THELOGICALINDIAN - Euler Finance is a decentralized permissionless lending agreement custombuilt to advance basic ability and abate the risks associated with lending and borrowing airy longtail crypto assets
Euler Finance is a second-generation money bazaar agreement that introduces a cardinal of innovations to the DeFi amplitude to accredit permissionless lending and borrowing of crypto assets. It’s advised to aerate basic ability and abbreviate the risks associated with the continued appendage of the market.
Euler Finance Explained
Euler Finance is a atypical lending agreement congenital to accredit permissionless borrowing and lending of risk-on, long-tail crypto assets.
To accept Euler’s different amount proposition, it’s account exploring DeFi’s accepted lending landscape. Today, the two ascendant decentralized lending protocols are Aave and Compound. Together, they abduction about 50% of the absolute bazaar share, appropriately captivation about $6.06 billion and $2.79 billion in total amount locked. Users attractive to acquire absorption on their crypto assets can drop them into Aave or Compound’s clamminess pools to accomplish them accessible for borrowing. On the added hand, users attractive to abbreviate crypto assets or booty on added advantage use these lending protocols to borrow.
Compound and Aave focus on enabling lending and borrowing for a baby cardinal of crypto assets. The tokens accessible in both protocols are about accounted as some of the safest on the market. Neither agreement was advised to handle the risks associated with added volatile, illiquid crypto assets. Instead, both protocols await on a permissioned advertisement arrangement whereby any new tokens ambitious to get listed charge aboriginal be accustomed by babyminding through voting.
While this somewhat bourgeois access has its benefits, it leaves a all-inclusive allocation of the believable lending and borrowing bazaar absolutely unserved. This is area Euler comes in. Euler is a permissionless money bazaar agreement advised to serve the all-encompassing long-tail end of the market. On Euler, every badge with an ETH clamminess brace on Uniswap V3 can be listed and fabricated accessible for borrowing and lending.
Crypto Briefing affiliated with Euler Finance co-founder and CEO Michael Bentley to apprentice about the protocol, and he began by highlighting the protocol’s abutment of riskier assets. “Euler was advised with lots of innovations to access basic ability and abate risk. In particular, it was advised or custom-built to handle the risks associated with volatile, long-tail tokens,” he said. Since ablution in December 2024, Euler has developed to abutment 74 assets. It currently holds about $200 actor in absolute amount locked.
While permissionless markets absolutely account the industry, it’s account accent that they additionally acquaint a countless of risks. Hence, Euler had to accede all of the perils and innovate during the architecture process.
How Euler Enables Permissionless Asset Listing
To body a permissionless lending agreement that maximizes basic ability while mitigating abeyant risks, Euler came up with a ambit of avant-garde solutions.
One of its key appearance is an asset allocation system. It aims to abate the abeyant spillover appulse liquidations could annual by classifying assets according to their accident profiles. Assets are disconnected into three tiers: isolation-tier, cross-tier, and collateral-tier. Isolation-tier assets can’t be acclimated as collateral, nor can they be adopted from the aforementioned annual alongside any added assets. Cross-tier assets, which abatement added on the left-hand ancillary of the accident curve, can’t be acclimated for collateral, but they can be adopted alongside added cantankerous and collateral-tier assets. Finally, collateral-tier assets are the alone assets that can be acclimated as collateral.
By isolating the riskiest assets and akin their use as collateral, Euler can acquiesce permissionless advertisement and run money markets after endangering the accomplished protocol. First-generation lending protocols like Aave can’t booty this access because a abeyant defalcation avalanche in one bazaar could discharge over to addition and leave the agreement with bad debt. As a result, their advertisement requirements are abundant stricter.
When assets are aboriginal listed on Euler, they are classified as isolation-tier. Their bank can be afflicted awaiting a babyminding vote. There are currently 59 isolation-tiered markets, 11 cross-tiered markets, and seven collateral-tiered markets.
Additionally, Euler uses Uniswap V3’s Time Weighted Average Amount (TWAP) on-chain answer band-aid to antecedent its amount feeds instead of relying on centralized answer providers like Chainlink. This access has two capital benefits: Uniswap’s TWAP is on-chain, acceptation it doesn’t crave centralized action whenever a new lending bazaar is created on Euler. Secondly, active bread-and-butter attacks on lending markets leveraging Uniswap’s TWAP answer is capital-intensive, acceptation the agreement is added aggressive to abeyant exploits involving amount manipulations than added centralized alternatives.
Commenting on this architecture choice, Bentley said that it was capital if Euler was anytime activity to accomplish its goal. “Whereas Compound and Aave act as gatekeepers over what assets users can accommodate or borrow because they depend on centralized oracles like Chainlink, we congenital on top of Uniswap,” he said. “You charge a decentralized amount answer if you’re anytime activity to be able to action permissionless lending and borrowing.“
Another affection that makes Euler different amid lending protocols is its accomplishing of acknowledging absorption rates, which break the botheration of manually free the actual ambit for every lending market. “We pioneered acknowledging absorption ante that a few added protocols accept now affected and implemented,” Bentley said, answer that the affection works like a thermostat. He said:
“Reactive absorption ante are a apparatus to access the basic ability of lending markets. They assignment analogously to how a thermostat regulates the temperature in your house: you set the adapted temperature and, if it’s algid outside, the thermostat turns up the heat; if it’s hot, it turns up the air con. Similarly, acknowledging absorption ante aim to balance the appliance arrangement of pools and accordingly access the basic ability of the agreement because lenders get a bigger amount for money on Euler than elsewhere.”
Specifically, Euler uses a proportional–integral–derivative (PID) ambassador to amplify or bedew the amount of change in the absorption ante depending on whether the appliance arrangement for the specific lending bazaar is aloft or beneath a specific appliance ambition level. In simple terms, instead of application changeless models that acclimatize a specific lending market’s absorption ante based on the accumulation and appeal for basic according to pre-set or hardcoded parameters, Euler uses a added flexible, acknowledging archetypal that targets a specific appliance ratio, authoritative the agreement added basic efficient.
Risk-Adjusted Borrowing Capacity
Besides the accessory factors that actuate borrowing accommodation based on the accident contour of the assets, Euler has implemented a alternate access that additionally considers the accident contour of the adopted assets or liabilities to abate the risks associated with the permissionless borrowing and lending of long-tail crypto assets. Explaining this feature, Bentley said:
“We’re acutely basic able in means I anticipate Compound and Aave aren’t. We accept article alleged borrow factors, which accredit the bulk of borrowing ability a user has to depend on both the asset they’re borrowing and the accessory they’re providing. If you anticipate about it, for a lending agreement that caters to the long-tail end of the market, it alone makes faculty to accede the accident agency of the adopted assets.”
Lenders on decentralized money markets can’t verify whether borrowers are creditworthy, which is why borrowing in DeFi tends to be overcollateralized. Lending protocols about await on alleged accessory factors that actuate the bulk users can borrow based on the accident contour of the assets they’re alliance as collateral. When the loan-to-value arrangement drops above a assertive beginning and starts abutting a point area it becomes bereft to awning the adopted amount, the position is apparent for liquidation.
In first-generation lending protocols that abandoned account beneath chancy tokens, the loan-to-value arrangement is absitively based on the collateral’s accident agency alone. For example, if a user wants to agreement $1,000 account of ETH as accessory to borrow wBTC, back the accessory agency for ETH is set (by governance) at 0.7, the user can abandoned borrow $700 account of wBTC. If the amount of the ETH accessory drops to $700, or the amount of the wBTC accountability rises to $1,000, the position gets apparent for liquidation.
While this arrangement may assignment able-bodied back it comes to borrowing safer tokens, it doesn’t annual for the accident of borrowing added obscure, riskier tokens. In response, Euler has implemented a alternate access that introduces borrow factors in accession to accessory factors.
On Euler, if a user has $1,000 annual of USDC, a abiding asset with a aerial accessory agency of 0.9, and wants to borrow ETH, a added airy asset with a lower borrow agency of 0.7, the user could borrow up to $630 annual of ETH. The bulk is affected by adding the USDC accessory by the two borrowing factors ($1,000 x 0.9 x 0.7). On Compound, which does not annual for the accident agency of the adopted asset, a user could borrow $900 annual of ETH ($1,000 x 0.9), putting their position at a college accident of liquidation. For assets added to the appropriate on the accident curve, Euler has alike lower borrow factors. For example, the borrow agency for Synthetix’s SNX badge is 0.28.
Efficient Liquidation Engine
Speaking of liquidations, Euler has innovated in this vertical too. Specifically, instead of alms the borrower’s accessory to liquidators at a anchored percentage-based discount, as Aave and Compound do, Euler runs Dutch bargain liquidations, which are far beneath castigating for borrowers and additionally annihilate gas wars amid ambitious liquidators.
Aave and Compound action a anchored 5 to 10% abatement for liquidations, so back the user’s collateral break accomplished the defalcation price, those acquisitive to cash the accessory blitz in at the aforementioned time to abduction the premium. This leads to antecedence gas auctions as allotment of DeFi’s alleged MEV wars, which produces abrogating externalities for the broader ecosystem.
Moreover, anchored discounts can be astringent for ample borrowers who ache a liquidation, potentially black them from anytime application the protocols in the future. At the aforementioned time, they may additionally be too baby to incentivize abate liquidations, potentially abrogation the agreement with bad debts.
Euler’s Dutch bargain action allows the admeasurement of the abatement to access depending on how underwater a position is. As altered liquidators accept altered accident and accolade expectations, they apparently aces altered times to liquidate, circumventing any charge to allowance gas wars. However, because miners or alleged “seekers”—agents specializing in MEV extraction—can front-run and abduct a liquidator’s transaction, Euler incentivizes the borrowers to become liquidators by allotment them abatement boosters. This gives the borrowers an advantage adjoin front-runners by authoritative them added assisting in the Dutch auction.
Euler’s UX-Focused Innovations
On top of the amount appropriate features, Euler has alien several abate innovations to advance the platform’s user experience. These accommodate adequate collateral, deferred clamminess checks, fee-free beam loans, an centralized transaction builder, sub-accounts, and able leverage.
Unlike added lending protocols, Euler accouterments a appropriate drop class alleged adequate collateral, which lets users drop assets after anon authoritative them accessible for lending. By leveraging this feature, users can cautiously agreement babyminding tokens as collateral, alive that added users won’t be able to borrow them to access babyminding decisions or booty abbreviate positions. Commenting on this feature, Bentley said:
“For assets like MKR or added babyminding tokens, bodies don’t drop them on money markets because they’re afraid bodies will borrow them to vote and dispense the babyminding of these protocols. For this reason, we created a distinctively adequate asset class area users can drop an asset as collateral—but no one can borrow it. This way, we can accept a accustomed MKR bazaar and a adequate MKR bazaar area users can use MKR as accessory after annoying that anyone can use their tokens to dispense the MakerDAO’s governance.”
Deferred clamminess checks, on the added hand, let users assassinate circuitous position administration after actuality accountable by adamant accessory conditions. Where added lending protocols analysis an account’s clamminess at the alpha of an operation, Euler users can acquaint the agreement to analysis it alone already at the end of their operation. For example, instead of accepting to agreement accessory afore borrowing, by deferring clamminess checks on Euler, users can borrow after alliance any collateral, accomplish an operation, and accord the accommodation aural one transaction. This finer allows users to assassinate chargeless beam loans to body up leveraged positions, booty advantage of arbitrage opportunities beyond DeFi, rebalance positions, assassinate circuitous trades, and so on.
Euler has additionally congenital a transaction architect central the user interface that allows users to accumulation affairs and abide them all at already to save on gas fees. In addition, the agreement accouterments a able way to abridge demography on leverage. For example, instead of allurement users to assassinate assorted affairs on a bend to batten up, Euler lets them use the protocol’s excellent action to conduct all of their activities in a distinct transaction. The excellent action creates an according bulk of deposits and debts for an account, acceptance users to batten up in one transaction via self-collateralized loans.
Final Thoughts
In a sea of forks and copycat protocols, Euler is one of the attenuate adolescent DeFi projects that absolutely stands out by introducing new appearance to the decentralized lending space. The key botheration it solves—enabling a permissionless money bazaar custom-designed for long-tail assets—has never been addressed in the amplitude before. Euler’s acceptance abstracts indicates that there’s a able-bodied amoebic appeal for such a artefact admitting DeFi’s year-long buck market.
To that point, it’s account acquainted that Euler is not necessarily a above artefact to beforehand lending protocols. Rather, it’s a altered one that fills a gap in the lending bazaar that added protocols missed.
Disclosure: At the time of writing, the columnist of this allotment endemic ETH and several added cryptocurrencies.
