a dynamic ecosystem, unlocking new opportunities for creative financial applications while prioritizing ecosystem growth over short-term fee generation, thereby setting a new standard for accessibility and user-centric DeFi solutions.

Risk-Adjusted Borrowing Capacity

Euler introduces a dual-sided risk adjustment system, considering both collateral and liability risks. Unlike traditional protocols, which only factor in potential collateral depreciation, Euler’s model also accounts for liability appreciation. This two-sided approach tailors liquidation thresholds to asset-specific risks, optimizing borrowing power while maintaining robust risk management. By dynamically adjusting for market volatility and asset-specific conditions, Euler enhances capital efficiency, enabling users to maximize their borrowing potential. This comprehensive framework safeguards the protocol while offering a more flexible and tailored experience for borrowers, setting a new benchmark for innovation in decentralized finance.

Decentralized Price Oracles

Leveraging Uniswap v3’s TWAP oracles, Euler ensures secure, manipulation-resistant price feeds. Using TWAP mitigates liquidation risks from transient price shocks, supports Dutch auction liquidations, and prevents abrupt price changes from destabilizing borrower positions. This decentralized approach enhances reliability and user confidence by reducing the likelihood of unfair liquidations, protecting users against flash loan attacks, and ensuring stable protocol operations during periods of high market volatility. Euler’s oracle integration establishes a robust foundation for sustainable growth and sets a new standard for decentralized financial infrastructure by prioritizing transparency and security.

MEV-Resistance

Euler combats Miner Extractable Value (MEV) issues with Dutch auction-based liquidations. The protocol minimizes priority gas auctions and fosters fairer liquidation practices by dynamically adjusting liquidation discounts and incorporating a “discount booster” for liquidity providers. This innovation reduces inefficiencies, incentivizes more liquidators to participate, and enhances overall system stability. By enabling more equitable access to liquidation opportunities, Euler supports large-scale borrowing activity, protects against front-running exploitation, and ensures that liquidation rewards align more closely with the actual costs of liquidators. This approach demonstrates Euler’s commitment to a balanced and resilient DeFi ecosystem.

Governance

Governance of the Euler Protocol is managed by its decentralized community using on-chain mechanisms on Ethereum. The protocol relies on EUL, its governance token, to empower users to propose and vote on changes. This ensures the protocol adapts to evolving market conditions and remains responsive to user needs. Key decisions, such as adjustments to risk parameters, asset classifications, and upgrades to core smart contracts, are implemented via the Tally platform for on-chain governance and Snapshot for gasless off-chain voting. This dual approach, supported by a structured and transparent process, fosters collaboration, flexibility, and long-term protocol sustainability.

Source: gov.euler.finance

What is the EUL Coin?

EUL is Euler’s governance token, empowering community-driven decision-making and protocol upgrades within decentralized finance. Its maximum supply is capped at 27.18 million units, of which 16.12 million are already in circulation (December 2024).

The EUL token is an ERC-20 asset enabling holders to shape the platform’s evolution. Introduced in a two-phase distribution program, EUL supports decentralization by rewarding both early adopters and active users. Epoch 0 retroactively distributed tokens to early participants, while Epochs 1-96 allocate governance tokens to borrowers and stakers based on their time-weighted activity. Users earn EUL by borrowing incentivized assets or staking eTokens into designated staking contracts.

The total supply of EUL is fixed at 27,182,818 tokens for the first four years. Post this period, token holders may vote to introduce an inflation rate of up to 2.718% annually, with new tokens directed into the Treasury. A significant portion of the initial supply was allocated to users (25%), Euler Labs shareholders (25.85%), partners (9.67%), and team members (20.65%), while the remaining tokens were earmarked for the Treasury, Encode incubator, and community programs.

Source: docs-v1.euler.finance

EUL holders can participate in staking gauges to determine future emissions for specific markets, providing a dynamic allocation model. Staking eTokens in WETH, USDC, and USDT markets earns users EUL, though staked tokens cannot be used as collateral for loans. Governance decisions, such as the continuation of staking rewards, are decided through DAO votes.

Is EUL a Good Investment?

Euler (EUL) offers a compelling DeFi proposition with its innovative risk management approach, permissionless listing, and efficient capital allocation, making it a promising platform for borrowers and lenders. Its governance model, which allows token holders to shape protocol decisions, fosters decentralization and community engagement, adding long-term value. However, the platform’s reliance on complex smart contract systems introduces potential vulnerabilities, as highlighted by past security incidents in DeFi. Additionally, the competitive landscape of lending protocols poses challenges for sustained user adoption and market share growth. Balancing innovation with security remains critical for success.

How to Own EUL?

To own EUL, you can use the services of a centralized crypto exchange. Start by creating a Gate.io account, and get it verified and funded. Then you are ready to go through the steps to buy EUL.

News on Euler

As announced on September 17, 2024, via the official blog, Euler launched Euler XP: Season 1, introducing an Experience Points system alongside its enhanced v2 protocol. The initiative rewards liquidity providers and vault creators, retroactively tracking points from the program’s start. Spanning three four-month seasons, the system will adapt based on community feedback and DAO decisions. While XP currently holds no inherent value, it symbolizes Euler’s commitment to fostering user engagement and ecosystem growth, highlighting its innovative approach to DeFi. This marks a significant step forward for the platform.

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