Euler is a lending protocol engineered to overcome the systemic weaknesses of traditional pooled credit models. The protocol uses a modular architecture on Ethereum, allowing for the creation of isolated and permissionless markets supporting a diverse range of ERC-20 assets.
This design fundamentally balances unprecedented customization with strong, built-in risk isolation.
What is Euler?
Euler constitutes a non-custodial lending protocol built on the robust security of the Ethereum blockchain. Its creation arose from a clear necessity: overcoming the structural rigidity of first-generation DeFi lending platforms. These older systems, for example, operated on a monolithic model, forcing all assets into a single, shared pool. Consequently, that centralized approach required lengthy, restrictive governance procedures to list new assets, which severely limited market access to only a few blue-chip cryptocurrencies.
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In contrast, Euler Finance entirely rejects this restrictive framework. Its central philosophy centers on permissionless innovation and radical inclusivity for digital assets. The protocol’s ultimate goal is to facilitate a vibrant, global credit market on-chain, enabling users to lend and borrow virtually any ERC-20 token.
Source: Euler Finance
This revolutionary Layer 1 lending solution introduces modularity as its primary design paradigm. Rather than one large pool, Euler uses isolated, customizable markets known as Vaults.
First, it enables permissionless listing, meaning anyone can launch a market for a new token immediately. Second, it completely walls off risk. An exploit or failure in one Vault cannot, therefore, trigger a cascade across the entire protocol, protecting all other pools.
Thus, Euler’s platform ensures that the entire DeFi ecosystem can leverage unparalleled capital efficiency while managing risk intelligently.
How It Works
Euler achieves its revolutionary flexibility and capital efficiency through two interconnected architectural innovations: the Euler Vault Kit (EVK) and the Ethereum Vault Connector (EVC).
In detail, these components function together to create a cohesive, yet segmented, on-chain credit system. This approach moves the protocol beyond the rigid structure of legacy lending platforms. It finally provides users and builders with the freedom to customize and connect various lending products, generating complex financial strategies.
The Euler Vault Kit (EVK)
The Euler Vault Kit represents the foundational infrastructure for creating decentralized lending markets. It essentially serves as a blueprint, allowing developers to deploy fully functional, isolated lending vaults for any ERC-20 token instantly.
- Customizable Parameters: Vault creators define the risk profile of their specific market completely. They select the appropriate price oracle, choose the interest rate model, and set the liquidation parameters.
- Risk Isolation: Each EVK Vault operates independently. A problem in one market, such as a price oracle manipulation or a malicious governance decision, cannot affect the funds locked in any other Vault.
- ERC-4626 Standard: All vaults built with the EVK adhere to the ERC-4626 tokenized vault standard. This thus ensures seamless compatibility and integration with a broad array of other decentralized applications and yield strategies across the Ethereum network.
Source: Euler Finance
The EVK supports different classes of vaults, providing builders with tools to meet various risk/reward appetites:
- Core Vaults: These vaults facilitate governed lending products, ideal for passive lenders who trust a DAO or risk manager to maintain stability and manage the risk settings.
- Edge Vaults (Ungoverned): These represent a free-market approach to risk. They operate with fixed parameters and allow users complete control over their risk exposure, perfectly suiting sophisticated, active traders.
- Escrow Vaults: These specific vaults hold deposits solely for collateral purposes. So, the assets do not earn yield and cannot be borrowed. This design guarantees the collateral is always available for liquidations, significantly protecting borrowers.
The freedom to permissionlessly list assets immediately expands the total addressable market for DeFi lending. It allows Euler to support “long-tail” assets, such as niche or newly launched tokens, which legacy protocols would never approve due to their strict risk-averse requirements.
The Ethereum Vault Connector (EVC)
While the EVK provides isolation, the Ethereum Vault Connector establishes interoperability, preventing liquidity fragmentation. To function as a powerful, immutable primitive, securely connecting the individual vaults, the connector ensures that the Euler ecosystem operates as a single, cohesive marketplace.
The EVC’s core function is enabling cross-vault collateralization. A user can deposit Asset A into Vault 1 and then use those deposited assets as collateral to borrow Asset B from Vault 2. This feature is entirely unique to Euler and serves as a powerful bootstrapping mechanism. Deposits in highly liquid, older vaults suddenly gain new utility as collateral for borrowing from newly created markets.
The EVC also offers advanced capabilities for high-frequency traders and developers:
- Batching Calls: Users can bundle multiple operations, such as depositing, borrowing, and swapping, into a single, atomic transaction. This dramatically improves efficiency and reduces gas costs.
- Permissions Delegation: The EVC supports an operator concept, allowing users to delegate specific permissions to other smart contracts or operator wallets. This is essential for building sophisticated, automated trading and risk management strategies.
- Sub-Accounts: This feature enables users to create virtual, isolated accounts within the protocol. Consequently, users can pursue different risk strategies simultaneously without affecting the health or collateral of their main position.
Source: Euler Finance
eTokens and dTokens
To manage the resulting positions from these complex strategies, Euler uses an accounting system involving two custom token types: eTokens and dTokens. These tokens represent a user’s position within the protocol.
Source: Euler Finance
- eTokens (Interest-Bearing Deposits): When a user deposits an asset like DAI, they receive a corresponding eDAI token. This eToken represents the user’s share of the total pool plus the interest they earn. The eToken’s exchange rate against the underlying asset increases constantly, reflecting the accruing interest and generating passive yield.
- dTokens (Debt Position): When a user borrows an asset, the protocol issues a dToken (e.g., dDAI) to the user’s account. This dToken represents the exact value of the outstanding debt. The user must repay this debt to redeem their underlying collateral.
Soft Liquidation
Beyond its core accounting, Euler innovated heavily on the liquidation process, a crucial component of any lending protocol. Traditional protocols often impose a fixed, high penalty on the borrower when their health factor drops below one. Euler introduces Soft Liquidation, a far more nuanced and equitable approach.
The penalty imposed on the liquidated collateral is not fixed. Instead, it starts at 0% and increases gradually. Specifically, the penalty rises by 1% for every 0.1 decrease in the borrower’s health score below 1. This mechanism caps the maximum penalty at 20%. Liquidators acquire the debt at a discount equal to this penalty percentage, providing them with a profit incentive.
Source: Euler Finance
- Benefits for Liquidators: The rising penalty ensures that the incentive to liquidate is always present, securing the protocol’s solvency.
- Benefits for Borrowers: This variable, gradual penalty prevents the borrower from suffering a catastrophic, fixed loss immediately. It encourages liquidations to happen incrementally, reducing the severity of the financial shock on the user.
Self-Collateralized Loans (Minting)
In addition to a fairer liquidation model, Euler provides a powerful recursive borrowing functionality, known as Minting or self-collateralized loans. This unique feature dramatically increases capital efficiency for users. It allows a user to deposit an asset, like DAI, and then borrow the same asset against that deposit. The system uses the eToken (the representation of the deposited DAI) as collateral.
In Euler’s previous V1, users could leverage their initial deposit up to a maximum Loan-to-Value (LTV) ratio of 95% for same-asset loans. This high Self-Collateral Factor (SCF) enables rapid, gas-efficient leverage.
- Process: The user deposits Asset A, receives eTokens, and then uses a mint function to borrow more of Asset A, using the eTokens as collateral. This process efficiently compounds the user’s exposure without requiring external flash loans.
- Advantage: This innovative functionality eliminates the need for multiple, complex transactions involving external DEXs. It allows for much greater leverage and gas optimization, offering a clear advantage for sophisticated traders pursuing high-frequency, complex yield strategies.
Source: Euler Finance
Technical Architecture
To support all these innovative features, Euler’s performance and security rely on a meticulously engineered, modular architecture.
Modularity and Replaceable Components
The design philosophy emphasizes distinct, replaceable components. This means the protocol consists of several key, interchangeable layers:
- Vaults: These are the isolated lending pools, customizable through the EVK.
- Oracles: Price feed contracts provide secure and reliable price data. Euler V2 supports numerous oracle types, including Chainlink, Pyth, Redstone, and Chronicle, and permits custom configurations for each individual vault. This flexible oracle system is essential for accurate collateral valuation and robust liquidation checks.
- Interest Rate Models (IRMs): These contracts dynamically determine the borrow and supply interest rates. The rates adjust automatically based on the vault’s utilization – the ratio of borrowed assets to total supplied assets. In this case, customizable IRMs ensure optimal capital utilization tailored to each market’s unique risk profile.
- Hook Targets: These are optional, advanced contracts that execute custom logic before specific actions occur. For example, a Hook Target can implement access control or perform a security check immediately before a deposit or liquidation happens.
This modularity allows builders to tailor every element of their lending market. They achieve a precise balance of features, risk parameters, and collateral requirements.
Euler V2. Source: Euler Finance
Multi-Tiered Risk Management
Furthermore, this architectural commitment extends to multi-tiered risk management. Euler’s previous V1 architecture categorized assets into three tiers to manage systemic risk, a system still philosophically relevant in V2’s modular context:
- Collateral Tier: This tier includes high-liquidity assets like ETH and major stablecoins. These assets possess the most conservative, stable risk parameters.
- Cross Tier: This tier accommodates assets with moderate risk, such as liquid staking tokens (e.g., wstETH). These assets support cross-collateralization across different vaults, offering more flexibility than the Collateral Tier.
- Isolated Tier: This tier is designated for speculative, high-risk assets, like new long-tail tokens. Exposure to these assets is often capped to minimize potential contagion risk across the wider protocol.
Ethereum Vault Connector
To facilitate this system and serve as the central hub, EVC is not merely a linker. It is also a secure entry point for user interaction and a router handling the complexity of cross-vault operations for the end user.
- Authentication and Trust: The EVC mediates interactions and handles authentication between vaults. It allows vaults to trust calls originating from the EVC, establishing a secure framework for asset transfer and collateral checks.
- Deferred Checks: The EVC facilitates atomic execution of batched calls. It performs a single, comprehensive check at the end of a multi-step transaction, ensuring that all collateral requirements are met atomically. This deferred checking process is highly efficient and secure.
- Gasless Transactions and Permitting: The EVC’s design enables advanced transaction types, including gasless transactions and permit-based execution (EIP712). These features greatly improve the user experience by reducing friction and lowering the cost of interaction.
Integration with EulerSwap
Euler’s vision extends beyond pure lending. The team developed EulerSwap, a DEX that merges lending and trading yields. This integration further enhances capital efficiency within the Euler ecosystem. EulerSwap allows users to perform trading activities directly within the lending environment.
This eliminates the necessity of moving assets between separate protocols, reducing gas fees and execution risk. Euler is thus evolving into a holistic hub for decentralized credit and trading.
Source: @SilvioBusonero on X.
What Does It Solve?
Euler tackles several chronic, painful friction points plaguing the current decentralized finance ecosystem. It delivers a modern, robust platform capable of supporting institutional-grade financial operations.
- Solves Liquidity Fragmentation: Euler directly addresses the issue of siloed liquidity created by older lending protocols. It allows assets deposited in any Euler Vault to serve as collateral for borrowing from any other connected vault, creating a single, deeply connected liquidity layer that boosts capital utilization across the entire system.
- Eliminates Restrictive Governance Bottlenecks: Traditional protocols require lengthy governance processes to list new assets, suppressing market innovation. Euler bypasses this barrier through Permissionless Vault Creation; anyone can launch a new lending market instantly using theEVK. This framework allows the market to immediately determine value and fosters a true free-market approach to on-chain credit.
- Mitigates Systemic Risk: The monolithic pool design exposed V1 DeFi to systemic risk, where one exploited asset could destabilize everything. In contrast, Euler’s modular architecture replaces this with isolated risk through ring-fenced environments. An exploit in one specialized Edge Vault cannot contaminate blue-chip assets in a separate Core Vault.
- Offers Fairer Liquidation Mechanics: Older protocols harshly punish borrowers with fixed liquidation penalties, often seizing more collateral than necessary. Euler corrects this with its Soft Liquidation mechanism, starting the penalty at 0% and increasing it gradually.
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Tokenomics
EUL serves as the native governance and utility token, meticulously designed to align incentives and secure the long-term future of the Euler protocol.
Source: Euler Finance
- Total Supply: 27,182,818 EUL.
- Core Utility and Governance: EUL’s primary function involves empowering holders to participate in the DAO. Holders can propose and vote on all major decisions, including changes to risk parameters, interest rate models, and major protocol upgrades.
- Fee Flow Auctions: The protocol uses EUL in a mechanism called FeeFlow. EUL tokens are the exclusive bidding currency for periodic auctions that convert accumulated protocol fees (often in stablecoins) into EUL.
Allocation
The initial EUL token allocation distribution ensured a diverse, balanced ownership structure across key stakeholders.
- Euler Labs Shareholders: 25.9%
- Community Selected Markets: 25.0%
- Employees and Advisors: 20.7%
- Treasury (Unallocated/DAO): 13.8%
- EulerDAO Partners: 9.7%
- Project Incubators: 4.0% to early development supporters like Encode.
- Retroactive Distribution: 1.0% distributed to early protocol users during the soft launch.
Team
Euler started in 2020 by a highly skilled group of technical experts. The co-founders drove the protocol from its inception to its status as a market-leading, modular platform.
Michael Bentley serves as the co-founder and CEO of Euler Labs, the entity leading the development. He has championed the core philosophy of permissionless lending and intelligent risk stratification. Bentley, along with co-founders Doug Hoyte and Jack Prior, built the highly complex, non-custodial set of smart contracts that define the protocol.
Investors
Euler has secured substantial financial backing, totaling $40 million across two primary funding rounds.
- Series A Funding: In August 2021, Euler completed an $8 million Series A round. Paradigm, a leading venture capital firm in the crypto space, anchored this round. Other key participants included Lemniscap and a consortium of other institutional and angel investors.
- Series B (DAO Treasury Diversification): A $32 million funding round occurred in June 2022. This significant raise, classified as a DAO treasury diversification round, valued the protocol at $375 million. Haun Ventures, founded by former Andreessen Horowitz partner Kathryn Haun, led the round. Other prominent investors participating included: Jump Crypto, Coinbase Ventures and Uniswap Labs Ventures.
Source: Euler Finance
FAQ
How to Buy Euler Tokens (EUL)?
EUL is now available for trading on major exchanges such as Binance, Coinbase, Upbit, Gate and MEXC.
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How Does Euler Minimize Risk Contagion Across Assets?
Euler minimizes risk contagion by employing a modular design. It utilizes the Euler Vault Kit to create isolated lending vaults for each asset. Consequently, an issue or exploit in one vault cannot affect the liquidity or security of funds in any other vault.
What Is Soft Liquidation?
Soft Liquidation is Euler’s unique mechanism that gradually increases the liquidation penalty, starting at 0%. This avoids the fixed, harsh penalties of legacy protocols. It protects the borrower by only liquidating the necessary amount of collateral.
How Does Euler Address Liquidity Fragmentation?
The Ethereum Vault Connector addresses liquidity fragmentation by enabling cross-vault collateralization. Users deposit collateral in one vault and use it to borrow from any other connected vault. This links all isolated markets into one deeply connected liquidity layer.
What Is The Primary Risk For Lenders On The Euler Protocol?
Lenders primarily face bad debt risk if the collateral price of a borrowed asset drops too quickly. While soft liquidation helps, extreme market volatility can occasionally cause the value of the collateral to fall below the outstanding debt.
What New Risk Does Permissionless Vault Creation Introduce?
Permissionless vaults, while promoting innovation, introduce the risk of unverified or manipulated markets. Users must exercise extreme caution and verify that any vault they interact with uses a legitimate price oracle and has been vetted by the community or curators.
How Does The Fee Flow Auction Benefit The EUL Token?
The Fee Flow auction benefits EUL by creating constant, transparent demand for the token. Protocol fees are auctioned off, and bidders must use EUL tokens to purchase them. This mechanism consistently converts protocol revenue into EUL demand and supports its value.
